[Senate Hearing 110-529]
[From the U.S. Government Publishing Office]
S. Hrg. 110-529
BIOFUELS IMPACT ON FOOD PRICES
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
TO
RECEIVE TESTIMONY ON THE RELATIONSHIP BETWEEN THE UNITED STATES'
RENEWABLE FUELS POLICY AND FOOD PRICES
__________
JUNE 12, 2008
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JIM DeMINT, South Carolina
MARIA CANTWELL, Washington BOB CORKER, Tennessee
KEN SALAZAR, Colorado JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Glauber, Joseph, Chief Economist, Department of Agriculture...... 11
Huttner, Jack, Vice President, Biorefinery Business Development,
Genencor, Rochester, NY........................................ 37
Karsner, Alexander, Assistant Secretary, Energy Efficiency and
Renewable Energy, Department of Energy......................... 5
Outlaw, Joe L., Agricultural and Food Policy Center, Texas A&M
University, College Station, TX................................ 20
Pyle, Jason, Chief Executive Officer, Sapphire Energy, Inc., San
Diego, CA...................................................... 25
von Braun, Joachim, Director General, International Food Policy
Research Institute............................................. 33
APPENDIXES
Appendix I
Responses to additional questions................................ 69
Appendix II
Additional material submitted for the record..................... 91
BIOFUELS IMPACT ON FOOD PRICES
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THURSDAY, JUNE 12, 2008
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 2:15 p.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. The hearing will come to order.
Thank you all for coming here today to discuss our Nation's
biofuels policy and how that policy is affecting domestic and
global food prices. The recent increase in commodity prices,
with food and fuel prices at historic highs, highlights the
importance of trying to be sure we get our policies right. We
called today's hearing in an effort to do just that, to make
sure that those policies make sense.
Last month, I asked the Secretaries of Agriculture and
Energy a series of questions about the impact of the Renewable
Fuels Standard on domestic and international food and fuel
prices. Those questions were intended to establish some of the
facts on this issue so that we could base today's discussion on
facts rather than on agenda-driven calculations that we see
more often than not.
The answers that I received from the Departments of
Agriculture and Energy indicate that U.S. biofuels policy
explains between 4 and 5 percent of the 45 percent global
increase in food prices this last year. At least that is my
interpretation of what they have said. If that is wrong, we can
clarify that. At the same time, biofuels have increased the
U.S. fuel supply and are reducing the price that Americans pay
at the gas pump by somewhere between 20 and 35 cents per
gallon.
As we continue on this path toward expanding our
alternatives to gasoline and reducing its cost, we obviously
need to find a way to eliminate any impact on global food
prices. The intent of the Renewable Fuels Standard that was
enacted in December of last year, December 2007, is to move
beyond our current technologies and to technologies that have
no implications for our food supply.
I think the critics of our current biofuels policy do not
question the validity of our end goal of a healthy second-
generation biofuels industry, but rather question our path for
arriving at that end goal. Our current path does require
increased use of existing biofuels, including corn ethanol and
soy-based biodiesel.
We need to consider what altering that path now would do to
industry that is attempting to respond to the Government
policies we have already put in place and if there would be
negative implications for second-generation fuels. It is a fact
that many of the companies that are expected to be next-
generation biofuel industry leaders, especially for cellulosic
ethanol, are current industry leaders in corn ethanol
production.
At the same time, we need to be mindful of any unintended
consequences of our biofuels policy. No one wants our biofuels
policy to increase the prices that Americans are paying at the
grocery store. We also, of course, need to ensure that our
policies, including but not limited to our biofuel policies,
are not negatively impacting the world's poor who are most
vulnerable to food price increases. I take seriously the United
Nations call for further study on the topic of biofuels and
look forward to constructive thoughts on how we can create a
more sustainable global biofuels industry.
Let me just defer to Senator Domenici for his statement at
this time.
[The prepared statements of Senators Bingaman and Salazar
follow:]
Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
Thank you all for coming today to discuss our nation's
biofuels policy, and how that policy is affecting domestic and
global food prices. The recent increase in commodity prices,
with food and fuel prices at historic highs, highlights the
importance of getting our policies right. I called today's
hearing in an effort to help us do just that: to make sure we
are getting our biofuels policy right.
Last month, I asked the Secretaries of Agriculture and
Energy a series of questions about the impact of the Renewable
Fuel Standard on domestic and international food and fuel
prices. Those questions were intended to establish some of the
facts on this issue, so that we could base today's discussion
on facts, rather than the agenda-driven calculations that we
see more often than not.
The answers that I have received from the Departments of
Agriculture and Energy indicate that U.S. biofuels policy
explains between 4 and 5 percent of the 45 percent global
increase in food prices in the last year. At the same time,
biofuels have increased the U.S. fuel supply and are reducing
the prices that Americans pay at the gas pump by between 20 and
35 cents per gallon.
As we continue on this path toward expanding our
alternatives to gasoline and reducing its cost, we obviously
need to find a way to eliminate any impact on the global food
prices. The intent of the Renewable Fuel Standard that was
enacted in December 2007 is to move beyond our current
technologies, to technologies that have no implications for our
food supply.
I think the critics of our current biofuels policy do not
question the validity of our end goal of a healthy second-
generation biofuels industry, but rather question our path for
arriving at that end goal. Our current path does require
increased use of existing biofuels, including corn ethanol and
soy-based biodiesel.
I am concerned that altering that path now would not only
be unfair to the industry that is responding to the government
policies that have already been put in place, but also would
have negative implications for second-generation fuels. It is a
fact that many of the companies that are expected to be next-
generation biofuel industry leaders, especially for cellulosic
ethanol, are current industry leaders in corn ethanol
production. To hurt those companies' bottom lines now would
endanger their investments in expanding their business to
include next-generation production.
I also suspect that investment in other kinds of next-
generation technology would suffer, as investors would feel
less confident of Congress's commitment to its biofuels
policies. I believe that many next-generation fuels hold great
promise for further diversifying our fuel supply. As we
diversify away from biofuel feedstocks that compete with our
grain supply, we also diversify the geographic production areas
beyond the current base in the Midwest.
In my home state of New Mexico, which has no corn ethanol
production, limited sorghum-ethanol production, and very small
amounts of biodiesel production, is an example of how the
geography of biofuels production can change. We are hopeful
that we will be home to the country's first biobutanol plant,
which could be located near Portales, New Mexico, and could use
sweet sorghum as a feedstock. We also understand that New
Mexico is one of the most promising states in the U.S. for
large-scale algae production, which we will hear more about in
today's hearing. We need the market certainty that comes with
the existing renewable fuels mandate in order to realize the
benefits of this next-generation industry.
At the same time, I do think we need to be mindful of any
unintended consequences of our biofuels policy. No one wants
our biofuels policy to increase the prices that Americans are
paying at the grocery store--although I think we can agree that
this domestic price increase is to some degree offset by the
savings we're seeing at the fuel pump. But we must also ensure
that our policies, including but not limited to our biofuels
policies, are not negatively impacting the world's poor, who
are most vulnerable to food price increases. I take seriously
the United Nations call for further study on the topic of
biofuels, and look forward to constructive thoughts on how we
can create a more sustainable global biofuels industry.
------
Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
Mr. Chairman and Ranking Member Domenici, thank you for
holding this critical hearing on the relationship between our
nation's renewable fuels policy and food prices. Obviously fuel
and gasoline prices are front and center in our minds today as
families across the country are struggling to cope with
spiraling fuel costs. Globally, however, there is an emerging
food crisis that threatens to affect the lives of millions of
the world's poorest citizens. It is our responsibility to
evaluate whether our biofuels policies are impacting food
prices.
As I have said repeatedly over the last four years there is
no quick fix to this enormous problem, but there are a number
of things we can do to stem the tide of rising fuel costs in
the long-run. We need to be improving our energy efficiency,
investing in technologies, and developing our clean energy
economy. And I am proud that under your and Sen. Domenici's
leadership this committee has produced two landmark energy
bills that are huge steps in the right direction in terms of
righting our nation's energy policy and breaking our addiction
to foreign oil.
At the end of 2007, Congress passed legislation to increase
fuel efficiency standards in cars and light trucks by over 40
percent by 2020. This will save over 1.1 million barrels of oil
a day. The bill we passed last December, the Energy
Independence and Security Act, is spurring rapid development
and deployment of the next generation of biofuels, such as
cellulosic ethanol. The bill quintupled the existing renewable
fuels standard to 36 billion gallons by 2022, 21 billion of
which must be from advanced biofuels, such as cellulosic
ethanol. That is more than enough to offset our oil imports
from Saudi Arabia, Iraq, and Libya combined.
I was also proud of the work we did in the Farm Bill to
spur cellulosic biofuels production. Cellulosic biofuels have
the potential to displace 3 billion barrels of oil annually,
equivalent to 60 percent of our country's yearly consumption of
oil in the transportation sector, without affecting our need
for food, feed or fiber, and DOE scientists believe have the
potential to dramatically reduce carbon pollution. The Farm
Bill includes a provision I sponsored that provides a $1.01/
gallon tax credit for the production of cellulosic biofuels. It
is the first incentive for cellulosic biofuels of its kind.
Biofuels are an essential and critical part of our strategy
to reduce our dependence on foreign oil. Recently many have
attributed the rising cost of food worldwide to the increased
use of biofuels, and corn ethanol in particular. Some are even
calling for a repeal of the expansion of our renewable fuels
standard that was a cornerstone of last year's Energy
Independence and Security Act. I believe firmly that we must
not lose our resolve.
The so-called ``food vs. fuel'' issue has been a part of
the discussion of biofuels from day one, and today's full-
throated debate is an important opportunity to engage in a
healthy discussion of the future of biofuels. But as I'll
explain, ethanol production is not driving food prices up. In
the long run, pushing forward with the RFS and the development
of cellulosic biofuels--biofuels that are made from various
waste feedstocks--is one of the most responsible things we can
do to reduce our dependence on foreign oil.
Three principal factors have driven rising food prices, and
ethanol production isn't one of them. First, global demand for
grains, particularly from China and India, is rising. Second,
global supply has slumped badly due to serious drought
conditions in several areas of critical agricultural
production. U.S. producers are doing everything they can to
boost supplies. Not counting corn used for ethanol production,
we produced 17% more corn food product and exported 23% more
food product overall in 2007 than in 2006. Furthermore, Ed
Lazear, Chairman of the President's Council of Economic
Advisors, stated recently that ethanol accounts for less than 3
percent of the increase in global food prices.
The third major factor driving increased food prices is the
rising cost of oil. Petroleum costs are embedded in every part
of the global food supply chain. Recent studies by USDA reveal
that for every dollar we spend on food, only twenty cents is
the cost of the food product itself. The other 80 cents or so
are the costs of labor, energy, transportation, etc. Simply put
there is a broad consensus that in the global marketplace, U.S.
corn production alone does not set the price for corn and that
biofuels production has a negligible impact on the prices of
wheat, rice, and other food commodities.
With the price of oil spiraling higher, it is easy to lose
sight of the fact that gas prices would be even higher today if
not for biofuels. Merrill Lynch estimates that we would be
paying 15 percent higher prices at the pump without current
domestic biofuels on the market. In addition, studies are
showing that, as a result of our renewable fuels standard
enacted in 2005, U.S. oil imports recently declined for the
first time in a quarter century.
In my view, biofuels are a centerpiece of our quest for
energy independence and we must stay the course with the RFS. I
am eager to engage in this discussion and to hear the
perspectives from our distinguished panel on these critical
issues. Thank you, Mr. Chairman.
Senator Domenici. Mr. Chairman, in order to expedite the
hearing, since we have a number of places to go and still want
to do this committee justice, I would ask that my statement be
put in the record, provided we can just proceed after this to
the witnesses. Is that what would happen?
The Chairman. That is correct since I do not anticipate any
other opening statements. So we will put your statement in the
record.
[The prepared statement of Senator Domenici follows:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From
New Mexico
Thank you, Mr. Chairman, for calling this hearing on a topic that
you and I have worked closely on in recent years. I am very proud of
the work that this committee has done to promote the production of
domestic biofuels. Increasing their availability and usage could help
resolve some of our most serious energy challenges.
Late last year we passed the Energy Independence and Security Act,
a bill that will significantly strengthen our nation's energy security.
One of its most important provisions was an expansion of the Renewable
Fuel Standard, which we first established in the Energy Policy Act of
2005.
Much has changed since the 2005 standard was put into place. In
2005, we thought of renewable fuels as fuel additives. But last year,
in his State of the Union Address, the President laid out his ``Twenty
in Ten'' initiative, which inspired people to think of renewable fuels
as full-fledged transportation fuels. Our re-evaluation and enhancement
of the renewable fuels standard in 2007 reflects our strong desire to
promote development of fuels that will reduce the nation's reliance on
foreign oil.
We have been on the Senate floor for the past week talking about
our energy crisis. I have stressed that we need to produce all the
domestic oil and gas that we can, and as soon as we can, not only to
dampen prices, but as a bridge to the future where we envision our
nation's freedom from foreign sources of energy. While some biofuels
technology, like corn ethanol, is available now to help build that
bridge, we must also move forward with advanced biofuels, including
cellulosic ethanol, if we're going to get to the other side of the
bridge where biofuels, nuclear energy, wind, solar, and other
renewables will secure our energy future, free of foreign sources. In
the near term, wholesale ethanol is currently about one dollar cheaper
than wholesale gasoline. As more biofuels are produced, as more service
stations offer them for purchase, and as more cars are able to run on
them, we should expect even more progress in decreasing fuel prices and
emissions. But the purpose of this hearing is not to look at the
benefits that biofuels have for our energy supply and security. We have
already concluded that the benefits are legion. Instead, we're here
today to examine what role, if any, biofuels are playing in recent
price increases for agricultural commodities. Many in the media, along
with other critics of biofuels, have been quick to blame increases in
the price of corn on greater demand for ethanol. America's biofuels
policy has been called into question, and the ``food versus fuel''
debate has now led to a number of formal requests to suspend or repeal
the Renewable Fuel Standard.
Most experts point out that there are multiple factors contributing
to food price increases. Those include higher energy prices, soaring
global demand for commodities, droughts, the weakening of the dollar,
and poor agricultural policies around the world.
A number of studies have examined the relationship between domestic
biofuels production and global access to food. I hope that our
witnesses today will help in our assessment of these studies and our
search for answers as to whether increased production of biofuels will
exacerbate world hunger.
We want to ensure that the expanded RFS promotes a robust biofuels
industry here in the United States. We want to make sure that we take
the right approach to facilitate the implementation of that program,
and provide a smooth transition to greater integration of biofuels into
our energy supply mix. But as we do those things, we also want to be
sure that we do not create other problems that will in turn need to be
dealt with.
I look forward to the testimony from today's witnesses, and hope to
learn more about what we can do to ensure that we meet these
objectives.
The Chairman. Let me just alert all the witnesses that we
do have a vote scheduled here at 3 o'clock. So we hope by then
we can have everyone's testimony in, and then we will probably
have a short recess and return for some of the questions that I
am sure people will have.
Let me just introduce our witnesses. First is Alexander
Karsner who is the Assistant Secretary in the Office of Energy
Efficiency and Renewable Energy in the Department of Energy.
He's a regular witness here, and we appreciate him being here
again today. Joseph Glauber, who is the Chief Economist with
the Department of Agriculture. We appreciate you being here
very much. Joe Outlaw, who is the Co-Director of the
Agricultural and Food Policy Center in the Department of
Agricultural Economics in College Station, Texas. Thank you for
being here. Joachim von Braun. I am getting you a little out of
order here. I guess the next in order of the way you are seated
is Jason Pyle. Jason is the Chief Executive Officer with
Sapphire Energy out of San Diego, California. Thank you for
coming. Joachim von Braun is the Director General of
International Food Policy with the Research Institute here in
Washington, DC. Thank you very much for being here. Jack
Huttner, who is the Vice President of Biorefinery Business
Development in Genencor out of Rochester, New York.
