High Gas Prices Hold Promise for Agriculture

July 21, 2000

USDA’s Chief Economist Keith Collins says higher energy prices and the nation’s dependence on imported oil can mean opportunities for agriculture to produce energy supplies that will help stabilize energy supplies. USDA is using existing authority to expand the production and use of ethanol and biomass energy supplies, he says.

In testimony before the Senate Agriculture Committee Thursday, Collins said crops, crop residues, and forest residues, as well as energy crops planted on idle or marginal crop land, could be converted to various form of energy, such as ethanol, biodiesel, and biopower. "Ethanol from grains now account for almost all of U.S. biofuel production," hesaid. In 1999, about 1.5 billion gallons of ethanol were produced by 58 ethanol plants located in 19 States. This year production is projected to increase to 1.6 billion gallons. Total US production capacity is 1.87 billion gallons with another 175 million gallons under construction and over 600 million gallons are under planning.

"Efforts are under way to convert cellulosic materials, such as grass and wood, to ethanol. Four companies are planning to build cellulosic ethanol plants in the United States in the near future," Collins added. According to Department of Energy projections, cellulosic ethanol production by 2010 may increase to about 300 million gallons. Currently, corn stover is a feedstock of choice due to its large concentrated supply and relatively low cost compared to other feedstocks, he said.

Because ethanol only accounts for 1.2% of the U.S. gasoline supply, its price does not affect the overall price of gasoline, according to Collins. "Instead, the price of ethanol is affected by the price of gasoline, other oxygenates, and octane." Consequently, as energy prices have increased this year and corn prices rose over fears of a dry summer, the price of ethanol increased from $1.18 per gallon in January 2000 to $1.35 by June 2000.

"However, the price of ethanol is still cheaper than MTBE and all grades of gasoline," said Collins. "The net corn cost, which is the price of corn, minus the price of coproducts, divided by the number of gallons of ethanol produced per bushel of corn, for the average wet mill was $0.33 per gallon in 1999. The net corn cost increased from $0.34 per gallon in January 2000 to $0.54 in May 2000, in response to higher prices of corn. With corn prices now declining and a large harvest in prospect, assuming average weather from here on, net corn costs for ethanol plants are expected to decline, providing an incentive to expand production."

Agriculture can play a major role as a supplier of bioenergy, according to Collins. "The major objective of (an executive order by the President) and recently enacted legislation is to boost production of bioproducts and bioenergy threefold by 2010. Both USDA and the Department of Energy are working closely together to implement the EO and the new act and expand use and production of bioproducts and bioenergy, utilizing agricultural resources."

USDA has proposed using Commodity Credit Corporation funds to boost production of ethanol and biodiesel during the next three fiscal years, Collins said. A proposed rule is almost ready for publishing.. USDA is also proceeding with implementing Section 769 of the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Act of 1999 to provide new authority to use Conservation Reserve Program (CRP) land for pilot biomass projects.

Committee Chairman Richard Lugar (R-IN) warned that the lack of a U.S. strategic energy policy could lead to devastating effects on economic growth and Americans' standard of living. "Are Americans prepared for the inevitable consequences resulting from the lack of a strategic energy policy? Does an energy policy exist with our government or private industry that will guarantee adequate energy supplies for a growing American economy? And if not, who will tell the American people that we are headed for lower growth in jobs, income, comfort, standard of living and competitive position in the world?"

Lugar continued, "There is a growing lack of confidence in the American people that there is any comprehensive effort to guarantee energy supplies. People suspect that supplies will be inadequate, that prices will continually go up – and worse still – that even at any price, energy will be unavailable for our communities." So far, he added, efforts "are at best small fixes in what is a fundamental problem."

Sen. Tom Harkin (D-IA), the committee’s ranking Democrat, said, "We have barely scratched the surface of the potential for agriculture to supply domestically produced, renewable and environmentally friendly energy." Renewable sources now total only 3% of domestic energy supplies and only about 1.2% of the gasoline.

"But our reliance on foreign petroleum is growing dramatically, to the point that we now import around 60% of our petroleum. And we’re not far more reliant on foreign petroleum than we were back in the 1970s when disruptions in oil supplies caused tremendous shocks to our economy."