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Wheat, Corn and Ethanol Fight for Acres

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Bruce Babcock
Director, Center for Agriculture and Rural Development, Iowa State University
Wednesday, April 30, 2008; 12:00 PM

Economics professor Bruce Babcock, director of the Center for Agriculture and Rural Development at Iowa State University, was online Wednesday, April 30 at noon ET to explain how high ethanol prices are impacting farmers individually and the world as a whole as less and less of the nation's farmland is used for growing food crops.

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The transcript follows.

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Gainesville, Fla.: Bruce, while this current situation with rising food prices creates a crisis for many, shouldn't it be an opportunity for governments/institutions around the world to step up their research and extension in agricultural production? If so, is it happening? If not, what can be done to jump-start the education, research and extension programs in those areas which have the capability of being food secure, if not food self-sufficient?

Bruce Babcock: I think that high commodity prices are a wake-up call to governments around the world that they cannot take adequate food supplies for granted. Investments by the private sector will take place where they can make a profit. But the role of public research on developing new varieties and management practices for crops that may not generate a profit has been underfunded for 20 years.

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Dewey Beach, Del.: Mr. Babcock: Could you please discuss how much of the dollar spent at the supermarket goes back to the farmer? For example, in one pound of bread there is less than one pound of wheat. Wheat at $4.30 per bushel equals $158 per ton, which equals eight cents per pound. Many people believe that a rise in commodity prices is the sole cause of increases at the supermarket. Thank you.

Bruce Babcock: For all food, less than 20 cents of the consumer dollar goes to farmers. For some foods it is much less than this. This low percentage means that large increases in prices received by farmers do not automatically translate into large increases in prices paid for food. Labor and energy have larger shares of the consumer food dollar than farmers.

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Freising, Germany: With all the talk about price per barrel of oil I haven't really kept up with the price for natural gas, but I assume that it's increasing as well. Isn't that directly related to the price of produce, given natural gas is used to make fertilizers, such as ammonium nitrate? Adrian Higgins once wrote a story about how chemical fertilizers do not build the soil, unlike organic fertilizers. One way or another, the agricultural landscape is going to change once natural gas becomes too expensive or the soil degrades because of lack of organic fertilizers, don't you think?

washingtonpost.com: Fertilizer, Down to A Science; One Way or Another, Plants Need Nutrients (Post, Feb. 23, 2006)

Bruce Babcock: I am not a soil scientist, but growing crops without commercial fertilizer degrades soils. Growing crops with fertilizer does not. There is not enough organic fertilizer in the world to fertilize all the crops. We have to use commercial fertilizer.

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Atchison, Kan.: How precisely do the price elasticities of the various crops -- both in the short run and the long run -- play a role in the run-up in food prices?

Bruce Babcock: When there is a decrease in the amount of a food commodity because of a cutback in acreage or a drop in yield, the price can increase greatly because food demand is not very price-sensitive (we all need to eat). This means that any shortage causes prices to spike. This is what we have seen in the past four months or so as it is perceived that we were running out of hard red spring wheat and rice. This lack of price sensitivity also means that the expected expansion in rice production will cause rice prices to fall dramatically from today's lofty levels.

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Falls Church, Va.: Are there any efforts in Iowa and the other temperate states with a lot of arable land to repeal ethanol subsidies and stop the licensing of new ethanol plants?

Bruce Babcock: Ethanol expansion has been a godsend for Iowa's crop farmers. Crop farmers never have seen such large per-acre potential profits (potential because they still must harvest a crop). Why would they want to slay the goose that laid the golden egg??

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Ashland, Mo.: Why did ethanol become thought of as a positive development when much of the recent literature suggests significant negatives? Were the earlier studies (if any) simply incomplete, or written for the purpose of promoting ethanol? Did people just read what they wanted to read to support their preconceived notions, or are the later studies less negative than portrayed?

Bruce Babcock: As with all unknowns (regarding the environmental impacts of ethanol), knowledge only comes with study. The answers were not immediately apparent until somebody took the time and effort to look at them. There is still a lot that we do not know.

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Silver Spring, Md.: Do we still subsidize farmers to not grow crops? Why don't those bozos in Congress stop the subsidies and have farmers produce more corn?

Bruce Babcock: The only subsidy we have for farmers not to grow crops is the Conservation Reserve Program that consists of about 10 percent of U.S. crop land. Most of this land is not well-suited for intensive crop production because is erodible, or is next to water bodies. This land also provides plentiful wildlife habitat. There is no doubt that a reduction in this land would decrease crop prices, but is a drop in crop prices worth the environmental damage that such action would cause?

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Raleigh, N.C.: Steve Mufson's Washington Post article today states: "Just four months ago, the Democratic-led Congress passed and Bush signed energy legislation that boosted the mandate for minimum corn-based ethanol use to 15 billion gallons, about 10 percent of motor fuel, by 2015."