Thank you all for being here, and if each of you could take
5 or 6 minutes and summarize the main points you think our
committee needs to understand and we will put your full
statements in the record as if read. Let us start with you,
Andy. If you will just go ahead. Thank you.
STATEMENT OF ALEXANDER KARSNER, ASSISTANT SECRETARY, ENERGY
EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY
Mr. Karsner. Mr. Chairman, Ranking Member Domenici, members
of the committee, thanks for the opportunity to appear before
you today to discuss the sustainable contribution that biofuels
make to the Nation's fuel supply in the context of the food
versus fuel debate. All of us recognize that rising food and
fuel prices are an important pocketbook issue for American
consumers. We also recognize the national and economic security
importance of addressing our dangerous addiction to oil, as
well as the urgency of developing clean alternative fuels that
reduce greenhouse gas emissions and enhance our environmental
well-being. Our biofuels policy and national program make
important contributions with consideration and inclusion of all
of these goals.
Unfortunately, recent media coverage of ethanol and food
prices has created a number of misconceptions about biofuels
and fed inaccuracies into the global and national dialog. The
most prominent recurring myths are that ethanol does not
improve the energy balance, that it has a net negative impact
on the environment, and that it is a primary contributor to
rising food prices. We appreciate the opportunity to address
these views and continue to invite all serious and interested
parties to engage with the depth of experience that our
national laboratories and scientists can provide on the
subject.
Data would suggest that domestic biofuels are not in and of
themselves creating a food security issue and in fact are only
a small fraction of the increase in food prices. Importantly,
biofuels offer a number of significant energy security and
environmental benefits that will continue to grow, assuming a
predictable policy environment as the technology for next-
generation biofuels evolves. Of course, next-generation
biofuels are exclusively what the Department of Energy invests
in.
In the U.S. today, conventional ethanol has a positive
energy balance and this balance is measurably and constantly
improving with new technologies and efficiencies. According to
Argonne National Laboratory, each gallon of ethanol produced
from corn today is estimated to deliver on average 25 percent
more energy than the energy that is used to produce it.
DOE's current estimates find that ethanol also results in
approximately 20 percent fewer greenhouse gas emissions
compared with gasoline. According to Argonne National
Laboratory, with improved efficiency and the use of renewable
energy in production, this reduction could potentially reach up
to 52 percent, which has recently been demonstrated. The
positive energy balance and the potential GHG reduction from
cellulosic ethanol is, of course, far greater still.
With regard to food price impacts, most preliminary
analyses suggest that present feedstock demand for domestic
biofuels plays only a small role in global food supply and
pricing. Moreover, the food price impact of domestic biofuels
on U.S. consumers is even smaller since the farm price of
commodities accounts for less than 20 percent of U.S.
consumers' food costs.
Of course, there is significant offset and compensation for
some of this through the constraint on retail fuel prices at
the gasoline pump which we conservatively estimate to be 20 to
35 cents per gallon savings for the use of ethanol every time
we fill up. Independently verified and peer-reviewed studies
suggest the number is far higher.
To help meet our long-term energy needs, this committee has
ensured that the Department of Energy's biomass-related
activities are 100 percent designed and dedicated to move
toward non-food, nonedible feedstocks in a renewable and
sustainable way. Primarily, this is from waste streams and
fast-growing sustainable energy crops that have the potential
to have an even greater positive environmental and energy
security impact.
Cellulosic biofuels are expected to deliver four to six
times as much energy as what is required to produce them.
Additionally, DOE research has shown that cellulosic feedstocks
can reduce life-cycle greenhouse gas emissions by up to 86
percent when compared with gasoline.
DOE's research, development, deployment, and
commercialization activities exclusively support the
development of cellulosic and advanced biofuels. This is
consistent with EPACT section 932. So the Department is
investing up to $385 million over the next 4 years in cost-
shared, integrated, commercial-scale biorefineries that are
projected to produce up to 130 million gallons of ethanol from
cellulosic biomass.
In addition, DOE is investing up to $200 million over the
next 5 years in smaller 10 percent scale cost-shared
biorefineries that will demonstrate a range of advanced
biochemical and thermochemical conversion platforms and
technologies and use a wide range of sustainable cellulosic
feedstocks.
With continued technological advances, cellulosic ethanol
and other advanced biofuels will, in fact, help our Nation reap
greater benefits in the future, complementing the bipartisan,
bold energy initiatives that the President and Congress have
put in place to enhance our Nation's energy security and
economy.
The food and fuel pricing issues, including aspects of
sustainability, need increased clarity and further dialog as
they are, of course, important and complex as we grow
alternatives to a carbon-based fossil fuel economy. We would
again caution, therefore, against hasty judgments based on
insufficient assumptions, limited information, or the interest
of particular parties or groups. Many analysts both within and
outside of the Government are currently working to analyze
these issues on a scientific and economic basis, and one
certainty is that our data, as well as the technologies and the
performance, will continue to improve substantially in the
months and the years ahead.
Mr. Chairman, thank you for holding this important hearing
and your continued leadership offering us perspective and
proportionality on these issues. I appreciate the leadership of
the committee in this and the opportunity to address the
current debate of the role of biofuels as part of our Nation's
energy portfolio.
This concludes my prepared statement and I am happy to
answer any questions that you may have.
[The prepared statement of Mr. Karsner follows:]
Prepared Statement of Alexander Karsner, Assistant Secretary, Energy
Efficiency and Renewable Energy, Department of Energy
Mr. Chairman, Ranking Member Domenici, Members of the Committee,
thank you for the opportunity to appear before you today to discuss the
sustainable contribution that biofuels can make to the Nation's fuel
supply in the context of the U.S. Renewable Fuel Standard (RFS) and the
food versus fuel debate. All of us recognize that high food prices and
high gasoline prices are important ``pocketbook'' issues for American
consumers. We also recognize the national and economic security
importance of reducing our dependence on oil as well as the urgency of
developing new fuels that will reduce greenhouse gas emissions. Our
biofuels policy makes important contributions to each of these goals.
FEDERAL COMMITMENT TO SUSTAINABLE BIOFUELS DEVELOPMENT
As part of the 2007 State of the Union Address, President Bush
called on Congress to significantly increase the use of advanced
biofuels as part of the Twenty in Ten Initiative. Congress passed and
the President signed into law the Energy Independence and Security Act
of 2007 (EISA), requiring that U.S. transportation fuels contain at
least nine billion gallons of renewable fuels in 2008, growing to 36
billion gallons in 2022. Of the quantity required in 2022, at least 21
billion gallons must be advanced biofuels (non-corn), and of that 21
billion, 16 billion gallons must be cellulosic biofuels; ethanol from
corn is capped at 15 billion gallons. The Department of Energy is
committed to the goal of developing cost-competitive cellulosic ethanol
by 2012. Our efforts will help spur the resources, technologies, and
systems at the rate and scale needed to enable this mandate to be met,
and impact climate change. To that end, DOE and other federal agencies
are working to develop diverse, non-food feedstocks that require little
water or fertilizer, and to foster sustainable agricultural and
forestry practices. The Administration is also committed to developing
a methodology, as required by EISA, to assess the life-cycle impacts of
biofuels production, from feedstocks to vehicles, and analyze the
impacts to land use and soil health, water use, air quality, and
greenhouse gas emissions. Many of these issues are also being addressed
through the senior-level Biomass R&D Board Sustainability Working
Group, which the Departments of Energy (DOE) and Agriculture (USDA) and
the Environmental Protection Agency (EPA) jointly chair.
Together, DOE, USDA, and EPA continue to be committed to collecting
and presenting accurate data, projecting potential impacts, and
initiating the necessary and appropriate actions to ensure the
sustainable growth of biofuels. To that end, DOE, USDA, and EPA have
significantly ramped up our analytical efforts to ensure that we
proceed with caution but also determination. The agencies will continue
to work together as we undertake our respective responsibilities under
Title II of EISA.
DOE is also leveraging other partnerships to support the RFS goals.
The Department is investing up to $385 million total over four years
(FY 2007-FY 2010, subject to appropriation) in cost-shared, integrated
commercial-scale biorefineries that are projected to produce up to 130
million gallons of ethanol from cellulosic biomass in four years when
they are fully operational. In addition, DOE is investing up to $200
million over five years (FY 2007-FY 2011, subject to appropriation) in
smaller (10% of commercial scale) cost-shared biorefineries that will
demonstrate a wider range of advanced biochemical and thermochemical
conversion technologies and use a wide array of cellulosic feedstocks.
In addition, the Department's Office of Science has recently
established three major new DOE Bioenergy Research Centers--led by the
University of Wisconsin-Madison, Oak Ridge National Laboratory, and
Lawrence Berkeley National Laboratory, respectively--which are bringing
together top scientists and researchers in an effort to accelerate the
transformational breakthroughs in basic science needed to make next-
generation cellulosic biofuels cost-effective. The Department plans to
invest over $400 million in total in this effort through FY 2012.
MISCONCEPTIONS ABOUT BIOFUELS: ENVIRONMENT, GASOLINE PRICES, AND
FOOD SUPPLY
Recent press coverage of ethanol and food prices has created a
number of misconceptions about biofuels. The most prominent of these
misconceptions are that ethanol does not improve the energy balance,
that it has a negative impact on the environment, and that it
contributes to rising food prices. We appreciate the opportunity to
address these views. We believe biofuels are not creating a food
security issue and are only a small part of increased food prices. In
addition, biofuels offer a number of important energy and environmental
benefits that will grow as the technology for next generation biofuels
comes online.
Today's corn-based ethanol has a positive energy balance--that is,
the energy content of ethanol is greater than the fossil energy used to
produce it--and this balance is constantly improving with new
technologies. According to Argonne National Laboratory, each gallon of
ethanol produced from corn today is estimated to deliver on average 25
percent more energy than would the fossil energy that is used to
produce it.\1\ Over the last 20 years, the amount of energy needed to
produce ethanol from corn has significantly decreased because of
improved farming techniques, more efficient use of fertilizers and
pesticides, higher-yielding crops, and more energy-efficient conversion
technology.\2\ A few scholars have conducted studies that allege a
negative energy balance for ethanol; however, these fail to take into
account the energy use avoided because of the production of co-products
such as Distiller's Grain, a high-protein animal feed.\3\
---------------------------------------------------------------------------
\1\ Source: Wang et al, ``Life-cycle energy and greenhouse gas
emission impacts of different corn ethanol plant types,'' Environmental
Research Letters, May 2007.
\2\ Source: May Wu, Center for Transportation Research, Argonne
National Laboratory, ``Analysis of the Efficiency of the U.S. Ethanol
Industry 2007.'' http://www.ethanolrfa.org/objects/documents/1656/
argonne_efficiency_analysis.pdf.
\3\ See metaanalysis supportive of this statement: Farrell et al,
``Ethanol Can Contribute to Energy and Environmental Goals,'' Science
Magazine, January 2006.
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DOE's current estimates find that ethanol also results in fewer
greenhouse gas (GHG) emissions than gasoline, and is fully
biodegradable, unlike some fuel additives. DOE's analysis shows that
today, on a life-cycle basis, corn ethanol produces approximately 20
percent fewer GHG emissions than gasoline. According to Argonne
National Laboratory, with improved efficiency and use of renewable
energy, this reduction could reach 52 percent.\4\ The positive energy
balance and the potential GHG reduction from cellulosic ethanol is far
greater, as I will discuss later in this testimony. It is important to
note that the lifecycle greenhouse gas emissions estimates discussed
here do not reflect indirect land use impacts requirements as specified
in EISA. Life-cycle analyses involve a number of complicating factors,
such as direct and indirect land use effects, and DOE is working with
EPA as they develop a lifecycle methodology that meets the EISA
definition.
---------------------------------------------------------------------------
\4\ Source: Wang et al, ``Life-cycle energy and greenhouse gas
emission impacts of different corn ethanol plant types,'' Environmental
Research Letters, May 2007.
---------------------------------------------------------------------------
Further evidence of ethanol's environmentally sound contribution to
the fuel supply is that vehicles fueled with the ethanol-blended fuels
currently in the market--whether E10 or E85--must meet EPA's stringent
tailpipe emission standards. Ethanol has proven to be a safe, high-
performance replacement for fuel additives such as MTBE.
Blending ethanol and gasoline has led to questions on its potential
impact on gasoline prices. However, evidence from an Iowa State study
suggests that without ethanol, gasoline prices would be higher.\5\
According to this analysis, even during the period in which MTBE was
being phased out (2006) and ethanol prices were very high, had ethanol
not been available, gasoline prices would have been even higher.\6\
---------------------------------------------------------------------------
\5\ Source: http://www.card.iastate.edu/publications/DBS/PDFFiles/
08wp467.pdf.
\6\ Historical spot conventional regular gasoline data from EIA
2003-2007, Spot ethanol prices at Chicago Board of Trade 2003-2007, Oil
Price Information Services (OPIS).
---------------------------------------------------------------------------
Ethanol is currently less costly than the refiner's average mix of
gasoline components. The cost of ethanol to refiners has been lower
than the wholesale cost of conventional gasoline.\7\ In fact, as of the
week of May 26, 2008, the gap was close to a $1.00/gallon difference;
even adjusting for energy content, ethanol is cost-competitive.
According to EIA, if we had not been blending ethanol into gasoline,
gasoline prices would be between 20 cents per gallon to 35 cents per
gallon higher.\8\
---------------------------------------------------------------------------
\7\ Based on Oil Price Information Service data for spot prices of
ethanol (after rebate) and conventional gasoline.
\8\ This estimate relies on data on the current price difference
between ethanol and gasoline and the elasticity of supply for
petroleum. Consequently, a range is presented.
---------------------------------------------------------------------------
With regard to food price impacts, our preliminary analysis
suggests that current biofuels-related feedstock demand plays only a
small role in global food supply and pricing.\9\ Moreover, the impact
of biofuels on U.S. consumers is even smaller since the farm price of
commodities accounts for less than 20 percent of U.S. consumers' food
costs.\10\
---------------------------------------------------------------------------
\9\ Source: http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/
7_0_1OB?contentidonly=true&contentid=2008/05/0130.xml, http://
www.afpc.tamu.edu/pubs/2/515/RR-08-01.pdf.
\10\ Source: USDA's Economic Research Service.
---------------------------------------------------------------------------
Numerous studies have found that world food prices have increased
due to many factors, including high oil prices (used both in
transportation and production of food); droughts in some key exporting
countries, including Australia; increased demand as emerging economies
grow and their populations consume better diets and eat more meat; a
reduction of global agricultural R&D; and other factors.
In 2007, about a quarter of the U.S. corn crop went to biofuels
production, but this fact can be misleading in isolation. Only the
starch from the corn kernel is used to produce the fuel, leaving the
co-product Distiller's Grain. These Distiller's Grains are used as
animal feed which is valued by its protein content, which is
significantly higher by weight than the protein content of corn. As a
result, almost one-third of each ton of corn used for ethanol
production is recovered as a livestock feed. Thus, in actuality, only
about one-sixth of the U.S. corn crop by mass is used in fuel
production. Moreover, it is important to note that U.S. corn exports
have been stable throughout the past decade, and have, in fact,
increased recently.\11\
---------------------------------------------------------------------------
\11\ Source: USDA National Agricultural Statistics Service.
---------------------------------------------------------------------------
Furthermore, our Nation's enhanced farming techniques and continued
improvement in plants and seeds will likely enable our supply to grow.
