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Biofuel Economics: How Many Acres Will Be Needed For Biofuels? Part II

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Cole Gustafson, NDSU Extension Service Biofuels Economist Cole Gustafson, NDSU Extension Service Biofuels Economist
It is very difficult to know at this stage what the implications for crop acreage are under the 2007 Energy Act.

By Cole Gustafson, Biofuels Economist

NDSU Extension Service

Ethanol has received considerable scrutiny from the national media lately questioning the industry’s impact on food prices and availability. In my last column, I began a discussion on the implications of the 2007 Energy Independence and Security Act. It sets a national goal of producing 36 billion gallons per year (BGY) of biofuels annually.

This production goal is four times the level of ethanol the U.S. will produce in 2008.

Many analysts are trying to discern the impact of this new legislation on crop acreage, resulting in a wide range of views. The views differ with respect to key assumptions about technological innovation and policy. In these two columns, I have chosen to discuss each end of the spectrum.

The first extreme scenario discussed last time assumed that ethanol production technology and existing legislation, with respect to ethanol policy, will remain static. If this is the case, we found incredible demands will be placed on existing agricultural resources.With stagnant corn yields, more acres will be required for corn production to meet the production goal for conventional biofuels. In addition, more acres also will be needed to produce both advanced and cellulosic biofuels. While some new land may be brought into crop production, most of this acreage will have to be taken away from other crop uses. Scenario No. 1 would place extreme pressure on already tight feed and food supplies. Critics of renewable energy often base arguments on this scenario. While this scenario could happen, it is doubtful that either technology and/or policy will remain stagnant.

Now let’s consider scenario No. 2, which is the other end of the spectrum. Under this view, it is possible that no additional cropland would be required to meet the new national goal of producing 36 BGY of biofuel. For this to happen, three key innovations and policy changes have to occur for each new biofuel specified in the legislation. The three are conventional, advanced and cellulosic.

First, advances in corn genetics must occur. Leading corn genetic companies, such as Monsanto and Dupont, claim that corn yields per acre are on the verge of rapidly increasing as new genetic traits come to the marketplace. These companies expect at least a 30 percent increase in corn yields per acre. If this innovation occurs, existing corn acreage and ongoing improvements in corn ethanol plant conversion technology may be sufficent in meeting the legislation’s goal of producing 15 BGY of conventional biofuel from corn.

Second, given the wide range of feedstocks being researched and evaluated for cellulosic biofuel production, it is conceivable that a nonagricultural crop could become the ideal and most economical way of meeting the cellulosic biofuel requirement in the 2007 legislation. For example, if tree and wood products end up being the feedstock of choice, large acreages of timber in northern Minnesota, Oregon, Washington, Alabama and Georgia will be in high demand, but is not traditional cropland. Alternatively, researchers are exploring urban wastes, such as grass clippings, shrubs and tree chippings, which also would not compete with existing agricultural lands. Consequently, the cellulosic biofuel requirement could be met with minimal demand for new crop acreage.

The third biofuel specified in the 2007 Energy Act is advanced biofuel. This category of fuel represents potential sugar-to-ethanol conversion by using sugar beets or sugar cane. The U.S. has great potential to divert sugar from food consumption to energy production. However, Mexico and South America also have great potential to develop sugar-to-ethanol industries and export ethanol to the U.S. At the moment, a 54-cent-per-gallon tariff exists on imported ethanol. Under the new farm bill, this tariff is scheduled to terminate after two years. Substantial increases in sugar ethanol imports from Mexico and South America easily could meet the advanced biofuel requirement of the 2007 Energy Act. Again, the impact on U.S. crop acreage would be minimal. In effect, we would be using U.S. cropland for food production and foreign cropland for energy production.

Like scenario No. 1, it is unlikely that each of these three technology innovations and policy changes for scenario No. 2 to play out will occur completely. Thus, it is very difficult to know at this stage what the implications for crop acreage are under the 2007 Energy Act. All we can say with confidence is that it will range between scenarios No. 1 and No. 2. Farmers and ranchers need to build flexibility into their long-term strategic plans.

Questions

Q: Is the blender’s tax credit reduced in the new farm legislation? (John,Williston)

A: Yes, the blender’s tax credit for ethanol is reduced from 51 cents per gallon to 46 cents per gallon. In a future column, I will evaluate the profitability of existing corn ethanol plants given this reduction, high corn prices, rising gasoline prices and higher plant heating expenses. Stay tuned.


NDSU Agriculture Communication

Source:Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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