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Biofuels Suffering from High Corn Prices and Dropping Demand

Biofuels Suffering from High Corn Prices and Dropping DemandAccording to a new report from the New York Times, the ongoing drought in the Midwest is causing the American biofuels industry to begin crumbling around the edges.

The United States has mandated for several years that gasoline contain 10 percent biofuel — a requirement generally met with corn-based ethanol. It also maintained a tax credit for ethanol of 45 cents per gallon, though that was allowed to expire at the end of 2011. That led to the establishment of hundreds of ethanol plants throughout the Corn Belt, and communities which in turn heavily rely on those plants for their livelihoods.

But now it looks like the punishment Midwest corn yields took from the drought — one Cairo, Missouri farmer quoted in the piece said his corn crop last year was just 5.5 percent of his usual yield — has driven the price so high that ethanol plants are being forced to shut down:

Nearly 10 percent of the nation’s ethanol plants have stopped production over the past year, in part because the drought that has ravaged much of the nation’s crops pushed commodity prices so high that ethanol has become too expensive to produce.

The other half of this is falling demand for gasoline — a result of both the recession, and a renewed policy push for electric and hybrid vehicles and tougher fuel economy standards. Most cars can only take a fuel blend of only 10 percent ethanol, and most service stations are set up to only handle that amount, resulting what’s referred to as the “blend wall.” The Environmental Protection Agency allows for blends of up 15 percent, but cars that can take that haven’t caught on in the marketplace. Nor have “flex-fuel” vehicles, which can take up to 85 percent.

That’s left ethanol with a smaller amount of gasoline to be blended with, squeezing the industry:

Thousands of barrels of ethanol now sit in storage because there is not enough gasoline in the market to blend it with — and blends calling for a higher percentage of ethanol have yet to catch on widely in the marketplace….

[Demand for fuel] has shrunk to 8.7 million barrels a day from 9.7 million in 2007, said Larry Goldstein, an economist and a director of the Energy Policy Research Foundation. And with corporate average fuel economy rules now in place to double the number of miles that the average car gets per gallon by 2025, “you know we’re on a trend,” he added.

Globally, the combined effect of U.S. and European biofuel policy has been a massive divergence of corn crops into biofuel production, which in turn drove up the price of corn and contributed to global food insecurity. Much of the carbon-reducing benefits of biofuels are diluted if not reversed entirely by the carbon output from the agricultural production required to produce them. Nor does the conversion of more grasslands and forest into biofuel cropland to take advantage of the higher prices help, as those environments actually sequester more carbon that cropland.

Cellulosic biofuels, by relying on crops that don’t double as food, could provide a solution. But whether they can be widely commercialized without requiring high levels of water and land use remains an open question.

All told, our reliance on biofuels as an answer to the challenge of climate change has been an ongoing policy and humanitarian disaster, so there’s a certain irony now that the droughts and extreme weather driven by climate change are starting to eat away at the biofuel industry itself.

Of course, the people paying the price of that irony aren’t the Beltway insiders who developed America’s biofuels policy. They’re the global poor, as well as the everyday working Americans whose communities and towns are being threatened by the loss of the plants. The plant in Cairo, Missouri had been buying 16.5 million bushels of corn per year before it shut down. And the town of Walhalla, North Dakota is bleeding families due to the closure of its plant.

Joseph Romm's picture

Thank Joseph for the Post!

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Ivor O'Connor's picture
Ivor O'Connor on Mar 19, 2013 6:43 pm GMT

The economic realities might make biofuels a footnote in history...

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