Yield increases could enable us to double our corn based ethanol
production over the next ten years while maintaining corn availability
for other uses.\12\
---------------------------------------------------------------------------
\12\ Source: Historical Trend data from USDA.
---------------------------------------------------------------------------
Finally, increased global food demand as living standards and diets
improve is an important factor in explaining increases in commodity
prices, and is unrelated to biofuels. According to the UN, global
economic growth has driven up prices for all commodities.\13\
---------------------------------------------------------------------------
\13\ Source: UNCTAD database: http://www.unctad.org/Templates/
Page.asp?intItemID=1584&lang=1.
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THE POTENTIAL FOR CELLULOSIC ETHANOL AND OTHER ADVANCED BIOFUELS
Evidence suggests that corn ethanol is not the primary driver
affecting worldwide food prices. To help meet our long-term energy
needs, the Department's biomass research and development activities are
designed to move toward non-food feedstocks that have the potential to
have an even greater positive environmental impact.
The biomass feedstocks of today include grains (corn, sorghum,
wheat), as well as oilseeds and plants (such as soybeans). The
feedstocks of tomorrow will come from a variety of sources such as
wastes and residues and fast-growing energy crops. These future
feedstocks will consist of agricultural residues like stalks, stems,
and other crop wastes, as well as forest resources such as wood waste,
forest thinnings, and small-diameter trees. Examples of energy crops
include switchgrass, miscanthus, and hybrid poplar trees, in addition
to oilseeds and oil crops like algae and jatropha. Some of these
promising energy crops can grow on marginal soils, and they can
actually sequester carbon. Forest resources, green wastes, and sorted
municipal solid waste will also play a role.
As I noted earlier, research to date suggests that today's ethanol
has a positive energy balance--that is, the energy content of corn
ethanol is greater than in the fossil energy used to produce it. In the
future, cellulosic ethanol is expected to improve upon this by
delivering four to six times as much energy as needed to produce
it.\14\ Additionally, DOE research has shown that cellulosic feedstocks
can reduce life-cycle greenhouse gas emissions by 86 percent compared
to gasoline.\15\
---------------------------------------------------------------------------
\14\ Source: Wang et al, ``Life-cycle energy and greenhouse gas
emission impacts of different corn ethanol plant types,'' Environmental
Research Letters, May 2007.
\15\ Ibid.
---------------------------------------------------------------------------
A number of market and technical barriers to advanced biofuel
production exist. Fortunately, Congress and the Administration have
taken steps to diminish these obstacles, and we are poised to make even
more progress. Market barriers include a lack of cellulosic feedstock
market and high capital costs. The main technical barriers are a lack
of cost-competitive conversion technologies, a lack of feedstock
collection equipment, the absence of standard cellulosic biofuels
production blueprints, and the lack of fully integrated large-scale
systems. As part of the effort to overcome these hurdles, EISA helps
establish a market demand for cellulosic biofuels. EISA also provides
grants for research and development projects; and demonstration and
commercial application of biofuel production technologies, including
important research on plants, enzymes, and microbes. These efforts are
working toward cost reductions in conversion technologies, and cost-
shared biorefinery projects will help validate approaches.
We have made significant advances, but there is more that would be
helpful to support the development of biofuels--for example, expansion
of the use of woody biomass and increased penetration of flex-fuel
vehicles into the market. Additionally, when developed in parallel to
E85 infrastructure, intermediate ethanol-gasoline blends (those between
E10 and E85) could also help enable continuous uninterrupted growth in
production. The research we are supporting today to produce advanced
biofuels beyond ethanol and biodiesel may also eventually help the
industry. With continued technological advances at all levels, ethanol
can help our Nation reap greater benefits in the future, complementing
the President's bold energy initiatives, which seek to increase our
Nation's energy and economic security.
CONCLUSION
The food and fuel pricing issues about which you have raised
questions are important and complex. We would again caution, therefore,
against hasty judgments. Many analysts both within and outside of
Government are currently working to analyze these issues and the one
certainty is that our data will improve substantially in the months
ahead.
Mr. Chairman, thank you again for holding this important hearing. I
appreciate your leadership in this matter as well as this opportunity
to address the current debate over the role of biofuels in our Nation's
energy portfolio. This concludes my prepared statement, and I would be
happy to answer any questions the Committee Members may have.
The Chairman. Thank you very much.
Dr. Glauber, go right ahead.
STATEMENT OF JOSEPH GLAUBER, CHIEF ECONOMIST, DEPARTMENT OF
AGRICULTURE
Mr. Glauber. Thanks very much. Mr. Chairman, Senator
Domenici, and members of the committee, thank you for the
opportunity to discuss the effects of the expansion in biofuel
production in the U.S. on commodity markets and food prices
both here and abroad.
In the U.S., two commodities, corn and soybean oil, account
for over 90 percent of biofuels production. From April 2007
through April 2008, corn and soybean prices rose by over 50
percent in response to a variety of factors, including domestic
and global economic growth, global weather, rising input costs
for energy, international export restrictions, and new product
markets, particularly biofuels. Over the same period, global
food commodity prices, as measured by the IMF, rose by over 45
percent and retail food prices in the U.S. increased by more
than 5 percent.
There has been much confusion in the media over the price
effects of biofuels. Some studies have attributed most and, in
some instances, all of the increase in global food prices and
retail food prices in the U.S. to biofuel production, while
other studies have reported considerably smaller effects. I
believe it is important to distinguish between, one, the
effects of biofuels on feedstock prices such as corn or soybean
oil, which tend to be quit large; two, the more general effects
on a bundle of world commodity prices, such as measured by the
IMF's Global Food Commodity Price Index, which tend to be
somewhat smaller; and three, the effects of U.S. food prices as
measured by the CPI, the Consumer Price Index, which tend to be
smaller still due to the relatively small value accounted for
commodities in the total consumer food bill.
In my written testimony, I have described the factors
affecting the farm commodity prices and the effects of biofuel
production on commodity prices, global food prices, and retail
food prices in the United States.
While increased biofuels production in the United States is
partially responsible for the increase in corn and soybean farm
prices, other factors have also contributed to the sharp
increase in prices for these commodities. We use various
analytical approaches to estimate the effects of increased
ethanol and biodiesel production on corn and soybean markets
for the 2006 and 2007 marketing years. We estimate that about
30 percent of the increase in the price of corn between
marketing years 2005 and 2007 can be attributed to the growth
in biofuels production in the U.S.
The growth in biofuels production in the United States has
also pushed up soybean, soybean meal, and soybean oil prices.
We estimate the percentage increase in the prices of soybeans,
soybean meal, and soybean oil between marketing years 2005 and
2007 would have been 25 to 40 percent lower in the absence of
any growth in biofuels production in the U.S. Again, those were
the price effects on the feedstock prices themselves.
Turning to the International Monetary Funds's Global Food
Commodity Price Index, it is often quoted as an indicator of a
change in global food prices. The IMF index includes a bundle
of agricultural commodities, including cereals, such as wheat,
corn, rice, and barley, as well as vegetable oils and protein
meals, meat, sugar, seafood, bananas, and oranges. The effects
of biofuels production in the U.S. on global prices for
agricultural goods is estimated by combining the individual
commodity price impacts with their relative weights in the IMF
price index. Assuming no growth in biofuels production in the
U.S., we estimate that the IMF Global Food Commodity Price
Index would have been increased by over 40 percent compared
with the actual increase of 45 percent from April 2007 to April
2008.
Let me turn briefly to the effects of higher feed prices on
dairy, livestock, and poultry markets. In my testimony, I
present a chart that looks at the ratio of livestock prices
relative to feed costs. These livestock feed cost ratios are a
measure of the pressure on livestock producers to adjust future
production in response to higher feed costs.
In April, the steer and heifer corn price ratio was the
lowest since August 1996. The hog corn price ratio was the
lowest since December 1998, and the milk feed price ratio and
the broiler feed price ratio were the lowest since at least
1995.
To estimate the effects of growth in ethanol on biofuels
production on U.S. retail food prices, we have assumed that all
of the increase in prices for corn, other feed grains, soybean
oil, soybeans, and soybean meal are passed on to consumers
through higher retail food prices. In 2007, the expansion in
ethanol and biodiesel production is estimated to have increased
the CPI for all food by 0.1 to 0.15 percentage points, or the
expansion in ethanol and biodiesel production accounted for
about 3 to 4 percent of the increase in retail food prices.
During the first 4 months of 2008, the food CPI increased by
4.8 percent, with increased ethanol and biodiesel production
accounting for about 4 to 5 percent of the increase in retail
food prices.
Over time, livestock and dairy producers will adjust to
higher feed costs by reducing production, leading to higher
retail prices for animal products. In future years, production
adjustment by livestock and dairy producers in response to
higher feed costs resulting from the expansion in ethanol and
biodiesel production could add a total of 0.6 to 0.7 percentage
points to the CPI for all food.
Last, much attention is focused on the size of this year's
corn crop. In March, producers indicated they would plant an
estimated 86 million acres of corn, down from the 93.6 million
acres planted in 2007. However, a wet spring in the Midwest has
slowed plantings and crop emergence and, in some cases, washed
out fields planted to corn.
USDA will report acreage in its acreage report on June 30
and its first objective yields survey for 2008 will be reported
on August 12. Both of these reports will be watched very
closely.
A shorter crop than expected could send corn prices sharply
higher. Indeed, over the last week, we have seen quite a large
rise in corn prices with the December 2008 corn futures
contract closing at $7.33 per bushel yesterday. An increase of
over $1 over the past few weeks--and this, indeed, puts
pressure as we watch--looking forward, will put pressure on
ethanol production margins.
Mr. Chairman, that completes my statement.
[The prepared statement of Mr. Glauber follows:]
Prepared Statement of Joseph Glauber, Chief Economist, Department
of Agriculture
Mr. Chairman, members of the Committee, thank you for the
opportunity to discuss the effects of the expansion in biofuels
production in the U.S. on commodity markets and food prices here and
abroad. In the United States, two commodities, corn and soybean oil
account for over 90 percent of biofuels production. From April 2007
through April 2008, corn and soybean prices rose by over 50 percent in
response to a variety of factors, including domestic and global
economic growth; global weather; rising input costs for energy;
international export restrictions; and new product markets,
particularly biofuels. Over the same period, global food commodity
prices as measured by the International Monetary Fund (IMF) rose by
over 45 percent and retail food prices in the U.S. increased by more
than 5 percent. I will describe the factors affecting farm commodity
prices and the effects of biofuels production on commodity prices,
global food prices, and retail food prices in the United States.
KEY FACTORS BEHIND THE INCREASE IN COMMODITY PRICES
Many factors have converged to increase commodity prices. Global
economic growth, weather problems in some major grain producing
countries, and depreciation in the value of the dollar have increased
the demand for U.S. agricultural commodities, leading to higher
commodity prices. In FY 2008, the value of U.S. agricultural exports is
projected to reach a record $108.5 billion, up from last year's record
of $81.9 billion.
Global economic growth is boosting the demand and prices for
agricultural commodities. Real foreign economic growth was a healthy
4.0 percent in 2007, only slightly below 2006's robust rate of 4.2
percent. Foreign economic growth is expected to be 3.9 percent in 2008,
down slightly from 2007, but well above trend, as has been the case
beginning in 2004 (Economic Research Service). Asia, excluding Japan,
will likely grow at over 7 percent in 2008, above trend for the fifth
consecutive year. Higher incomes are increasing the demand for
processed foods and meat in rapidly growing developing countries, such
as India and China. These shifts in diets are leading to major changes
in international trade. For example, China's corn exports are projected
to fall from 5.3 million metric tons in 2006/07 to 0.5 million metric
tons in 2007/08, as more corn is used for domestic livestock feeding.
Adverse weather events in a number of countries have reduced
production leading to higher commodity prices. The multi-year drought
in Australia reduced wheat and milk production and that country's
exportable supplies of those commodities. Drought and dry weather have
also adversely affected grain production in Canada, Ukraine, the
European Union, and the United States. These weather events have helped
to deplete world grain stocks. With world stocks for wheat at a 30-year
low, grain importers are increasingly turning to the U.S. for supplies.
Furthermore, the tight stocks situation is leading to increasing
concerns that prices could move sharply higher if this year's harvest
falls below expectations. These concerns are causing some importers to
purchase for future needs, pushing prices higher.
Many exporting countries have put in place export restrictions in
an effort to reduce domestic food price inflation. The United Nations
Food and Agriculture Organization recently noted the cereal import bill
of the world's poorest countries is forecast to rise by 56 percent in
2007/2008, which comes after a significant increase of 37 percent in
2006/2007. Exporting countries as diverse as Argentina, China, India,
Russia, Ukraine, Kazakhstan, and Vietnam have placed additional taxes
or restrictions on exports of grains, rice, oilseeds, and other
products. By reducing supplies available for world commerce, these
actions exacerbate the surge in global commodity prices. Export
restrictions are ultimately self-defeating, reducing the incentives for
producers to increase production.
Higher food marketing, transportation, and processing costs are
also contributing to the increase in retail food prices. Record prices
for diesel fuel, gasoline, natural gas, and other forms of energy
affect costs throughout the food production and marketing chain. Higher
energy prices increase producers' expenditures for fertilizer and fuel,
driving up farm production costs. Higher energy prices also increase
food processing, marketing, and retailing costs. These higher costs,
especially if maintained over a long period, tend to be passed on to
consumers in the form of higher retail prices. ERS estimates direct
energy and transportation costs account for 7.5 percent of the overall
average retail food dollar. This suggests that for every 10 percent
increase in energy costs, the retail food prices could increase by as
much as 0.75 percent if fully passed on to consumers.
RECENT DEVELOPMENTS IN COMMODITY MARKETS
Higher commodity prices are contributing to the increase in food
price inflation, even though in the United States the farm value
accounts for only about 20 cents of each dollar spent on food. For
highly processed foods, such as cereal and bakery products, the farm
component of the retail value is less as processing costs account for a
higher portion of the retail value. In contrast, for food products that
undergo little processing prior to being consumed, such as eggs and
fresh fruits and vegetables, the farm value accounts for a much larger
share of the retail value.
The index of prices received by farmers for all products increased
by 18 percent in 2007, as farm prices for several major crops, beef,
milk, broilers, and eggs either reached new record highs or posted
large annual gains. Compared to one year ago, the index of prices
received by farmers for all products was up 13 percent during the first
4 months of 2008. Over the same period, the prices received for all
crops were up 19 percent, reflecting continued strong prices for major
crops. Meanwhile, the prices received for livestock and livestock
products, while up 7 percent during the first 4 months of 2008 compared
to one year ago, have moderated in recent months as record large
supplies of red meat and poultry have lowered farm prices for cattle
and hogs.
Wheat & Coarse Grains: The 2007/08 wheat marketing year reflects a
third straight year in which global production has fallen short of
consumption, driving expected world stocks to their lowest level in 30
years. Back-to-back years of lower production in the major exporting
countries, including Australia, Canada, and the European Union, have
combined with below-trend yields in the United States to reduce the
availability of exportable supplies. Tight supplies in competitor
countries and restrictions on exports in major producing countries such
as Argentina, Ukraine, and Russia have boosted export demand for U.S.
wheat. U.S. ending stocks are projected at their lowest level in 60
years. As a consequence, wheat prices have increased to record levels.
Farm prices for 2007/08 are estimated at a record $6.50 per bushel,
sharply higher than last year's $4.26 and the previous record of $4.55
per bushel.