Am I missing something? I've got a printout of the 2007 Energy Bill (HR6) and am also examining an online version. There's a "Renewable Fuel" mandate for 20.5 billion gallons by 2015, and smaller targets for advanced biofuel, cellulosic biofuel and bio-diesel, but nothing I can find specifying corn ethanol (or "conventional biofuel" as defined in HR6). Is The Washington Post confusing corn ethanol with biofuel in general? Even the numbers are wrong. Can you give me legislation chapter and verse, or does The Washington Post have it wrong?

Bruce Babcock: The Post is right -- there is nothing that mandates "corn" biofuel, but there is nothing that forbids it, and corn biofuel is the only viable source of biofuels that we have. So that is why some people refer to corn ethanol having a 15 billion gallon mandate by 2015.

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Brooklyn, N.Y.: A great concern of developing countries for many years has been the unfair corn and wheat subsidies given to farmers by America and the E.U., which has a direct effect on the costs and the growth of farming in these regions. What would be the effect on the market if we finally did away with these subsides, which is just another form of corporate welfare?

Bruce Babcock: My research on this issue suggests that elimination of U.S. crop subsidies of the form that are provided for in the Farm Bill would have no significant impact on U.S. agriculture. In fact, if we never had had the subsidies, then U.S. agriculture would look almost identical to what we have today. Biofuels subsidies, however, have affected U.S. agriculture in a major way. Elimination of the commodity title in the about-to-be-passed farm bill would not adversely affect U.S. agriculture.

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Boise, Idaho: Will there be a burst in the ethanol bubble, plummeting farmers into a wild frenzy to sell suddenly surplus corn?

Bruce Babcock: Given current federal policy, there will be no burst in the ethanol bubble. Even if we are lucky and crude oil prices drop to $50 per barrel, we will still have $4-plus corn because of the mandates and tax credits and import tariffs.

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McLean, Va.: Bruce, what do you expect in the way of a global supply response to current high crop prices? Do you expect these high prices to cure themselves? Thanks.

Bruce Babcock: I have stated many times that high prices will cure themselves, and we already see evidence of this with published reports about expanded rice and wheat acreage. However, they will not be a complete cure because we are asking agriculture to provide a significant portion of the U.S. transportation fuel supply. This does not come free. Corn farmers will not produce the required amount of corn need to meet the targets without a higher price than they had been getting from the market. So $20 rice and $10 wheat will solve themselves, but $4-plus corn is with us as long as we have federal ethanol mandates and an ethanol industry.

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Dallas: I don't know if this is on topic, but it is related. I know Congress was pushing for building more gas refineries, which would provide more gas and might relieve the demand for ethanol. Has there been any progress on this?

Bruce Babcock: Congress can ask all they want, but oil companies are not going to invest in expanded capacity unless they can make money doing it. (I guess Congress could subsidize the oil companies to get them to expand capacity.) Right now profit margins on refinery capacity are low; hence there is no incentive for them to expand. The margins are low in part because ethanol production is taking market share from them.

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Ferguson, Mo.: Morning, Bruce. Kind of a circuitous question here. I understand that Brazil does a much better job of turning crops into fuel (sugar cane, I think). With a Democratic Congress and president next year (this is all hypothetical!), might they be more willing to give a more liberal regime abroad greater trade opportunities and let Iowa go back to making corn for food? Thanks

Bruce Babcock: The advantage that sugar cane ethanol has over corn ethanol is that an expansion in sugar cane ethanol in Brazil does not drive up sugar cane prices because the sugar cane is planted on untilled land and is dedicated to fuel production. That is, there is no competition of the acreage.

Having said that, I do not see Congress subsidizing Brazilian sugar cane producers to expand production to help us meet our fuel requires, although there is a carve-out of 4 billion gallons in the new mandates for "advanced" biofuels that could be filled by expanded imports from Brazil. So I gave a circuitous answer.

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Annapolis, Md: Hi -- thanks for taking my question. Just two months ago, there was a breakthrough in the development of an enzyme that would break down coarse items -- such as stalks -- into sugar, which more easily turns into ethanol. Thus, it seems to me that "waste products" can now be used in the production of gas. How does this feed into this debate? Thanks.

Bruce Babcock: Everybody hopes we can take waste products and convert them at low cost to transportation fuels. This is why the Department of Energy is spending upward of $1 billion on research and subsidies for pilot plants to try to figure out how we meet our targets for non-corn biofuels. It will take time, however.

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Washington: Doesn't growing corn so intensively really degrade the soil? What good are thousands of acres of infertile farmland?

