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Opportunity for agriculture: U.S. growth of biofuel unprecedented

For now, there's not much slowing the ethanol boom and the good corn prices U.S. farmers are enjoying. So “sit back and enjoy the ride,” says the president and CEO of Informa Economics, Inc., (formerly, Sparks Companies), Memphis.

“I think (the biofuel boom) is an American agricultural revolution of unprecedented magnitude, a great opportunity,” said Bruce Scherr, during The Seam cotton marketing seminar, in Tunica. Miss. “It isn't very often that American agriculture can pick up something positive from an issue.

“Biofuel is the industrial rage in the United States. Although it doesn't hold a candle to the economic growth and expansion in China and India, there hasn't been anything in modern, American agricultural history that has been bigger and has more potential for American agriculture than the renewable fuels effort.”

Events within the last year have proven that the rules of economics need not apply to American's thirst for energy.

“Nationally, we're paying about $3 for regular, unleaded gasoline. Three years ago, we were paying $1.50. But we are using 110,000 more barrels per day than we were using two years ago. I was always told that the demand curve slows down when prices go up. That's true unless there are structural and cultural circumstances that override the economics.”

Scherr's explanation is that America “feels energy entitled. How many of us, as everyday citizens, are using less gas today than we were three years ago? We are not cutting back even while prices double.

“Our culture isn't conducive to cutting back. We're using more. Gasoline consumption is a great example of how we have evolved as a society and how important energy is to us.”

Those very same high fuel prices, and a shortage of refining capacity for petroleum fuel, have had a positive effect on the profitability of renewable fuels.

“We started producing ethanol back in the 1970s, but it was never highly regarded as a business,” Scherr said. “But over the last several years, we've seen more constraints, like last year's hurricanes which gave us a really good idea of how tight our gasoline refining capacity is.

“Anyone in the southeastern quadrant of the country has seen the bags on the gas pumps. You couldn't get gas for a while.”

The biggest boost for ethanol has come with government incentives and mandates to increase production of biofuel, including a goal to produce 60 billion gallons of renewable fuels for gasoline consumption in the next 15 to 20 years.

“That was more important to an industrial expansion for ethanol and biodiesel than you can imagine.

“Today, the United States produces slightly over 4 billion gallons of ethanol. So that's another 56 billion gallons of ethanol over the next 15 to 20 years.”

Scherr believes getting to 20 billion gallons, or even 30 billion to 35 billion gallons will not be all that difficult. “But it's a lot tougher to get to 50 billion to 60 billion gallons.

“But this is the impetus for the phenomenal amount of money and interest that has been chasing this business over the last seven months.”

The new energy bill calls for 7.5 billion gallons of renewable fuels to be produced by 2012, a goal that Scherr expects the United States to reach by the 2007-08 crop year, “which will have an impact on the corn utilization for that year.”

Another factor pointing to runaway demand for corn: due to liability concerns, many refineries and fuel blenders are planning to completely end the use of MTBE (methyl tertiary butyl ether) as a required oxygenate additive for fuel by the end of 2006, and replace it with ethanol.

Scherr points out that between now and the 2007-08 crop year, the U.S. corn industry will have grown the corn use in one category (ethanol) by a billion bushels.

“What has ever happened in a demand for an agricultural commodity that's been bigger than that? Nothing. I'm telling you that by 2012, we will be at 15 billion gallons of ethanol, which will require 5 billion-plus bushels of corn.”

Already, USDA is projecting the range for farm prices for corn at 20 cents to 40 cents higher on each end, compared to last year.

One rule of economics does apply to ethanol production — high revenue minus low costs equal big profits.

“If you produce 2.7 gallons of ethanol for every bushel of corn, that's about $8.80 worth of ethanol. Subtract a price of corn at $2.65 a bushel, that gives you $6 per bushel to produce the ethanol. That's equivalent to minting money.

“If you have a 100 million-gallon ethanol plant that starts up today, and current prices persist, you will pay for the plant in less than one year, from your net proceeds. There is no business around today that can accomplish that.

“The outlook would dim if petroleum prices declined significantly. But even if they did, I think gasoline prices are going to nearer $3 a gallon than they are $1.50.”

Most problems associated with ethanol production are logistical, according to Scherr. Ethanol is not “conducive to running through a pipeline. Most of it has to be moved by rail, barge or truck.”

Dried distillers grains (DDGs) are a by-product of ethanol made from corn and have to be marketed and/or transported. Such a problem could be solved if a dairy or cattle operation moved into an area close to an ethanol plant.

Scherr noted that the ethanol industry can remain profitable at much higher corn prices than livestock feeders, which will change the dynamics of rationing in case of a short crop.

“In 1996-96, when we had limited supply of corn and lot of demand, the importer was the last to ration. They were paying $5 a bushel. The domestic livestock feeder was second to ration, and the first to ration was the industrial manufacturer, which were a handful of ethanol producers.

“In the future, that's going to flip-flop. The last rationer will be the industrial sector. If you have a 100-million-gallon ethanol plant, and you produce $3.25-per-gallon ethanol, you can go all the way to $4 corn, and you're still making money. But if you're feeding hogs, or cattle, and you get to $4 corn, you're going to have to ration. You'll have to liquidate.”

Other factors that could change the future for ethanol are a collapse of the Asian economies due to recession or economic collapse. Scherr is also concerned about political changes that remove mandates and incentives for continued growth, “which might happen with lower crude prices.”

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