Wheat producers indicated in March they intend to plant 63.8
million acres in 2008, up 6 percent from 2007. Yield prospects for the
2008 crop remain mostly favorable, but persistent dryness remains a
concern in the southwestern portions of the hard red winter wheat belt
in western Kansas and the panhandle areas of Texas and Oklahoma. In
addition to higher production in the U.S., wheat production in other
major wheat producing countries is expected to rise sharply as planted
area is up around the world, spurred by record prices and encouraged by
favorable fall sowing weather. If trend yields are achieved, world
production could set a new record, rising as much as 50 million tons
from 2007/08. Global production is expected to exceed global
consumption for the first time in four years leading to some recovery
in global wheat stocks. Nonetheless, the average farm price is
projected to increase in 2008/09 to $6.75-$8.25 per bushel, supported
by forward sales made at prices well above last year's level. Cash
wheat prices during the first quarter of the marketing year are also
expected to be supported by strong competition between domestic mills
and foreign buyers.
The U.S. corn market in 2007/08 is characterized by record
production and farm prices driven by strong domestic and export demand,
which is boosting use to record levels. U.S. producers planted 93.6
million acres to corn in 2007, the largest plantings since 1944.
Domestic use for 2007/08 is estimated at a record 10.5 billion bushels,
up 1.4 billion or 16 percent from last year. Ethanol use, projected at
3.0 billion bushels, is expected to surpass exports for the first time
ever, accounting for 23 percent of total corn use. Despite high prices,
export demand remains strong with growing world demand for animal
protein and tight supplies of feed quality wheat, particularly in the
European Union. Exports are projected at a record 2.45 billion bushels,
up 15 percent from last year. The farm-level price of corn for 2007/08
is expected to average a record $4.25-$4.45 per bushel, up
substantially from $3.04 per bushel in 2006/07.
Corn prices are expected to rise again in 2008/09. Demand is
expected to remain strong, supported by expanding use for ethanol,
which is forecast to reach 4 billion bushels in 2008/09. Corn area and
production are expected to be lower in 2008/09 as record soybean prices
and high input costs for corn encourage a rebound in soybean plantings.
Producers indicated in March they intend to plant 86.0 million acres of
corn in 2008, down 8 percent from last year. In addition, cool, wet
weather slowed planting progress, which could also lead to lower corn
plantings and lower yields in 2008. With higher use and lower
production, ending stocks are expected to decline, keeping upward
pressure on prices. The farm price of corn is forecast to average
$5.30-$6.30 per bushel in 2008/09.
Rice: Tighter domestic rice supplies, higher global rice prices,
and export bans imposed by some major rice exporters have helped to
boost U.S. rice prices in 2007/08. Producers cut back on rice area in
2007 by 3 percent, because they could earn higher returns by planting
alternative crops such as wheat, corn, sorghum and soybeans. U.S.
exports in 2007/08 are projected to increase 23 percent to 112 million
hundredweight (cwt). Tight global supplies and self-imposed export bans
in Egypt, Vietnam, and India are helping to support U.S. exports. Rice
ending stocks are forecast at 21.6 million cwt, down from carry-in
stocks of 39 million cwt. The season-average farm price is forecast at
$12.85-$13.15 per cwt, up from $9.96 in 2006/07 and the highest since
1973/74. Domestic rice prices in 2008/09 are expected to be higher than
in 2007/08 due to tighter domestic and global supplies and higher world
prices.
Soybeans: U.S. soybean prices are record high this year, reflecting
lower production and strong demand. The farm price received for
soybeans is estimated to average $10.00 per bushel during 2007/08,
compared with $6.43 last marketing year and the previous record of
$8.73 per bushel set in 1983/84. Lower production was brought about by
sharply lower planted area as producers shifted some soybean acres to
corn in 2007. Lower stocks are projected in part due to strong export
demand for U.S. soybeans resulting from record imports by China and
limited growth in South American supplies despite high prices.
U.S. soybean crush is also a contributing factor to declining
stocks as foreign demand for U.S. soybean meal remains exceptionally
strong. Wheat shortages in many parts of the world are leading to
strong export demand for soybean meal protein which can be used to
replace wheat in feed rations. Soybean crush is also supported by
growing demand for biodiesel, production of which is expected to
account for 14 percent of total soybean oil use for 2007/08. Strong
domestic and export demand have pushed prices for both soybean meal and
soybean oil higher. The prices of both soybean meal and soybean oil are
up by over 50 percent in 2007/08, compared with one year ago.
U.S. producers indicated in March they intend to plant 74.8 million
acres to soybeans in 2008, up 18 percent from last year. If these
intentions are realized, soybean supplies for 2008/09 could increase as
larger production more than offsets sharply lower beginning stocks.
Reflecting the increase in projected soybean production, soybean ending
stocks are expected to rebound in 2008/09 from this year's very low
level. Forward sales at prices above last year's average and high corn
prices are likely to push soybean prices higher in 2008/09. The farm
price of soybeans is currently forecast to average $11.00-$12.50 per
bushel in 2008/09.
Fruits and Vegetables: Retail prices for fruits and vegetables
increased 3.8 percent in 2007, as fresh fruit and vegetable prices rose
by 3.9 percent and processed fruit and vegetable prices rose by 3.6
percent. Price spikes in these commodities are often linked to drought
or freeze damage. In 2008, the CPI for fruits and vegetables is
projected to increase by 3.5-4.5 percent.
Livestock and Poultry: Beef production is currently forecast to
increase by 1.5 percent in 2008 due to continued strong cow slaughter.
Drought conditions in the Southeast led to strong increases in cow
slaughter last year and, even with a return to normal weather in 2008,
cow slaughter is expected to remain relatively high in 2008. The
January Cattle report indicated the cow herd continued to contract
during 2007. Beef cow numbers were estimated about 0.6 percent lower
than a year ago, and the number of beef cows expected to calve was down
1 percent. In addition, the number of beef heifers to be retained for
the breeding herd was down 3.5 percent. Higher feed costs are lowering
returns to cattle feeders. Nebraska Direct steer prices averaged a
record $91.82 per cwt in 2007 and are expected to average $89-$93 per
cwt. in 2008.
Pork production in 2008 is expected to increase 6.6 percent due to
expansion triggered by positive returns to producers in 2006 and 2007
and strong productivity gains. However, the growth in production is
expected to slow later in the year as producers respond to much higher
feed costs. The most recent Quarterly Hogs and Pigs report indicated
that producers farrowed 5 percent more sows during December 2007-
February 2008, but intend to farrow 2 percent fewer sows during June
2008-August 2008. In 2008, hog prices are expected to decline from
2007's $47.09 per cwt to $46-$48 per cwt.
Broiler producers reacted to low returns in 2006 and pulled back
broiler production during the last two quarters of 2006 and the first
two quarters of 2007. As broiler prices hit record levels in mid-2007,
broiler producers responded by expanding production. Since last fall,
weekly estimates of chicks placed for growout were consistently 3 to 5
percent above a year earlier, but the increase in placements has
dropped below 3 percent recently. However, little to no expansion in
broiler production is expected during the second half of 2008, as
producers respond to higher corn and soybean meal prices. Broiler
prices for 2008 are forecast to average 80 to 83 cents per pound in
2008, compared with a record 76.4 cents in 2007.
Eggs: In 2007, the wholesale price for a dozen grade A large eggs
in the New York market averaged $1.14 per dozen, 43 cents higher than
the previous year. The strong increase in egg prices reflected lower
production and strong domestic demand. In 2007, table-egg production
was down 1 percent, as producers lowered production in order to
increase the hatching-egg flock.
Given the current size of the table-egg flock and the number of
birds available to add to the flock, no significant expansion in
production is expected in 2008. Wholesale table-egg prices (New York
area) averaged $1.59 per dozen in the first-quarter, up 51 percent from
the previous year. Prices are expected to decline seasonally in the
second quarter and average $1.21-$1.25 per dozen in 2008.
Milk: Very strong international dairy product prices, robust
domestic demand and modest expansion in domestic production in response
to very low milk prices in 2006 were the primary factors pushing up
dairy product prices in 2007. The recent increase in feed costs
probably had only a minimal effect on milk production in 2007.
Although higher feed costs are expected to temper later-year
expansion plans, milk producers are expanding herds in response to
generally favorable returns during much of 2007. Production in 2007
increased about 2 percent as the herd increased fractionally. Milk per
cow increased but lagged its historical growth. Driven by strong
domestic demand and sharply higher international prices in response to
declining milk production in Australia due to drought and limited
surpluses of dairy products in the European Union, the all-milk price
averaged a record $19.13 per cwt, over $6.00 above 2006. Cow numbers
are expected to increase further in 2008 but high feed costs may slow
the growth in milk per cow. Milk production in 2008 is expected to
increase about 2 percent and about equal the growth in demand for dairy
products domestically and for export. The all-milk price is forecast to
average $18.90-$19.30 per cwt in 2008.
EFFECTS OF BIOFUELS PRODUCTION ON COMMODITY PRICES
In recent years, the conversion of corn and soybean oil into
biofuels in the United States has been an important factor shaping
major crop markets. The amount of corn converted into ethanol and
soybean oil converted into biodiesel nearly doubled from 2005/06 to
2007/08. The growth in biofuels production has coincided with rising
prices for corn, soybeans, soybean meal, and soybean oil.
While increased biofuels production in the United States is
partially responsible for the increase in domestic corn and soybean
farm prices, other factors have also contributed to the sharp increase
in prices for these commodities. The strength in exports resulting from
global economic growth and drought and dry weather in some major grain
producing countries has boosted prices for corn and soybeans. For
example, corn exports are projected to reach 2.45 billion bushels in
2007/08, up from 2.1 billion bushels in 2005/06, and soybean exports
are projected to increase by 18 percent over the same period.
Estimating the effects of increased ethanol and biodiesel
production on domestic agriculture and domestic food prices
necessitates segmenting the portion of the increase in corn and soybean
prices due to the expansion in ethanol and biodiesel production and the
increase in corn and soybean prices due to other factors. Various
analytical approaches were used to estimate the effects of increased
ethanol and biodiesel production on corn and soybean prices. Table 1
compares actual and estimated corn and soybean prices over the period
2005/06-2007/08, assuming corn used for ethanol and soybean oil used
for biodiesel production in the United States remained unchanged from
the amount used in the 2005/06 marketing year.
Under the alternative scenario, lower corn and soybean oil use
lowers the prices of corn and soybeans. In addition, changes in
relative returns for corn and soybeans cause producers to switch from
planting corn to planting soybeans. Lower corn and soybean prices could
also result in increased plantings and lower prices for other crops and
lower feed costs to livestock producers.
The recent increase in corn and soybean prices appears to have
little to do with the run-up in prices of wheat and rice. Corn and
soybean prices began increasing during the fourth quarter of 2006. By
this time, producers had already planted the 2007 winter wheat crop.
Rice and spring wheat plantings could have been affected by increasing
corn and soybean prices, but weather problems, low stocks, and strong
global demand likely had a much greater impact on wheat and rice prices
than increasing corn and soybean prices in 2007/08. In 2008, U.S. wheat
producers indicate they intend to plant more acreage to wheat, while
rice acreage is projected to remain flat, suggesting that higher corn
and soybean prices have not greatly altered wheat and rice producers'
planting decisions.
EFFECTS OF BIOFUELS PRODUCTION ON GLOBAL FOOD COMMODITY PRICES
The International Monetary Fund's (IMF) global food commodity price
index is often quoted as an indicator of the change in global food
prices. The IMF global food commodity price index includes a bundle of
agricultural commodities including cereals such as wheat, corn (maize),
rice, and barley as well as vegetable oils and protein meals, meat,
seafood, sugar, bananas, and oranges. A complete list of the
commodities included in the index, the percentage change in each
commodity price, and the estimated contribution of each commodity to
the overall percentage change in the food price index from April 2007
to April 2008 are presented in Table 2. It is unclear how the list of
commodities and the prices used in the IMF index relate to the foods
purchased and the prices paid for food items by consumers in less
developed countries.
The IMF global food price commodity price index increased by an
estimated 45.0 percent from April 2007 to April 2008. Sunflower oil and
rice exhibited the largest price changes, with prices for both
commodities increasing by over 200 percent. Prices for corn, wheat,
soybeans, soybean oil, soybean meal, palm oil, sunflower oil, and
rapeseed oil also exhibited relatively large price increases,while the
prices for beef and swine meat actually fell.
Combining the change in corn prices with the corn weight of 8.1
percent, the change in corn prices contributed 5.0 percentage points to
the estimated 45.6 percent increase in the global food commodity price
index. Soybeans, soybean oil, and soybean meal exhibited larger price
increases and play a much larger role in the global food commodity
price index, a combined weight of over 15 percent. The combined effects
of the increase in soybean, soybean meal, and soybean oil prices
contributed 11.7 percentage points to the estimated 45.0 percent
increase in the IMF global food commodity price index from April 2007
to April 2008.
In order to estimate the impact of the increased production of U.S.
biofuels on global food prices, one needs to estimate the direct and
indirect effects of the increased use of corn and soybeans on
individual commodity prices. Last month, CEA testified before the
Senate Foreign Relations Committee about corn-based ethanol's impact on
global food prices using this strategy. The analysis below continues in
this spirit, but it considers a broader category of factors and costs
and a slightly different time period. Here the analysis is updated to
the 12 months ending in April, and the analysis considers a broader mix
of biofuels--focusing on corn-based and soybean oil-based biofuels.
Table 3 presents the estimated effects of increased ethanol and
biodiesel production in the United States on global prices for corn,
soybeans, soybean oil, and soybean meal as well as the impact on the
IMF global food commodity price index. We estimate that the percentage
increase in the price of corn from April 2007 to April 2008 would have
been 23 percent lower in the absence of any growth in biofuel
production in the United States. Based on this analysis, we estimate
that the price of corn would have increased by 47.5 percent assuming no
growth in biofuel production in the United States, down from the actual
increase of 61.7 percent, from April 2007 to April 2008. Assuming no
growth in biofuel production, the price of soybeans, soybean meal, and
soybean oil in the global food commodity price index would have
increased by 54.2, 51.2, and 61.5 percent, respectively, down from
actual increases of 78.6, 69.3, and 80.9 percent, respectively, from
April 2007 to April 2008.
Assuming no growth in biofuel production in the United States, the
IMF global food commodity price index would have increased by 40.6
percent compared to the actual increase of 45 percent, from April 2007
to April 2008. Lower corn prices contributed 1.2 percentage points,
lower soybean, soybean meal, and soybean oil prices contributed 3.2
percentage points to the total reduction in the global food commodity
price index.
However, combining soybeans, soybean meal, and soybean oil in the
same index overstates the impact of biofuels on global prices. Soybeans
are processed into soybean meal and oil and by including the effects of
biofuels on the prices of all three commodities we magnify the impacts
of biofuels on the global food prices. If we exclude the impacts of
biofuels on soybean meal and oil prices, the IMF global food price
index would have increased by 42.0 percent assuming no growth in
biofuels production in the United States, compared to the actual
increase of 45.0 percent from April 2007 to April 2008.
EFFECTS OF BIOFUELS PRODUCTION ON U.S. RETAIL FOOD PRICES
In 2007, the Consumer Price Index (CPI) for all food increased by
4.0 percent, up from 2.4 percent in both 2004 and 2005. In 2007, the
retail price of eggs increased by 29.2 percent, retail dairy product
prices rose by 7.4 percent, retail poultry prices posted a 5.2 percent
gain, and retail beef prices increased by 4.4 percent. In 2008, the CPI
for all food is projected to increase by 4.5 to 5.5 percent, with the
retail prices of eggs, dairy products, fats and oils, and cereals and
bakery products all increasing by more than 5 percent.
