Saturday, May 26, 2007

Staying Home: How Ethanol Will Change U.S. Corn Exports

Staying Home: How Ethanol Will Change U.S. Corn Exports

Written by Heather Schoonover, Program Associate, and
Mark Muller, Director, Environment and Agriculture Program
Minneaspolis: The Institute for Agriculture and Trade Policy
Published December 2006

Executive Summary
U.S. ethanol production is expanding at a phenomenal pace, doubling between 2001 and 2005 and likely to double again in the next few years. While some corn needed to meet higher ethanol demand could come from increased production, the U.S. Department of Agriculture (USDA) states that much of the additional corn needed for ethanol production will be diverted from exports. Despite this fact, there has been little focus on or discussion of the impact of corn-based ethanol on U.S. corn exports. But these impacts could be significant, and ethanol’s potential impact on corn exports should cause policymakers to reconsider their long-standing focus on exports.

The U.S. already has over 100 active ethanol plants capable of producing more than five billion gallons of ethanol per year. An additional 58 plants currently under construction or expansion will add nearly four billion more gallons of capacity, bringing total capacity to nearly nine billion gallons—and surpassing the Renewable Fuels Standard requirement of 7.5 billion gallons by 2012, far ahead of schedule. In addition, if all 150 currently proposed ethanol plants were to be built, U.S. ethanol capacity would surpass 19 billion gallons per year.

While ethanol from cellulosic sources looks promising, corn will continue to be the primary source of ethanol in the near future. Given the continued enormous expansion of ethanol capacity, this will result in significant shifts in the corn market.

In a break from past projections, many of the major agricultural organizations are now projecting flat corn export levels or even a decline in corn exports, citing ethanol as a key to this change. But even these new projections are likely to underestimate the impact of ethanol on exports, because they do not take into consideration the many ethanol plants currently on the drawing board.

Factoring in the impact of proposed ethanol plants yields some stunning results. For example, if only a quarter of the plants currently proposed in the Midwest do come on line, and if the corn needed to supply these plants and the plants currently under construction were to be diverted from exports, Midwest corn exports could be cut in half. This shift would impact some states more than others. For example, Nebraska could see negative corn exports (meaning corn needed for ethanol plants would exceed corn for exports) if only a fraction of its proposed plants come online.

The growing demand for corn from the ethanol industry will result in several shifts in the Midwest agricultural economy. First, higher prices will likely induce more farmers to grow corn. Second, the livestock industry may reduce its Midwest corn demand, either by using alternative feed sources or raising less Midwest livestock. Yet even with these shifts, it appears very likely that ethanol will reduce the availability of corn for export.

The shift of agricultural land into energy production and bio-based products is not likely to reverse course anytime in the near future. Whatever the crop—be it corn or switchgrass—domestic markets are likely to provide more opportunities to farmers than the export of agricultural commodities. Our agricultural, transportation and trade policies also need to shift to address this new reality and truly invest in the future of U.S. agriculture.

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