Bruce Babcock: Growing corn does not degrade the soil. Most corn in the U.S. is grown in rotation with soybeans, and it turns out that although soybeans provide the soil with nitrogen, they do not provide adequate crop residues to keep the soil in place in fields that are subject to erosion. So an argument can be made, in fact, that planting continuous corn is better for the soil than planting corn after soybeans.

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Minneapolis: I'm curious where a mega-agricultural company like Cargill stands on biofuels. Do they have an interest in all this?

Bruce Babcock: Cargill's ownership of livestock facilities put them in the anti-ethanol camp because of increased feed costs. And they are not benefiting from the increased volatility of commodity prices necessarily (although volatility does increase traders' profit potential). So it is not really clear where they stand.

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Washington -- Disclosure, Please: Don't you think you should disclose that you receive extensive funding from confined animal feeding/slaughter owners and operators -- who have a direct economic interest in maintaining their intake of cheap (and subsidized) corn, in competition against ethanol producers?

Bruce Babcock: Disclosure: We received some funds last year to help us study the impacts of ethanol. Much of this came from the meat industry. Most of the funds we obtained from that study came from USDA. Ironically, the meat industry funders did not like our research results because we did not find a major impact on food prices -- that is, our estimates of the impact on food prices from expended corn ethanol were on the low side. More disclosure: I own 25 shares in Lincolnway Energy, our local ethanol plant. I wish that its margins were higher. But I also own some farmland, so higher corn prices benefit me as a corn farmer but hurt me as an ethanol producer. Do you need more disclosure?

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Princeton, N.J.: What sense does it make to put a high tariff on efficiently produced Brazilian sugar beet ethanol and to subsidize inefficient corn ethanol except as a payoff to Archer Daniels Midland and big farmers?

Bruce Babcock: The rationale for a tariff on Brazilian ethanol is to keep them from benefiting from the subsidy we give gasoline blenders who use ethanol. If we reduce that subsidy (as we are doing in the farm bill) then it makes sense to reduce the import tariff.

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Seattle: Assuming that the technology works out eventually, what happens to food prices if/when switchgrass biofuel becomes possible? What happens to the corn-based ethanol craze, and who wins and who gets hosed?

Bruce Babcock: Switchgrass ethanol will not be viable if it is going to be grown on the same ground as crops. Only if it can be grown on unused land will it be viable. The first feedstock for cellulosic ethanol will be corn stover.

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Anonymous: How do you respond to a USDA report published in January 2008 that stated that for the marketing year ending in August 2008, the U.S. corn supply was projected to reach nearly 14.5 billion bushels, while demand was expected to be only at 12.7 billion bushels?

Bruce Babcock: They underestimated domestic feed use and export demand.

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Raleigh, N.C.: Dr. Babcock, thank you for answering my earlier question about biofuel targets in the 2007 Energy Bill. You stated that "corn biofuel is the only viable source of biofuels that we have." What about biodiesel? As I understand it, biodiesel production has raised soybean demand to such an extent that some biodiesel plants have stopped production because they can't afford the feedstock. But it can be -- and is being -- made even from used restaurant grease. The production method is relatively low-tech, and it has a good energy balance. With the huge amount of diesel used for on-road transportation and off-road uses, isn't biodiesel production a viable and practical way to offset fossil fuels? Thank you for this discussion.

Bruce Babcock: As long as biodiesel expansion competes with vegetable oils, biodiesel loses. There is a mandate for biodiesel that, if it is met with soybean oil, guarantees that we will have high vegetable oil prices for a long time.

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Clifton, Va.: Ethanol has also increased the price of fine untaxed Virginia corn liquor. Didn't anyone realize that ethanol production would lead to an increase in commodity prices? If plug-in hybrids or electric cars become commonplace, folks will complain about the spike in the cost of electricity, and increased air pollution. There are no unintended consequences, just morons who don't think things through.

Bruce Babcock: There are always unintended consequences of policy actions. Who would have suspected that crude oil prices would be where they are today? Who would think that rice exporters would cut off supplies? Who would think that rice importers would panic?

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Richmond, Va.: I've heard conflicting opinions about the energy value of corn ethanol -- some say production has a net positive energy yield, others say it's negative (takes more energy to grow the crop, transport grain, distill and distribute than the energy value of each gallon). Are there any authoritative energy balance studies that answer this question?

Bruce Babcock: Yes there are. USDA did the authoritative study and concluded that corn ethanol has a positive energy balance. I did my own study and concluded the same thing. The only studies out there that offer a different conclusion made a series of incorrect assumptions about how corn is used and about how the byproduct of ethanol production is fed to cattle and hogs.

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Dewey Beach, Del.: You said your research did not find that ethanol had a major impact on food prices. Why is the media devoting such extensive coverage to this "crisis"? Are they blowing it out of proportion? Thanks.