It is very unlikely that the retail prices for dairy products,
beef, poultry, and eggs were greatly affected by higher corn and
soybean prices in 2007. Higher corn and soybean prices increase
livestock and dairy producers' feed costs. The increase in feed costs,
with no offsetting increase in livestock prices, reduces livestock
producers' margins. Livestock producers react to these lower margins
over time by reducing the breeding herd. In the short term, higher feed
costs lead to an increase in livestock slaughter and lower livestock
prices. For milk and eggs, higher feed costs may have lowered
production somewhat 2007, partially contributing to the increase in
retail prices for these food products. However, other factors, such as
low returns in 2006, strong demand, abnormally high international
prices, especially for dairy products, and increasing use of eggs for
hatching to expand broiler production likely contributed to the bulk of
the increase in retail food prices for these commodities in 2007.
The ratio of livestock prices relative to feed costs is a measure
of the pressure on livestock producers to adjust future production in
response to higher feed costs. In April, the steer and heifer corn
price ratio (bushels of corn equal in value to 100 pounds of steers and
heifers, live weight) was the lowest since August 1996, the hog-corn
price ratio (bushels of corn equal in value to 100 pounds of hog, live
weight) was the lowest since December 1998, and the milk-feed price
ratio (pounds of 16 percent mixed dairy feed equal in value to 1 pound
of milk) and the broiler-feed price ratio (pounds of broiler grower
feed equal in value to 1 pound of broiler, live weight) was the lowest
since at least 1995.
In 2008, higher feed costs are likely to lead to lower prices for
beef and pork as producers react to higher feed costs by reducing the
number of breeding animals. In contrast, dairy producers react to
higher feed costs by cutting back on the number of dairy cows and
adjusting rations. In 2008, higher feed costs are expected to dampen
the growth in milk production per cow but the dairy herd is expected to
continue to expand in response to strong milk returns in 2007.
To estimate the effects of growth in ethanol and biodiesel
production on U.S. retail food prices, we assume that all of the
increase in prices for corn, other feed grains, soybeans, soybean oil
and soybean meal presented in Table 1 are passed on to consumers
through higher retail food prices. In 2007, the expansion in ethanol
and biodiesel production is estimated to have increased the CPI for all
food by 0.10-0.15 percentage point. During the first four months of
2008, the all food CPI increased by 4.8 percent, with increased ethanol
and biodiesel production in the U.S. accounting for about 0.20-0.25
percentage point of the increase in retail food prices. Over time,
livestock and dairy producers will adjust to higher feed costs by
reducing production leading to higher retail prices for animal
products. In future years, production adjustments by livestock and
dairy producers in response to higher feed costs resulting from the
expansion in ethanol and biodiesel production could add a total of 0.6-
0.7 percentage point to the CPI for all food.
CONCLUSION
Many factors have converged to increase corn and soybean prices.
Some of these factors include domestic and global economic growth;
global weather; rising input costs for energy; international export
restrictions; and new product markets, particularly biofuels. At this
time, the expansion in biofuel production in the United States would
appear to be a relatively modest contributor to food price inflation
globally and in the United States. Assuming no expansion in biofuel
production in the U.S., we estimate the IMF global food commodity price
index would have increased by over 40 percent from April 2007 to April
2008, compared with the actual increase of 45 percent. In the U.S., the
CPI for all food would have increased by 4.55- 4.60 percent during the
first four months of 2008, compared with the actual increase of 4.8
percent, assuming no expansion in U.S. biofuel production. In future
years, production adjustments by livestock and dairy producers in
response to higher feed costs resulting from the expansion in ethanol
and biodiesel production could add a total of 0.6-0.7 percentage point
to the CPI for all food.
Mr. Chairman, that completes my statement.
The Chairman. Thank you very much.
Dr. Outlaw.
STATEMENT OF JOE L. OUTLAW, AGRICULTURAL AND FOOD POLICY
CENTER, TEXAS A&M UNIVERSITY, COLLEGE STATION, TX
Mr. Outlaw. Mr. Chairman and members of the committee,
thank you for the opportunity to testify on behalf of the
Agricultural and Food Policy Center at Texas A&M University.
For more than 25 years, we have worked with the agricultural
committees in the U.S. Senate and House of Representatives
providing members and committee staff objective research
regarding the potential effects of agricultural policy changes.
My testimony today summarizes the results of a number of
our reports and analyses that evaluate the potential impacts of
changes to U.S. renewable fuels policies. The most recent
study, which I have provided for the record, analyzed the
impacts of farm level corn prices on the retail prices of
selected food products at the national level and also included
analysis of alternative RFS levels.
In the short run, it can be argued that economic
encouragement is needed to develop a new industry through
Government policies. However, in the long run, the cost of
production will determine whether biofuels are a viable energy
alternative. The answer as to whether the corn-based ethanol
industry will be viable over the long run is: it depends.
Table 1 illustrates that the net returns for a typical
ethanol plant varies substantially depending on the feedstock
costs and the ethanol price. Currently the corn price in the
U.S. is around $6 per bushel and the ethanol price is slightly
under $2.50 per gallon. With this combination, a typical
ethanol plant would be expected to realize 6 cents per gallon
in net income. While positive, these profit levels are not as
likely to spur additional investment. Clearly, this is the
reason why some proposed ethanol plants have put their plans on
hold. However, for those plants already built, it is in their
best interest to continue to produce as long as they can cover
the variable costs increasing the amount a plant would actually
pay for corn.
Recent requests for a waiver to the RFS inspired research
looking at whether a waiver, if granted, would have a
significant impact. The initial RFS, instituted under the
energy bill of 2005, always had a limited probability of
binding, given that the powerful market incentives for ethanol
production that prevailed in the 2 years following its
establishment. The new RFS, instituted under the 2007 energy
bill, requires significantly higher levels of blending.
We analyzed the possible market outcomes under the RFS and
under partial waivers of one-quarter and one-half of the
conventional biofuel RFS. The waivers are assumed to be
immediate and permanent.
As indicated in table 2, the expected national average
wholesale market prices for ethanol are likely to remain in the
mid-$2 per gallon range, with expected prices being somewhat
lower if the RFS is relaxed by one-quarter and even lower still
if the RFS is relaxed by one-half. Under all scenarios, these
expected levels of ethanol production are above the RFS by a
billion gallons or more, except for 2008 when the margin is
much smaller. This again reflects the fact that high fossil
energy prices will result in high demand for ethanol as a fuel
extender. Partial relaxation of the conventional biofuel RFS
would result in somewhat lower expected levels of production.
Like ethanol prices, expected corn prices are fairly steady
near current levels under all scenarios. Expected prices across
scenarios gradually diverge, with the one-quarter RFS waiver
price falling about 30 cents per bushel below the full RFS
price and the one-half RFS waiver price falling about 50 to 60
cents per bushel lower.
To summarize the results, a sustained reduction in RFS by
one-quarter to one-half of the RFS would not significantly
reduce ethanol production or prices. These policy changes would
be expected to result in corn prices that are 5 to 10 percent
lower than under current policies.
At the bottom of page 3, I would like to note a typo. It
says 7 billion acres of corn. It should be ``million.'' If it
was 7 billion, we would not be here today.
[Laughter.]
Mr. Outlaw. In an attempt to quantify the impact of key
economic variables on selected retail food prices, we examined
the dynamic interrelationships among retail food prices and the
prices of labor, crude oil, and corn. Using data from January
1990 to February 2008, the results indicate that higher corn
prices can be passed through to consumers relatively quickly
for bread, in this case, through acreage competition with wheat
acres, milk, and eggs, with retail prices of those products
rising by amount commensurate with the quantities of grains
used in their production.
We also find, however, that the contribution of higher corn
prices to recent increases in the retail prices of bread, milk,
and eggs are smaller than the contributions of other factors
such as national and international weather variability and
production cycles.
Labor cost increases have also contributed to increased
retail prices of these commodities, but the effects of
increased energy prices have been minimal through February
2008.
By contrast, we detected no statistically significant
effect of corn on retail meat prices to date. Taken as a whole,
this evidence suggests that over the short term livestock
producers have been unable to pass higher feed costs to
consumers due to their industry structure and competitive
pressures. There is no doubt, however, that these industries
are experiencing dramatic financial losses due to increases in
their cost of production. If current market conditions persist,
meat supplies will eventually decline due to producer attrition
and capacity reduction, which will lead to higher retail prices
for meats. In short, retail meat prices must eventually adjust
to reflect increased feed costs. The only uncertainty is the
timing and the duration of adjustment.
Mr. Chairman, that completes my statement.
[The prepared statement of Mr. Outlaw follows:]
Prepared Statement of Joe L. Outlaw, Agricultural and Food Policy
Center, Texas A&M University, College Station, TX
Mr. Chairman and members of the Committee, thank you for the
opportunity to testify on behalf of the Agricultural and Food Policy
Center at Texas A&M University on our research regarding the
relationship between U.S. renewable fuels policy and food prices. For
more than 25 years we have worked with the Agricultural Committees in
the U.S. Senate and House of Representatives providing Members and
committee staff objective research regarding the potential affects of
agricultural policy changes.
Due to the growing interdependence of agriculture and energy, over
the past 5 years our Center has been focusing a considerable amount of
research toward renewable energy policy and the likely consequences for
U.S. agricultural producers, consumers, and renewable energy industry
participants.
My testimony today summarizes the results from a number of our
reports and analyses that evaluate the potential impacts of changes to
U.S. renewable fuels policies. The most recent study, which I have
provided for the record, is entitled ``The Effects of Ethanol on Texas
Food and Feed''.* This report included an analysis of the impacts of
farm level corn prices on the retail prices of selected food products
at the national level and alternative RFS levels.
---------------------------------------------------------------------------
* Report has been retained in committee files.
---------------------------------------------------------------------------
Over the past few years, the U.S. ethanol industry has been
expanding as fast as plants could feasibly be built. Currently, as corn
prices have increased, some of the proposed ethanol plants have dropped
their plans and/or put them on hold. Most industry observers realize
the Renewable Fuels Standard (RFS) contained in the Energy Policy Act
of 2005 was never binding. However, this may not be the case with the
RFS of 15 billion gallons of grain based ethanol mandated in the Energy
Independence and Security Act of 2007. Depending on corn and ethanol
prices, the higher mandate will likely encourage the expansion of
ethanol capacity to, at least, the 15 billion gallon per year level.
Governments around the world have enacted policies designed to
encourage biofuels production, use, and protect biofuel producers from
international competition. The U.S. has chosen to utilize a combination
of the three: 1) the volumetric ethanol excise tax credit that is
generally referred to as the ``blender's credit'', 2) the ethanol
import tariff, and 3) the renewable fuels standard (RFS). There is no
question that these three policy tools have influenced the amount of
ethanol produced and consumed in the United States, as well as the
level of ethanol imports.
In the short-run, it can be argued that economic encouragement is
needed to develop a new industry through government policies. However,
in the long run, the cost of production will determine whether biofuels
are a viable energy alternative. The answer as to whether the corn
based ethanol industry will be viable over the long-run is--it depends.
The price of oil and the cost of ethanol feedstocks, both more than
double where they were only last year, will determine ethanol
viability. With or without government support, there will likely be
combinations of low and high oil prices and feedstock costs that result
in profits or losses for the ethanol sector.
Table 1 illustrates that the net returns for a typical ethanol
plant varies substantially depending on feedstock (corn) costs and the
ethanol price. Currently, the corn price in the U.S. is around $6.00
per bushel, and the ethanol price is slightly under $2.50 per gallon.
With this combination, a typical ethanol plant would be expected to
realize $0.06 per gallon in net income. While positive, these profit
levels are not as likely to spur additional investment. Clearly, this
is the reason why some proposed ethanol plants have put their plans on
hold. However, for those plants already built, it is in their best
interest to continue to produce as long as they can cover their
variable costs increasing the amount a plant could pay for corn. There
are a large number of ethanol and corn price combinations that result
in negative net returns for a plant. While these numbers are typical of
a 100 million gallon per year plant, each plant location has attributes
or drawbacks that could tilt (both positively and negatively) the
economic picture for that plant location.
Recent requests for a waiver to the RFS inspired research looking
at whether a waiver, if granted, would have a significant impact. The
initial RFS, instituted under the energy bill of 2005, always had a
limited probability of binding or needing to insure the mandated level
of ethanol blending given the powerful market incentives for ethanol
production that prevailed in the two years following its establishment.
The new RFS, instituted under the 2007 energy bill, requires
significantly higher levels of blending.
We analyzed the possible market outcomes under the RFS, and under
partial waivers of one-quarter and one-half of the conventional biofuel
RFS. The waivers are assumed to be immediate and permanent. The results
presented below reflect the averages for selected market variables over
500 realizations of possible future states of the world. In all
scenarios, the tax credits for ethanol and biodiesel blending are
assumed to continue. The high levels of fossil energy prices expected
over the next few years result in powerful market incentives for
ethanol production, in the absence of a supply-related spike in corn
prices.
As indicated in Table 2, the expected national average wholesale
market prices for ethanol are likely to remain in the mid-$2.00 per
gallon range, with expected prices being somewhat lower if the RFS is
relaxed by one-quarter, and even lower still if the RFS is relaxed by
one-half. Under all scenarios these expected levels of ethanol
production are above the RFS by a billion gallons or more, except for
2008 when the margin is much smaller. This again reflects the fact that
high fossil energy prices will result in high demand for ethanol as a
fuel extender. Partial relaxation of the conventional biofuel RFS would
result in somewhat lower expected levels of production, as production
would be lower if unfavorable market conditions were realized.
Like ethanol prices, expected corn prices are fairly steady near
current levels under all scenarios. Expected prices across scenarios
gradually diverge, with the one-quarter RFS waiver price falling about
$0.30 per bushel below the full RFS price a few years out, and the one-
half RFS waiver price falling about $0.50 to $0.60 per bushel below the
full RFS expected price.
To summarize our results, a sustained reduction in the RFS by one-
quarter to one-half of the RFS would not significantly reduce ethanol
production or prices. These policy changes would be expected to result
in corn prices that are 5 to 10 percent lower than those under current
policies.
The boom in corn-based ethanol production in the United States has
led to sharply higher corn prices and, by extension, higher soybean and
other crop prices as farmers have shifted acres between crops. High
prices for some crops like wheat and rice and other commodities such as
milk have been higher are due to other causes. The ethanol, or biofuel,
revolution has, in turn, been caused by rapidly increasing oil prices,
aided by government policies and the desire for cleaner burning fuels
to ease global warming fears. The overall effect on agriculture and the
economy, as a whole, is complex. While corn prices have increased, crop
producers also face higher fertilizer and fuel prices. Higher feed
costs have caused large increases in production costs for livestock
producers. These rising production costs are being felt by producers,
and to a lesser extent, consumers throughout the economy.
In our opinion the current discussion in the media about ethanol
causing high food prices is overly simplistic. There is no doubt that
higher corn prices are being transferred throughout the rest of the
economy just as higher petroleum prices are impacting the economy. In
the United States unlike most of the countries in the world, consumers
spend a relatively small amount of their incomes on food--around 11
percent. The farmer's share of retail food prices is around $0.19 per
dollar spent on food. Obviously for some products the share is higher--
especially retail food products such as fresh vegetables that have not
undergone significant transformation and further processing. That is
not the case for corn in the United States. Corn is typically used as
feed in livestock and poultry production or it generally undergoes
significant processing before it ends up as one of many food
ingredients such as HFCS in soft drinks.
Our report identifies a number of other factors that have also
contributed to higher corn prices such as increased exports. The
declining value of the dollar makes U.S. corn relatively cheaper to the
rest of the world even with the highest corn prices on record. Another
factor that has to be noted when discussing corn prices is the
competition for land among commodities is another factor. Across the
United States, not all land is suitable for producing every crop we
grow. When farmers do have choices among crops, relative returns that
consider relative prices and costs of production across crops cause
crops with higher returns to bid land away from crops with lower
returns. At planting time this year, the returns for soybeans relative
to corn created an estimated 7 million acre shift from corn acres to
soybean acres from 2007. This happened even though corn prices were
relatively high by historical standards. Soybean prices were also high
for a variety of reasons such as the increased demand for soybean oil
in biodiesel production and higher export demand for soybeans as a food
and feed protein.
