Renewable Fuels Heating Up the U.S. Agriculture Sector

Not that long ago, when you heard someone mention "ethanol," you would never relate it to something that makes your car or truck run. But today, ethanol and biodiesel are becoming very much a part of the mainstream. Several forces are helping propel the use of renewable fuels. Among the driving forces are air-quality needs, reformulated fuel standards, improved production technologies, higher crude oil prices, increased numbers of ethanol and biofuel ready vehicles, significant tax incentives, and plenty of corn, soybeans, and other crops to produce fuel from. When you put all these forces to work at the same time, you create the most vigorous demand engine that agriculture has seen in quite some time.

A quick trip back to school for "Ethanol 101" allows us to understand where the U.S. ethanol industry has been, and even what it is doing elsewhere around the word. While most any crop can be processed into ethanol, corn is the leader due to its high starch content and easy availability. Additionally, processors are familiar with corn because they already use it in the production of corn sweeteners. For many years, companies such as ADM have played a huge role in ethanol production from corn, as well as many other corn-derived products.

In 1980, the amount of corn processed in the United States to make fuel ethanol was 35 million bushels (less than 100 million gallons of ethanol), or about 0.5% of total corn demand for the year. Production increased steadily thereafter, exceeding 1.4 billion gallons (533 million bushels, or 6.0% of total demand) by 1995. But in 1996, the industry went into a tailspin, when production shortfalls and dramatically higher exports caused the price of corn to increase nearly 70% in only a few short years. At the same time, petroleum prices were falling. Despite significant tax incentives for U.S. ethanol production, the industry was unprofitable and production dropped by more than 25%. It took five years for production levels to rebound above the 1995 level. In the 2004/05 corn market year (September 2004–August 2005), corn ethanol production soared above 3.5 billion gallons, with corn usage to sustain this fuel amount exceeding 12% of total corn demand for the year—roughly the equivalent to 72% of U.S. corn exports. Over the past 20 years, corn ethanol production has been the strongest source of corn demand, and one of the only growth areas in both share and absolute volume.

The volume of corn used for ethanol production in the United States is only one of the changes that have occurred in the industry over the past 20 years. Moreover, many states (including California and much of the Northeast) have reformulated their gas legislation to include ethanol as an oxygenate, rather than a petroleum-derived MTBE, unpinning much of the recent demand. . Furthermore, the U.S. Department of Energy has implemented federal targets for renewable fuel production that will continue to place a growth floor for the industry. Of course, high crude oil prices have made ethanol prices competitive as a replacement for gasoline. Other factors that have changed recently include improved ethanol processing yields (2.50 gallons of ethanol per bushel of corn in 1980, compared with 2.85 gallons per bushel today), strong increases in corn productivity with little or no increase in fertilizer use, and greater use of specific corn varieties that are tailored to ethanol use. The pipeline for technology and information is fuller today than ever, assuring that the industry will be even more efficient and competitive in the future.

While ethanol technology is well established and very much mainstream, biodiesel is in its infancy but growing fast. Biodiesel uses the oil component of a crop to replace petroleum-based fuel. In some cases, biodiesel can even be produced from the cooking waste oil from deep-fryers. The largest oil-seed crop produced in the United States is soybeans. The land area devoted to soybean production is somewhat less than that devoted to corn; and soybeans are a food product, as opposed to corn, which is an animal feedstock. Thus far, the availability of data on the biodiesel industry have been limited, but the data Global Insight has indicate that the industry tripled in size during 2005.

The future of the renewable fuels industry will hold some interesting changes, not all of which are obvious today. One factor that remains to be seen is whether there are any alternative feedstocks for both ethanol and biodiesel. Ethanol produced in Brazil is created from sugar cane and has demonstrated to be significantly cheaper and more efficient for that country's circumstances and climate. Cellulose crops/fodder or waste material have demonstrated to be potential ethanol feedstocks, but the technology has been slow to reach commercial viability to date. Biodiesel, on the other hand, can be produced from several oil crops such as soybeans, canola/rapeseed, sunflowers, palm oil,, and cotton seed oil. An advantage to canola is that it contains twice the oil per unit as soybeans, and is suited for production in areas with different climatic conditions than soybeans.

Finally, the biofuel craze is not just a U.S. event—it is happening on almost every continent. In 2004, Brazil, the United States, China, India, France and Russia were the top players.