Bruce Babcock: When rice prices hit $20 and wheat prices hit $10 and corn prices hit $6 and soybean prices hit $13, then I do not think the media is blowing this out of proportion. My study looked at the impact of expanded ethanol production on food prices. We found relatively modest impact. Expanded corn ethanol did not cause rice to hit $20 or wheat to hit $10. There are many other factors that have contributed to these prices levels. We only studied one.

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New Hudson, Mich.: Haven't tax incentives provided for the petroleum industry since 1968 far and away exceeded the incentives received by the ethanol industry since 1979? (According to a U.S. General Accounting Office study done at the request of Sen. Tom Harkin (D-Iowa) in 2000, tax incentives for the petroleum industry has ranged from $134 billion-$149 billion since 1968, significantly more than the $7 billion-11 billion that the ethanol industry has received since 1979.)

Bruce Babcock: I won't quibble with my senator on this one. Also, if you attribute even a fraction of the cost of the Iraq war to the fact that Iraq is in the Persian Gulf, then the subsidies for oil grow even larger. We need to drive and eat. It is likely a proper role for government to ensure that we have the regulations and market incentives to make sure that we can drive and eat.

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New Hudson, Mich.: Is ethanol our best near-term solution to solving our country's dependence on foreign oil and the withering petroleum supply?

Bruce Babcock: No. If we care about dependence on foreign energy supplies (at least those energy supplies that do not come from our good neighbors to the north and south) then we should adopt policies today that have a long-term impact on our demand for energy (for example the increased energy efficiency regulations that were included with the new Energy Bill), and we should increase incentives to invest in wind, solar and conservation here at home.

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McLean, Va.: Bruce, do you think the support for ethanol subsidies and mandates might erode in Congress as constituents complain about high food prices, livestock producers complain about high feed costs and environmentalist complain about unexpected environmental aspects of ethanol production? Thanks.

Bruce Babcock: Support could erode, but Congress just decided that we need to do something about our appetite for fossil fuels. It seems unlikely that they will reverse that decision -- particularly when it takes 60 votes in the Senate to do anything.

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Washington: Will the new coal-fired power plant near Waterloo, Iowa, affect the quality of the corn grown in the surrounding area?

Bruce Babcock: There's no reason to think that it will.

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Washington: Hello. A question about the rise of staples like beans, rice, etc. I'm a middle-class American, and eat pretty well. I'm guessing that the rise in prices of these staples isn't gonna impact me too much, it's just going to limit my variety and selection (i.e. when push comes to shove, $5 that previously bought me a little meat, some veggies and some grain for a meal now only will buy a meal of rice and bean). Is this an accurate of how these rising prices will affect me, and that it's the very poor nations where a cup of rice costs their equivalent of $5 that really will be impacted?

Bruce Babcock: You are exactly right. Poor consumers that get a large proportion of their food directly from commodities (rice, wheat to turn into flour, vegetable oil for cooking) are bearing the brunt of high commodity prices. If we stay with $5 corn, then all of us will be paying more for milk, beef, eggs, cheese, pork, etc.

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Anonymous: Why not put the farm acreage that is put in the soil bank back into the production of ethanol and biodiesel fuel? Are the oil companies behind trying to stop the production of alternate fuels?

Bruce Babcock: One thing that the federal government could do to reduce crop prices is to allow farmers to plant on their land that is enrolled in the Conservation Reserve Program. To my knowledge oil companies would not oppose such a move. Many oil companies actively are investing in biofuels and supporting research into trying to figure out how to make biofuels from cellulose and non-food feedstocks.

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Go Cyclones!: Hi Bruce, I always thought corn based ethanol was a jumping off point to cellulosic ethanol. I know right now that cellulosic ethanol is still farther away, but won't cellulosic ethanol be more efficient and environmentally friendly?

Bruce Babcock: That is the idea. Expanded corn ethanol will "teach" gasoline blenders how to make alternative fuels work, then if we can figure out how to turn cellulose into fuel at reasonable cost, there will be a ready market for it.

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Potomac, Md.: Has the use of kudzu as a biofuel source been investigated?

Bruce Babcock: Sorry, I know nothing about kudzu, other than that it grows like crazy where you don't want it to and that it cannot stand Iowa winters (or Iowa springs).

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Bloomington, Ind.: Are we studying ways to use other crops, such as tall grass, etc., that do not require replanting each year? Can we use areas owned by the federal and state government for ethanol production? Will the margins of profit in the production of ethanol from corn and other crops improve with time? What strategies are being implemented to assure enough wheat and other food products will be produced?

Bruce Babcock: Yes -- the Department of Energy is investing heavily in cellulosic ethanol and feedstocks. I do not think we have a strategy to ensure adequate supplies of food will be produced other than to let the marketplace work its magic.

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