And finally, the average person probably does not understand the
degree to which the weather both in the U.S. and abroad impacts food
prices. As indicated earlier, weather problems across the world
contributed to lower wheat availability worldwide, leading to higher
wheat prices that led to higher bread prices. U.S. retail prices of
rice and milk have been impacted similarly.
In an attempt to quantify the impact of key economic variables on
selected retail food prices, we examined the dynamic interrelationships
among retail food prices and the prices of labor, crude oil, and corn.
Using data from January 1990 to February 2008, the results indicate
that higher corn prices can be passed through to consumers relatively
quickly for: bread, milk, and eggs; with retail prices of those
products rising by amounts commensurate with the quantities of grains
used in their production. We also find, however, that the contribution
of higher corn prices to recent increases in the retail prices of
bread, milk, and eggs are smaller than the contributions of other
factors, such as national and international weather variability and
production cycles. Labor cost increases have also contributed to
increased retail prices of these commodities, but the effects of
increased energy prices have been minimal through February 2008.
By contrast, we detected no statistically significant effect of
corn on retail meat prices, to date. Taken as a whole, this evidence
suggests that over the short-term (less than two years), livestock
producers have been unable to pass higher feed costs to consumers, due
to their industry structure and competitive pressures. There is no
doubt, however, that these industries are experiencing dramatic
financial losses due to increases in their costs of production. If
current market conditions persist, meat supplies will eventually
decline due to producer attrition and capacity reduction, which will
lead to higher retail prices for meats. In short, retail meat prices
must eventually adjust to reflect increased feed costs, the only
uncertainty is the timing and duration of the adjustment period.
Mr. Chairman, that completes my statement.
The Chairman. Thank you very much.
Dr. Pyle, go ahead.
STATEMENT OF JASON PYLE, CHIEF EXECUTIVE OFFICER, SAPPHIRE
ENERGY, INC., SAN DIEGO, CA
Mr. Pyle. Thank you. Mr. Chairman and members of the
committee, thank you for inviting me to this important panel on
this critical issue. I'm Jason Pyle, the Chief Executive
Officer of Sapphire Energy.
First of all, I would like to thank you for your leadership
on alternative and renewable fuels. Your vision for the
Renewable Fuels Standard is guiding our country on the right
path.
We are here to talk about a dilemma, though, and that is
food versus fuel. I think the most important thing that I can
say here is something that the committee already knows. If you
empower innovators and entrepreneurs to solve this problem,
then we can have a future where we do not have to choose
between food and fuel.
Sapphire Energy has developed just such a technology, a
technology that transcends the food versus fuel debate. Here it
is. This is it right here. This is green crude, a truly
renewable, truly sustainable alternative fuel product. It
requires no food and no agricultural land. It is made entirely
from algae in the desert. It is carbon-neutral. It can be
produced at enormous scale, tens of billions of gallons a year.
Best of all, just like petroleum, it can be used to make the
products that we all use today, and when I say the products we
all use today, I mean the gasoline, the diesel, and the
aircraft fuel that are in our cars and our trucks and our
fleets that are flying and driving right now.
This is not biodiesel and this is not ethanol. This is
crude oil. It is green crude, a very real and very permanent
solution to our energy needs.
Two weeks ago we announced that Sapphire Energy has
produced the first renewable, ASTM-compliant, 91 octane
gasoline from this crude. Using algae, we have turned sunlight
into fuels, real fuels like the gasoline we all use, completely
sustainable fuels that are carbon-neutral, highly scalable, use
no food and no agricultural land.
Because of the support of visionaries like ARCH Venture
Partners, Venrock Associates, and the Wellcome Trust, we will
be putting this completely sustainable and carbon-neutral crude
in the pipelines within 5 years' time.
But guess what. According to the current Renewable Fuels
Standard, it is unclear if this will qualify as a renewable. It
is kind of hard to believe.
Americans want energy independence and cleaner fuel
products, not a specific subsidy for a specific fuel process.
When this committee put forth the Renewable Fuels Standard, it
was technology-neutral. You recognized that this country was
built on innovation and ingenuity. You recognized that beyond
biodiesel and beyond ethanol, we needed to encourage a new
generation of sustainable products by allowing a fairer playing
field for all renewable fuels. What we have is an RFS that
supports technologies which rely mainly on food and
agricultural land. What we need is a policy that supports all
avenues to energy independence.
The food versus fuel debate is just the first of many that
the technology-specific nature of the RFS will create. By
subsidizing only a limited subset of technologies, we run the
risk of discouraging a real future for America.
There have been discussions about repealing the Renewable
Fuels Standard. I think this would be a terrible mistake. This
would be a stumble backward in our Nation's quest for a cleaner
and more secure energy future.
Ethanol and biodiesel will both be parts of a very valuable
and renewable fuel mix, but they are not enough. The promise of
cellulosic technologies are not enough. If we are going to
produce 32 billion gallons of renewable fuel in 2022 and not
ruin food and agricultural markets in the process, we are going
to need every possible source of technology and ingenuity
available. We are going to need all the forms of the technology
to participate in the Renewable Fuels Standard. This committee
understood that when the RFS was first proposed, and now I am
asking you to return to that principle.
In conclusion, the phrase ``food versus fuel'' suggests a
conflict, but we have just been forced into this dilemma
because there have been virtually no alternatives to current
fossil fuel usage. But now we have one. Green crude is here and
I am telling you about it and it is something that I believe
in. A renewable and sustainable source of gasoline and diesel
and aircraft fuel. It does not use any agricultural land or
food products. It is completely carbon-neutral.
Sapphire Energy can help you give the American people what
they want: a cleaner and more secure energy future. Please help
me and other innovative companies in this country to provide
for the evolving Renewable Fuels Standard by creating a fair
playing field for all of the products out there. If you take
the handcuffs of technical progress, we can solve this food
versus fuel debate and we can solve our energy problems before
they really become a tragedy.
Thank you again, Mr. Chairman, for the opportunity to
appear before you, and I will gladly take questions at the
appropriate time.
[The prepared statement of Mr. Pyle follows:]
Prepared Statement of Jason Pyle, Chief Executive Officer, Sapphire
Energy, Inc., San Diego, CA
Mr. Chairman and members of the Committee, thank you very much for
inviting me to participate on this important panel, and on this
critical issue.
First, let me thank the Committee for its leadership on
alternative, renewable fuels. Your keen focus and vision have resulted
in the first ever Renewable Fuel Standard. Although there will
inevitably be elements of RFS that will improve over time, you've
guided the country along on the right path. Second, within the RFS
debate, I want to thank this Committee for its vision and support for
technology neutrality in RFS legislation, even though that vision did
not survive final passage. As you predicted by supporting a technology
neutral position, we are now seeing the evolution of an entirely new
generation of renewable fuels. These fuels transcend the use of food as
fuel feedstock. The current dilemma that pits fuel against food is just
the first of many consequences of a technology-specific RFS. Without a
technology-neutral RFS, this nation will not meet its goals of
providing 32 billion gallons of renewable fuel by 2022. Although last
year's Energy Independence and Security Act has yet to foster such
solutions, this Committee should be applauded for anticipating an ever-
expanding universe of alternative and renewable fuels.
That's why I am here. I'm Jason Pyle, Chief Executive Officer of
Sapphire Energy. Sapphire is one of several of this nation's best
technology companies working to produce the next generation of
renewable fuels. At Sapphire, we focus on the production of current
fuel products, such as gasoline, diesel and aircraft fuel, from
completely renewable sources, such as photosynthetic microorganisms, or
algae. Our mission is to produce fuels for today's oil and gasoline
infrastructure, and two weeks ago we announced that Sapphire had
produced the first ever renewable, ASTM-compliant, 91 octane gasoline
from microorganisms. Please refer to the attached two documents for
more background on Sapphire Energy.
THE PROBLEM
One of the many reasons we have cheap food is the availability of
cheap energy. We cannot expect to turn large amounts of food back into
energy in an economic manner. In today's debate between food and fuel,
we should not have to make a choice. Both are critical to the economy,
the environment and the world at large; we should not match one against
the other. But when price and demand rise for one, both suffer. Instead
of a Pyrrhic choice between food and fuel, I offer the opportunity to
transcend the debate and produce ample supplies of both, leading this
nation toward energy independence. Instead of a dispute between two
basic necessities, we need a dialogue that supports truly sustainable
alternative fuel sources.
Over the past year we have all seen prices and demand rise for
commodities such as corn, sugar and vegetable oil. The entire world now
feels the pressure. Daily we are faced with reports of people who
struggle to afford essentials. A host of factors has contributed to
price increases for food and fuel: weather, heightened demand, a weaker
dollar, decreasing supplies.
Just like energy, food is linked in a global market. Once we begin
fueling our cars with food crops, we witness international
repercussions. Riots occurred in Mexico earlier this year over
expensive corn flour. This price increase has been attributed to U.S.
demand for corn-based ethanol products, leaving less maize available
for export. Protests over similar issues have occurred around the
world, contributing to inflation and political instability.
Even at an increased rate of production, current domestic biofuel
processes will meet part, but not all, of U.S. demand. If the entire
annual domestic soybean crop of 3 billion bushels were converted to
biodiesel at the current efficiency of 1.4 gallons per bushel, it would
provide about 6.5% of U.S. diesel fuel production. Though certainly a
valuable asset to our fuel supply, it is clear that a spectrum of
additional and diverse biofuels sources will be necessary to fulfill
demand.
Congress first adopted the Renewable Fuels Standard in 2005, but
wisely recognized that neither biodiesel nor ethanol would be the final
solution. It created the program as a bridge to a new generation of
fuels, and established a system of incentives to create a marketplace
for new technologies. Congress should consider whether the incentives
are neutral and fair. Ask whether these mechanisms will lead to the
support and development of fuels that will give America true energy
independence. Congress should ensure that the next round of incentives
can be applied to advanced technologies such as Sapphire's. American
innovation is the heart of our people and our economy; I urge you to
support this with additional legislation that promotes a technology-
neutral RFS.
THE SOLUTION
Food for fuel concerns are real, but can be managed. Industries
such as ethanol from corn and biodiesel from vegetable oil can continue
to play an important role in the energy mix. However, if we intend to
practically and economically reach the goals of the RFS, we must be
ready to rapidly embrace new fuel technologies. We must call on
American ingenuity and entrepreneurialism for the solutions.
When Congress passed the Energy Policy Act of 2005, it put the
country on a path toward an energy future independent of imported
resources. As Americans, we must support this vision. We should strive
to maximize production, create fuel-efficient cars, reduce the amount
of driving we do and, finally, develop alternatives to fossil fuels.
All these efforts deserve increased support. But without a truly new
source of fuel, the system will remain in turmoil, prices will soar and
the conflict between food and fuel will persist.
Senators, my colleagues and I at Sapphire Energy have been thinking
about this for a long time. We knew that an energy source based on
agriculture would serve this country best as a stepping stone to a
green energy future. We knew that energy requiring vast amounts of
fresh water resources was not a viable option. And, finally, if we
wanted to make a difference quickly, we knew we needed a fuel that
could be transported and refined just like petroleum. Two years ago we
asked ourselves, ``In a perfect world, how should the next generation
of fuel be produced and distributed?'' These were our founding
principles:
1. Fuel production must not use farmland. Period.
2. Fuel production must be carbon neutral.
3. Fuel production and delivery must use the existing
petroleum infrastructure.
4. Fuel production must scale domestically to reach tens of
billions of gallons per year.
5. The next generation of fuels must be compatible with
today's vehicles.
That sounded like a tall order. But Americans have dreamed big and
delivered in the past--atomic energy, highways and railroads that
crisscross our nation, a man on the moon, mapping the human genome.
Now, a similar ingenuity has developed a completely renewable and
homegrown source of gasoline. I offer that we do not have to sacrifice
food production for fuel production. We do not have to choose between
powering our industries and feeding the hungry.
The Sapphire processes and technologies are so revolutionary that
the company is at the forefront of an entirely new industrial category
called ``Green Crude Production''. Products and processes in this
category differ significantly from other biofuels because they are made
solely from photosynthetic microorganisms, sunlight and CO2;
do not result in biodiesel or ethanol; enhance and replace petroleum-
based products; are carbon neutral and renewable; and don't require any
food crop or agricultural land. The Sapphire process produces a replica
of light sweet crude, green crude that can be used in traditional
refining to make real gasoline, diesel, and aircraft fuel. Our
feedstocks produce 10 to 100 times more energy per acre than cropland
biofuels. A side benefit of our process is that the microorganisms
consume pollutants and convert them to fuel. Using the Sapphire
process, we have dramatically altered the domestic energy and
petrochemical landscape and avoided the food versus fuel debate.
Please allow me to reiterate, the Sapphire process does not create
ethanol; it does not produce biodiesel; it does not use crops or
valuable farmland. Sapphire fuel is the fuel we use today, the kind
that is in your car or truck or airplane right now. It's gasoline,
diesel and aircraft fuel. Senators, this is a solution. This is a truly
renewable, truly sustainable, alternative fuel--``Sapphire's green
crude oil''.
This fuel, Sapphire fuel, is the world's first truly renewable
petrochemical product, produced by converting sunlight and
CO2 into a renewable, carbon-neutral alternative to
conventional fossil fuels, without the drawbacks of current biofuels.
This fuel is compatible with the current energy infrastructure--
cars, refineries, and pipelines.
Sapphire's scalable production facilities will produce this fuel
economically because production will be modular, transportable, fueled
by sunlight, and not constrained by arable land, crops, or other
natural resources. Sapphire has turned sunlight into gasoline.
THE GOVERNMENT'S ROLE
Governments often offer subsidies in areas in which they hope to
create incentives for certain economic behaviors. Naturally,
governments must act as arbiters to separate those who qualify from
those who do not qualify for the subsidies. Unfortunately, sometimes
those separations create an artificial division that prevents the
subsidies from achieving their goal. The nation has asked for energy
independence and cleaner fuel products. Thankfully, our lawmakers have
responded and given us a Renewable Fuel Standard. Unfortunately, the
artificial division of technology within that standard is hindering the
most promising fuel technologies from developing alongside existing
renewable industries. The nation asked for energy independence and
cleaner fuel products, not a specific subsidy for a specific fuel
process. If we want to have 32 billion gallons of renewable fuel in
2022, we are going to need every source of technology and development
possible to deliver it. Please take the handcuffs off of innovation and
allow all forms of renewable technology to participate in the Renewable
Fuel Standard.
We at Sapphire are fortunate in that we receive financial support
from top venture capital firms such as ARCH Venture Partners and
Venrock, and from one of the world's largest and most visionary
foundations, the Wellcome Trust. Not all emerging producers of green
crude or renewable gasoline, however, will be so fortunate. By
continuing to subsidize mostly the existing technologies instead of
emerging alternatives, the government runs the risk of discouraging a
real future of renewable energy.
I support technology neutrality when it comes to subsidies for
renewable fuels. In other words, none of the technologies and products
that would help achieve the RFS should receive favorable treatment--not
biodiesel, not cellulosic ethanol, and not fuels from algae. A growing
competitive market should separate winners from losers. A subsidy
system should support a constantly changing landscape of fuel and fuel
technology. I recommend a technology-neutral platform that supports
criteria rather than specific feedstocks, fuels or fuel processes. I am
offering a future that relies on non-arable, non-agricultural land; a
future based on domestic fuel production and a supply of fuel we use
today within 5 years time. I believe this will be an essential part of
the renewable fuel landscape and I urge you to assist me and other
innovative companies with technology-neutral legislation.
