Abet Chichi2

[bob3]

Flooding muddies push for ethanol
Higher corn prices lead to call to modify biofuel rule

David Shepardson / Detroit News Washington Bureau

http://www.detnews.com/apps/pbcs.dll/article?AID=/20080623/AUTO01/806230375/1148

WASHINGTON -- Massive flooding in the Midwest has ruined millions of acres of crops, spurring record corn prices and raising serious questions about whether the United States can meet new requirements for using corn-based biofuels in the nation's cars and trucks.

A sweeping federal energy bill signed into law in December requires the production of 9 billion gallons of biofuels this year, nearly all of it corn-based ethanol, up from 6.5 billion in 2007.

Backed by farm state politicians and President Bush, the increase in biofuels output drew strong support as a way to reduce the nation's dependence on foreign oil with a homegrown alternative.

But a backlash is emerging.

In April, Texas Gov. Rick Perry asked the Environmental Protection Agency to cut the 2008 mandate in half, citing steep increases in feed prices for cattle and rising food prices.

Last month, 24 Republican senators, including John McCain, the presumed Republican presidential nominee, sent a letter to the EPA saying it needs to revisit the mandate, also because of the rise in food prices, among other factors.

The U.S. Department of Agriculture said Friday it expected food prices to rise 5 percent in 2008, the highest increase since 1990, when oil prices spiked in the run-up to the Persian Gulf War. That estimate is expected to go up after the flooding to take into account reduced production.

The Grocery Manufacturers Association blames ethanol, calling the fuel diversion "unsustainable."

But the redirection of food for fuel is only going to increase: By 2015, the United States must produce 15 billion gallons of biofuels, and 21 billion gallons by 2022.

The damage to the corn crop -- as much as 4 percent of total U.S. corn production, or 3.3 million acres, could be lost -- is pushing up ethanol prices as well.The wholesale price of ethanol rose 40 cents a gallon in the last month as corn prices have doubled in the past year to an all-time high of nearly $8 a bushel.

Some energy analysts now say the government may have to suspend the biofuels mandate because at those prices it's not profitable to make ethanol, and because 400 million gallons of production has been lost because of the floods.

Congress won't pull back

Bob Dineen, president of the Renewable Fuels Association, said ethanol is still a good deal.

"Abandoning our commitment to ethanol and biofuels, as some would suggest we do, would do nothing to provide meaningful relief from high grain prices today or in the future," he said. "It would absolutely force the price of gas through the roof and require the import of more record-high foreign oil."

Congress isn't likely to pull back on the biofuel mandates in an election year, despite the continuing rise in food prices and the challenges that now exist because of the floods. Additionally, support remains strong in farm states to leave the mandates in place.

Sen. Charles Grassley, R-Iowa, said no decisions should be made on the mandate until after the harvest is complete. He and other farm state members of Congress argue that the Agriculture Department should allow more planting in 35 million acres of conservation land as a way to help ease the price increases.

That won't help Texas cattle ranchers today. Every 1 cent increase in corn prices boosts feed prices for the Texas cattle industry by $6 million. Perry asked the EPA to move quickly because Texas is the nation's largest beef producer and one of the top 10 poultry, egg and dairy producers.

The EPA, which has the authority to suspend the biofuels mandate, is studying Texas' request, said EPA spokesman Jonathan Shradar.

Corn fuels concerns

Corn is the United States' biggest agriculture product -- 13.1 billion bushels worth $52 billion were produced in 2007, twice the value of soybeans, the second largest crop.

Michigan is the nation's 11th biggest producer of corn, according to the Agriculture Department.

The state's 2.35 million acres of corn have largely been spared the devastation caused by floods in nearby Indiana, Illinois and Iowa, but Michigan farmers may not benefit from the steep hike in corn prices. Many of them locked in prices at $3 to $4 a bushel before the harvest was planted.

The United States exports more than half of the world's corn. But more of it is going to ethanol -- 25 percent in 2007, and it will be 35 percent this year, Merrill Lynch said in a June 6 research note.

That has fueled concerns that corn is behind the big jump in worldwide food prices that have led to higher inflation and food riots in poor countries that rely on corn as a staple food source.

If that corn wasn't going into engines, Americans would be burning a lot more gasoline, according to Merrill Lynch, and oil prices would be at least 15 percent higher without biofuels.

Others, like Bruce Dale of Michigan State University, an expert on ethanol, note that energy prices, especially oil, are driving much of the increase in food prices.

"We've had cheap food and cheap energy for a long time," Dale said. He noted diesel fuel has jumped to $4.70 a gallon, up $1.88 in the last year, which also has boosted food prices.

Detroit's Big Three automakers have made a big bet on ethanol, promising to produce half of their fleets as flex-fuel vehicles by 2012, capable of running on E85, a blend made of 85 percent ethanol and 15 percent gasoline.

Automakers get credits toward meeting fuel economy requirements by building vehicles that can run on E85.

Last year, GM alone produced 759,000 flex-fuel vehicles in 11 models in the United States, said Alan Adler, a GM spokesman.

GM also has helped get E85 in more than 300 gas stations since 2005 and will have 18 flex-fuel 2009 models, Adler said.

"This is a pretty challenging time, and I don't see anybody's resolve weakening," Adler said.

You can reach David Shepardson at [e-mail].