CONCLUSION
The unfortunate phrase ``food vs. fuel'' suggests a conflict, a
dilemma. We have faced this dilemma because there have been virtually
no viable alternatives to existing sources of fossil fuel. Until now.
At Sapphire Energy, we can change all that. This is the fuel that can
address the food versus fuel dilemma by enabling ample production of
both.
Thank you again, Mr. Chairman, for the opportunity to appear before
you. I will gladly take questions from you and the Committee at the
appropriate time.
Attachment.--Sapphire Energy News Release
SAPPHIRE ENERGY UNVEILS WORLD'S FIRST RENEWABLE GASOLINE
Pioneering effort alters `food vs. fuel' debate, supports American
energy independence with revolutionary platform that harnesses
microorganisms, sunlight, CO2
Leading investors commit over $50 million to scale effort; production
innovator Brian Goodall hired, team leader behind first biofuel 747
flight
Sonoma, Calif.--May 28, 2008--Sapphire Energy announced today they
have produced renewable 91 octane gasoline that conforms to ASTM
certification, made from a breakthrough process that produces crude oil
directly from sunlight, CO2 and photosynthetic
microorganisms, beginning with algae.
``Sapphire's goal is to be the world's leading producer of
renewable petrochemical products,'' said CEO and co-founder Jason Pyle,
speaking from the influential Simmons Alternative Energy Conference.
``Our goal is to produce a renewable fuel without the downsides of
current biofuel approaches.
``Sapphire Energy was founded on the belief that the only way to
cure our dependence on foreign oil and end our flirtation with ethanol
and biodiesel is through radical new thinking and a commitment to new
technologies.''
The end result--high-value hydrocarbons chemically identical to
those in gasoline--will be entirely compatible with the current energy
infrastructure from cars to refineries and pipelines.
Not biodiesel, not ethanol. And no crops or farm land required
The Sapphire platform offers vast advantages--scientific, economic
and social--over traditional biofuel approaches.
Company scientists have built a platform that uses sunlight,
CO2, photosynthetic microorganisms and non-arable land to
produce carbon-neutral alternatives to petrochemical-based processes
and products. First up: renewable gasoline.
Critically important, in light of recent studies that prove the
inefficiencies and costs of crop-based biofuels, there is no `food vs.
fuel' tradeoff. The process is not dependent on food crops or valuable
farmland, and is highly water efficient.
``It's hard not to get excited about algae's potential,'' said Paul
Dickerson, chief operating officer of the Department of Energy's Office
of Energy Efficiency and Renewable Energy ``Its basic requirements are
few: CO2, sun, and water. Algae can flourish in non-arable
land or in dirty water, and when it does flourish, its potential oil
yield per acre is unmatched by any other terrestrial feedstock.''
Scalability key to success
Sapphire's scalable production facilities can grow easily and
economically because production is modular, transportable, and fueled
by sunlight--not constrained by land, crops, or other natural
resources.
``Any company or fuel that hopes to solve the biofuel conundrum
must be economically scalable--and that requires conforming to the
existing refining distribution and fleet infrastructure,'' said Brian
Goodall, Sapphire's new vice president of downstream technology.
Goodall led the team responsible for the highly visible, first-ever
Virgin Atlantic ``green'' 747 flight earlier this year. In addition to
a three-decade career in the petrochemical industry, he is a corporate
inductee at the National Inventors Hall of Fame.
Domestic production a matter of national security, economic growth
A new domestic energy platform based on sunlight and CO2
has the economic potential to herald a tectonic market shift as well as
make the country more secure. Last year, the nation imported over $200
billion of foreign oil, and, with oil prices reaching record heights
every week, that number is expected to increase dramatically.
Protecting these strategic overseas interests is an increasingly
expensive proposition.
``It is imperative, both economically and for national security
reasons, that American companies figure out ways to produce oil here at
home,'' said Sapphire co-founder Kristina Burow of ARCH Venture
Partners, the company's founding investor. ``Imagine if even a portion
of the $200 billion we spend on foreign crude stayed here: The payoff
in new jobs, and domestic economic growth would be huge.''
Developments require new industrial category: Green Crude Production
In fact, Sapphire's processes and science are so radical, the
company is at the forefront of an entirely new industrial category
called `Green Crude Production.' Products and processes in this
category differ significantly from other forms of biofuel because they
are made solely from photosynthetic microorganisms, sunlight and
CO2; do not result in biodiesel or ethanol; enhance and
replace petroleum-based products; are carbon neutral and renewable; and
don't require any food crop or agricultural land.
The final products meet ASTM standards and are completely
compatible with the existing petroleum infrastructure, from refinement
through distribution and the retail supply chain.
Leadership team stars in their fields
Sapphire's founders and leadership team includes top scientists in
the fields of petro chemistry, biotechnology, algal production, plant
genomics, and biogenetics. ARCH Venture Partners, with a long history
of taking innovative life-science technologies to market, is the
founding investor. ARCH is joined by the Wellcome Trust, the world's
largest biomedical research charity, and Venrock, one of the oldest and
most respected venture capital firms in the country. The strength of
the syndicate is unparalleled: between ARCH and Venrock, they have
launched well over 500 companies. Sapphire is also collaborating with
the leading scientists and organizations in the field including the
DOE's Joint Genome Project; University of California, San Diego; The
Scripps Research Institute; and the University of Tulsa.
``Sapphire's interdisciplinary team hit milestones within three
months that everyone thought were impossible,'' said ARCH managing
director Robert Nelsen.
``We realized at that point we could change the world, so we sat
them down and told them, `the checkbook is completely open; tell us
what you need'.''
``When the Wellcome Trust made the decision to invest in Sapphire,
we evaluated the energy landscape to find a solution with the potential
to realistically address the world's current challenges in energy
production,'' said Danny Truell, Wellcome's chief investment officer.
About Sapphire Energy
Sapphire Energy was founded to address the overwhelming
inadequacies of current biofuel approaches and the profound costs of
American dependence on foreign oil. The company has built a
revolutionary platform using sunlight, CO2 and
microorganisms such as algae to produce renewable, 91 octane gasoline
that meets ASTM standards; it is not ethanol and not biodiesel.
Sapphire is led by an interdisciplinary team of entrepreneurs and
experts in cell biology, plant genomics and algal production, as well
as investors with long histories of taking innovative technology to
market, including co-founder ARCH Venture Partners, along with the
Wellcome Trust and Venrock. Sapphire's scientific supporters include
Scripps Research Institute; University of California, San Diego; the
University of Tulsa, and the Department of Energy's Joint Genome
Project. The company is located in San Diego. For more information,
visit www.sapphireenergy.com and www.greencrudeproduction.com.
About ARCH Venture Partners
ARCH Venture Partners is a premier provider of seed and early stage
capital for technology firms, with a special competence in co-founding
and building technology firms from startup. ARCH invests primarily in
companies co-founded with leading scientists and entrepreneurs,
concentrating in innovations in life sciences, physical sciences, and
information technology. ARCH enjoys special recognition as a leader in
the successful commercialization of technologies developed at academic
research institutions and national laboratories. The company manages
seven funds totaling over $1.5 billion and has invested in the earliest
venture capital rounds for more than 120 companies over 22 years.
Portfolio companies where ARCH was a co-founding or early investor
include Illumina, Aviron, Impinj, Xenoport, Alnylam, Ikaria,
Microoptical Devices, New Era of Networks, Netbot, Trubion
Pharmaceuticals, Adolor, Nanosys, Caliper Life Sciences, Ahura, Xtera,
Array Biopharma, Everyday Learning Corporation, Nanophase Technologies,
and deCode Genetics, among others.
About The Wellcome Trust
The Wellcome Trust is the largest charity in the UK. It funds
innovative biomedical research, in the UK and internationally, spending
around #650 million each year to support the brightest scientists with
the best ideas. The Wellcome Trust supports public debate about
biomedical research and its impact on health and wellbeing.
About Venrock
Venrock is a premier venture capital firm with offices in Menlo
Park, New York, Cambridge, MA, and Israel. Originally established as
the venture capital arm of the Rockefeller family, Venrock continues a
seven-decade tradition of partnering with entrepreneurs to establish
successful, enduring companies. Having invested $1.9 billion in 405
companies resulting in over 120 IPOs over the past 39 years, Venrock's
investment returns place it among the top tier venture capital firms
that have achieved consistently superior performance. With a primary
focus on technology, healthcare, and energy, portfolio companies have
included Adnexus Therapeutics, Apple Computer, Centocor, Check Point
Software, DoubleClick, Gilead Sciences, Idec Pharmaceuticals, Illumina,
Intel, Millennium Pharmaceuticals, Sirna Therapeutics, StrataCom, and
Vontu.
Attachment 2.--Green Crude Jet Fuel: On Spec, Reliable and
Entirely Domestic
The United States Air Force consumes over 3 billion gallons of fuel
each year, which is more than half the fuel consumed by the U.S.
Government. Nearly 90% of this fuel is used for aviation. Currently,
the U.S. military aviation fuel supply is inextricably linked to
commercial oil production. Yet domestic petroleum resources continue to
dwindle year after year. With over 60% of the earth's proven oil
reserves beneath the ground in the Middle East, the future of national
defense is growing progressively more reliant on one of the world's
most politically turbulent regions.
Competition for fossil fuel products will skyrocket over the next
decade. Emerging economies have a greater dependence on GDP growth than
developed nations, and China, with both rapid expansion and history's
largest standing army, will soon outpace the U.S. as the world's
dominant energy consumer. As most energy products are traded on an
international commodities market, rising worldwide demand will strain
fuel availability to all nations. We are already seeing markets
fracture, as Asian nations aggressively negotiate special supply
contracts with Middle Eastern and African producers.
The Department of Defense is aggressively pursuing technologies
that will reduce our energy vulnerabilities and strengthen our national
security. Secretary of the Air Force Wynn states, ``The reliance on
imported oil continues to threaten the economic, financial, and
physical security of the nation, while the use of domestic fossil fuels
contributes to nationwide pollution problems. The Air Force believes
that development of renewable energy sources for facility energy is one
important element of our comprehensive strategy.''
The Air Force Office of Scientific Research and the Defense
Advanced Research Projects Agency are studying how to produce cleaner
jet propellants by adding plant oils. Both are looking at triglyceride
oils, such as algae oil, as potential feedstocks because they do not
emit any carbon during production. Sapphire stands ready to provide the
best strains and the most advanced proteoic algae technology available
today.
ENERGY SECURITY BY SAPPHIRE
Sapphire has developed a process to produce on-spec jet aircraft
fuels. The core technology relies on Sapphire's Green Crude production.
Green Crude is a product that can be used as a petroleum replacement in
existing oil refineries to produce gasoline, diesel, and aircraft fuel.
Rendering it yet more valuable to the United States Armed forces, Green
Crude possesses these additional properties:
1. Green Crude can be produced entirely within the
continental United States.
2. Green Crude is a perfect substitute for petroleum crude,
and requires no change to existing aircraft or fuel
infrastructure.
3. Production is stable and reliable.
4. It is economically competitive with fossil fuel products.
5. By adopting Green Crude, the U.S. Air Force would become
the most environmentally friendly fuel consumer in the world.
Sapphire uses transgenic technology originally developed for the
production of pharmaceuticals. We have modified the metabolic pathways
of photosynthetic organisms to convert the energy from the Sun into
pure hydrocarbon molecules. This product is Green Crude, a biosynthetic
oil that can be introduced directly into the existing petroleum
infrastructure to produce products chemically identical to current
liquid transportation fuels.
Sapphire has assembled some of the Nation's most distinguished
scientists, engineers, entrepreneurs, and investors to develop a
completely integrated fuel production process that is independent of
international petroleum resources.
Sapphire's R&D team has already proven the viability of Green Crude
production, and we are currently at the research facility stage. Our
process does not use food, fresh water or agricultural land, and thus
is exempt from many of the recent concerns surrounding other biofuel
production methods. Our photosynthetic organisms consume vast amounts
of carbon dioxide as the building block for liquid hydrocarbon fuels,
reducing greenhouse gases and providing a fuel that is carbon-neutral
or carbon-negative.
Sapphire's development target, currently slated for New Mexico, is
a facility capable of producing 10,000 barrels of Green Crude each day.
Once the process has been demonstrated at this scale, Sapphire will
improve and replicate the modular system to produce 200,000 barrels per
day, providing the Air Force with a reliable domestic supply of
aviation and transportation fuel.
The Chairman. Thank you for your testimony.
Dr. von Braun, go right ahead.
STATEMENT OF JOACHIM VON BRAUN, DIRECTOR GENERAL, INTERNATIONAL
FOOD POLICY RESEARCH INSTITUTE
Mr. von Braun. Thank you, Mr. Chairman and members of the
committee.
The high and unstable food and energy prices have led to a
world food crisis because they are leading causes of inflation,
especially in Asia, but also in other parts of the world,
causing macroeconomic problems. They are affecting low-income
countries where this contributes to political unrest and
instability. Global markets for food are becoming increasingly
disrupted through export stocks, export bans to protect
domestic consumers. High prices are undermining nutrition and
health among many of the world's poorest 2 billion people. All
these crisis symptoms have long-term consequences.
Last week the International Grain Council reports an
overall growth in the use of cereals for biofuels globally by
32 percent in the season 2007/8 and an estimated 31 percent
growth in the coming year. The U.S. has a share of about 80
percent in the total world quantity of grains, including corn
used for biofuels. The total quantity used globally this year
is about 95 million tons, and that is large relative to world
trade--total world corn trade is 100 million tons, so roughly
the same amount--and also large relative to total world corn
production, about 780 million tons.
Biofuels are not per se bad or good. There are smart
technologies as we have just heard also in agriculture. Sweet
sorghum is one such alternative. Imagine a sorghum plant where
you have the sugar in the stem and the grain on top of it. You
have both good things. You can produce the ethanol and still
harvest grain. It is already in larger scale testing in fields
in India.
In any case, the hungry poor cannot wait for getting relief
from second-generation biofuels technology.
Let me come to the much disputed price effects. The study
of my institute did a careful comparison between a simulation
of actual demand for food crops as biofuel feedstock for the
time period from 2000 to 2007 and compared that with the
simulation of the biofuel growth at the rate of what we had in
the 1990s. So it is a with versus without comparison, but
taking the past trend forward in the demand for bio-ethanol
sector.
The result is increased biofuel demand during the period
2000 to 2007 accounted for 30 percent--3, 0--30 percent of the
increase in weighted average grain prices. Not surprisingly,
the biggest impact was on corn prices for which increased
biofuel demand is estimated to account for 39 percent of the
increase in real prices. So if corn prices went up from $100 to
$200, that is a 100 percent increase. Then $39 of these $100
were due to biofuels.
These are very conservative estimates as they portray price
effects from market fundamentals only and not factor in
indirect additional effects from speculation that accelerate
the price effect in the more tight markets which we have today.
The grain-based biofuels would not be a problem if the
world could draw on a pile of grain, but it does not have a
pile of grain. Productivity growth in grain production has
declined over the past 2 decades for complex reasons. A
comprehensive policy response will be fundamental to address
the world food crisis. Biofuels must be part of that.
Four actions need to be addressed with a sense of urgency.
First, cut back on biofuels that are based on grain and
corn, including a freeze or a temporary moratorium. This would
have fast impact on the markets.
Second, invest in agriculture crop productivity globally.
That is investment in science and technology. The U.S. science
system has a lot to offer here that would compensate for the
use of grains in biofuels.
Third, markets and trade policies call for building a
global system for biofuels markets and trade that is
undistorted and operates with low transaction costs.
Finally, protection of the food-insecure poor which is a
necessity given the current food crisis is upon them. Such
protection would include employment programs, school feeding,
cash and food transfers, et cetera. Without such a social
component, the current food crisis cannot be addressed.
Thank you for your attention.
[The prepared statement of Mr. von Braun follows:]
Prepared Statement of Joachim von Braun, Director General,
International Food Policy Research Institution
INTRODUCTION
World agriculture is at a turning point: economic growth, energy
needs, and climate change redefine the equations of agricultural supply
and demand and contribute to accelerate food prices. Biofuels have been
particularly high on the global agenda largely due to rising concerns
about national energy security, high energy prices, and global climate
change, as well as the income expectations of farmers and other
investors (von Braun and Pachauri 2006).
The International Grain Council reports an overall growth in the
use of cereals by 32% in 2007/8 and an estimated 31% in the coming
year, and by 41% and 32% in the USA respectively (see table 1). The USA
has a share of about 80% in the total quantity. The total quantity used
globally this year (95 Mill. Tons) is large, relative to total world
trade of corn (100 Mill. Tons) and relative to total world corn
production (777 Mill. Tons).
The rapid expansion of ethanol and biodiesel has increased
dependency on natural vegetation and crops grown specifically for
energy. Biofuel production has also introduced new food-security risks
and new challenges for the poor, particularly when resource constraints
have lead to trade-offs between food and biofuel production and rising
food prices. For the further development and use of biofuels, it is
necessary to carefully assess the impact of different technologies,
products (ethanol, bio-diesel, bio-gas), and feed stocks (e.g. sugar
cane, corn, oilseeds, palm oil, agricultural waste and biomass).
energy and agriculture in a broader conceptual framework
A comprehensive policy framework will be fundamental to developing
biofuels in such a way that they contribute to energy security, climate
change mitigation, and environmental sustainability, and at the same
time they do not negatively affect food prices and the food security of
the poor. The three main domains upon which biofuels have an impact-
namely the political/social, the economic, and the environmental-
interact when agriculture and energy become more closely linked through
the production of biofuels (Figure 1).* This interaction will lead to
changes in the dynamics of agriculture as well as changes in the impact
on households, businesses, and the private sector.
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* Figures 1-3 have been retained in committee files.
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Participants in the biofuel discussion come from many sectors and
include farmer representatives, the energy industry, global
environmental movements, large capital funds, and science and
technology lobbies. The extent to which biofuels remain on the agenda
will depend on political pressures and security concerns. High levels
of rent seeking as well as political lobbying are part of the picture,
and their impact can be seen in the current subsidy and trade policies
adopted by some countries. The implemented biofuel subsidies are
regressive and anti-poor because low-income households lose much on the
food consumption side if food prices rise, and gain little on the
energy side if energy prices decline.
The quantities of biofuels required to meet energy needs vary
between countries and depend on the choice of feedstock. For example,
if 20 percent of the maize crop in the United States were to be used
for ethanol production, it would meet only one-third of the country's
10-percent ethanol blending target. On the other hand, if 20 percent of
the sorghum crop in India were to be replaced with sweet sorghum, it
would be sufficient to meet India's entire 10-percent ethanol blending
target (Winslow 2008). Less-known crops such as Jatropha curcas and
sweet sorghum also represent an area of opportunity for using
marginalized lands and reducing greenhouse gases.
Whether biofuel production is a viable and sustainable source of
energy depends not only on the choice of feedstock, but also on
cultivation practices, technologies employed, or the security, trade,
and environmental policies that are adopted. Many countries have
already established ambitious biofuel expansion plans and blending
targets, and yet biofuel production remains uncompetitive in many
places of the world. Since second-generation biofuel technologies,
which may lessen the food-fuel competition and the negative effects on
the poor, are still a long way away, it makes sense for many countries
to wait for the emergence of these technologies and ``leapfrog'' onto
them later.
However, it is also important to recognize that technology may not
necessarily overcome the food-fuel competition. The trade-offs between
food and fuel may actually be accelerated when biofuels become more
competitive relative to food with a further increased demand as a
consequence. Therefore, it is not a question of either or: It is
essential to simultaneously invest in energy and other agricultural
technologies to soften the trade-offs. The Consultative Group on
International Agricultural Research (CGIAR) can play a vital role in
this process.
BIOFUELS AND RISING FOOD PRICES
Feedstock makes up the principal share of total biofuel production
costs. It accounts for 50-70 percent and 70-80 percent of overall costs
for ethanol and biodiesel, respectively (IEA 2004). Net production
costs, which refer to all costs related to production (including
investments), differ widely across countries. For instance, Brazil
produces ethanol at about half the cost of Australia and one-third the
cost of Germany. However, feedstock costs have increased by 50 percent
and more during the past few years, impinging on comparative advantage
and competitiveness. While the biofuel sector will contribute to price
changes, it will also be a victim of changes in feedstock prices.
The high price of energy is a key factor behind rising food prices.
Energy and agricultural prices have become increasingly intertwined.
With oil prices at an all-time high and the U.S. government subsidizing
farmers to grow crops for energy, U.S. farmers have massively shifted
their cultivation toward biofuel feedstocks, especially corn (see Table
1), often at the expense of soybean and wheat cultivation.
An IFPRI study by Mark Rosegrant (2008) did a comparison between a
simulation of actual demand for food crops as biofuel feedstock through
2007 and a scenario simulating biofuel growth at the rate of 1990-2000
before the rapid takeoff in demand for bioethanol. This approximates
the contribution of biofuel demand to increases in grain prices from
2000 to 2007. The percentage contribution of biofuel demand to price
increases during that period is the difference between 2007 prices in
the two scenarios, divided by the increase in prices in the baseline
from 2000 to 2007. The increased biofuel demand during the period,
compared with previous historical rates of growth, is estimated to have
accounted for 30 percent of the increase in weighted average grain
prices. The biggest impact was on maize prices, for which increased
biofuel demand is estimated to account for 39 percent of the increase
in real prices. Increased biofuel demand is estimated to account for 21
percent of the increase in rice prices and 22 percent of the rise in
wheat prices (Rosegrant 2008).
Scenario analyses undertaken with IFPRI's International Model for
Policy Analysis of Agricultural Commodities and Trade (IMPACT have
examined the effects of biofuels on food prices as they may occur in
the future. The developed scenarios include:
Scenario 1--based on the actual biofuel plans of countries
and biofuel expansion for identified high-potential countries.
Under this scenario prices increase ceteris paribus by 18
percent for oilseeds and 26 percent for corn by 2020.
Scenario 2--based on a more drastic expansion of biofuels,
assuming a doubling of the production expansion rate over
Scenario 1 levels. Under this drastic biofuel expansion
scenario (Scenario 2), the price of corn rises by 72 percent
and of oilseeds by 44 percent.
would the poor go even hungrier with more biofuel production?
Poor people are impacted by biofuels as consumers in food and
energy markets, producers of agricultural commodities in small
businesses, and workers in labor markets. The increase in agricultural
demand and the resulting increase in agricultural prices will affect
poor people in different ways. Some poor farmers could gain from this
price increase. However, net buyers of food, which represent the
majority of poor people, would respond to high food prices with reduced
consumption and changed patterns of demand, leading to calorie and
nutrition deficiencies.
Under the two IMPACT scenarios, the increase in crop prices
resulting from expanded biofuel production is also accompanied by a net
decrease in availability and access to food. Calorieconsumption is
estimated to decrease across regions under all scenarios compared to
baseline levels (Figure 2). Food-calorie consumption will fall the most
in Sub-Saharan Africa, where calorie consumption is projected to
decrease by more than 8 percent if biofuels expand drastically.
As a result of rising food prices, cuts will likely be made to food
expenditures, exacerbating diet quality and micronutrient malnutrition.
A study of the effects in an East Asian setting suggests that a 50-
percent increase in the price of food, holding income constant, will
lead to the decline of iron intake by 30 percent. As a result, the
prevalence of micronutrient deficiency among women and children will
increase by 25 percent (Bouis 2008). Studies also show that current
malnutrition of mothers and children has long lasting effects (Lancet
2008) and will show in deteriorated health and income decades later.
IMPLICATIONS FOR POLICY
A comprehensive policy framework will be fundamental to developing
biofuels in such a way that they contribute to energy security, are
environmentally sustainable and that complementary policies protect the
pro-poor as long as grain based biofuels contribute to high food
prices. Such a framework requires a strategic approach with three
pillars:
1. Science and technology policy , which calls for
accelerated agricultural productivity to maintain and improve
food security, accompanied by an expanded focus on agricultural
and biofuel technologies and close coordination with biofuel
users-for example, the automobile industry.
2. Markets and trade policy, which calls for building a
global system for biofuel markets and trade that is undistorted
and operates with low transaction costs. Transparent standards
are needed, including sustainability and performance-based
standards rather than technology-based standards that will
quickly become outdated.
3. An insurance and social-protection policy for the food-
insecure poor, which is a necessity given existing large-scale
food and nutrition insecurity and the growing number of changes
in the food system which are partly driven by the expansion of
biofuels. Such protection could include employment programs,
school feeding and food for schooling programs, conditional and
unconditional cash transfer programs, and social security
systems for the poorest.
The Chairman. Thank you very much for your testimony.
Mr. Huttner, you are the final witness. Go right ahead.
STATEMENT OF JACK HUTTNER, VICE PRESIDENT, BIOREFINERY BUSINESS
DEVELOPMENT, GENENCOR, ROCHESTER, NY
Mr. Huttner. Thank you, Chairman Bingaman and the
committee, for this invitation today. I am here on behalf of my
company, Genencor, a division of Danisco, and the Industrial
and Environmental Section of the Biotech Industry Organization,
of which Genencor is a longstanding member.
We are a leading industrial biotechnology company
specializing in biotech enzymes for the ethanol, detergent,
textile, and feed industries.
BIO's members include enzyme companies like ours, oil
companies, first and second-generation biofuels companies, and
dedicated energy feedstock developers.
Each of us is working to deliver products that enhance
agricultural productivity, energy security, and boost the rural
economy, contributing to a more sustainable bio-based economy.
I wanted to start by thanking you and your colleagues in
Congress for your continued support of the emerging biofuels
industry here in the U.S. The Renewable Fuels Standard included
in the energy bill this year and the biofuels provisions in the
farm bill are essential to the shared vision we have of a
strong, sustainable economic future.
I have submitted prepared testimony and I will just
summarize my remarks briefly.
As other speakers have commented today, the biggest cause
of higher food prices is the cost of energy, particularly oil.
Some small measure of the price increase likely can be
attributed to the production of ethanol in the U.S. We admit
that. While it is minimal, the question I would like to address
today is how we can reduce that impact further. More
importantly, how do we provide the world's growing population
with abundant supplies of food while also meeting our growing
energy needs?
First will be increasing agricultural yields here and
around the world. Over the past 30 years, new hybrid and
biotech varieties of corn, for example, have increased corn
yields from 90 bushels to nearly 150 bushels per acre, and we
are on our way to delivering 200 bushels per acre in this next
decade. The consulting company McKinsey estimates that if
current yield trends continue, no additional acres of corn will
be needed to meet the 15 billion gallons of conventional
ethanol required by the RFS.
One big problem we face today is the huge fall-off in yield
seen in developing economies. Indeed, the worldwide average
yield per acre is just 50 percent of the United States. There
was an interesting story in Tuesday's Wall Street Journal
reporting on changing attitudes among development agency
economists who are now revising their thinking to conclude that
investments in agriculture will improve, not thwart economic
development. Policy and investment should focus on spreading
technologies to improve yields here and around the world. We
have no doubt that sustainable agricultural development can
provide both abundant food and biofuel.
The second big development that gives us confidence is the
emerging second-generation biorefinery. Just last month, for
example, DuPont and Genencor announced a joint venture to
produce cellulosic ethanol. This technology will use non-food
portions of the corn crop, namely cobs and corn stalks, to make
ethanol. In the U.S., we will deploy this technology directly
to the current ethanol industry by offering bolt-on units. This
strategy uses the existing ethanol infrastructure to bring
cellulosic ethanol to the market just as quickly and as
efficiently as possible. By using these agricultural residues,
we can greatly increase the volume of ethanol produced from an
acre of land. That is why the infrastructure being developed
for today's ethanol industry is so vital to second-generation
biofuels. Our pilot plant will be operating in 2009, and within
5 years, we plan to be producing commercial volumes.
Beyond corn, we are also working with other companies in
BIO to prepare for dedicated energy crops like switchgrass. The
first commercial switchgrass seeds will be available next year
for planting. Of course, other biomass feedstocks like wood
chips, forest thinnings, and sugar cane are all targets for
sourcing renewable carbon.
Many BIO member companies are also working aggressively to
commercialize other advance biofuels such as bio-butanol.
Several cutting-edge companies are even developing renewable
hydrocarbons to make gasoline and diesel from carbohydrates and
algae.
Cellulosic ethanol is on the verge of becoming a viable
industry. Longstanding support of the U.S. Government for basic
research, applied R&D, and demonstration facilities will soon
be paying off. Congressional authorization and funding of the
USDA and DOE, for example, have made the transition to
cellulosic ethanol possible. These investments and the policy
framework provided by the recently enacted energy and farm
bills have laid the groundwork for a new, low-carbon economy
that uses renewable carbon from biomass to replace fossil
carbon for the production of fuels and chemicals.
In the future, biorefineries will be scattered throughout
the rural landscape. This is the promise we see of the bio-
based economy. We are at the beginning of the journey, not the
end. 10 years from now, second-generation biorefineries will
produce a variety of products and liquid fuels, but today's
ethanol plants and the infrastructure supporting them is the
foundation we will be building upon. Without a robust, stable
policy framework, the journey is going to be much more
difficult, if not impossible. We hope Congress will not be
persuaded by our critics to reverse the biofuels policy you
have worked so hard to develop and enact. We must keep the RFS
in place, staying on course to realize the great commercial and
environmental potential that a bio-based economy can bring.
Thank you for your attention and the invitation today.
[The prepared statement of Mr. Huttner follows:]
Prepared Statement of Jack Huttner, Vice President, Biorefinery
Business Development, Genencor, Rochester, NY
I would like to thank the committee for inviting me to testify
today. I am here on behalf of my company, Genencor, a division of
Danisco A/S, and the Industrial and Environmental Section of the
Biotechnology Industry Organization--BIO, of which Genencor is a long-
standing member.
Genencor is a leading industrial biotechnology company with over
1500 employees around the world. Our specialty is the development and
production of biotech enzymes for the ethanol, detergent, textile and
feed industries.
BIO's members include enzyme producers, like Genencor, as well as
agricultural seed companies, oil companies, first and second generation
biofuels companies and dedicated energy feedstock developers. Each is
helping to deliver technologies that enhance agricultural productivity
and energy security, boost the rural economy and deliver a cleaner
environment.
I wanted to start by thanking you and your colleagues in Congress
for your continued support of the emerging biofuels industry in the US.
The Renewable Fuels Standard included in the 2007 energy bill and the
biofuels provisions in this year's farm bill are essential to the
shared vision of a strong, sustainable future in which America's
farmers continue to produce abundant supplies of food and feed while
also helping to meet our growing energy needs. We at Genencor, and our
colleagues in BIO, are working hard to help make this vision a reality.
Recently, the media has been full of stories linking food price
increases to ethanol production. This is a false debate. We have the
ability to produce both food and biofuels in abundance. Many
commentators have noted the various factors driving global food price
increases, including dramatically rising oil prices, booming demand for
animal feed in China and India, drought in agricultural producing
regions and the weak US dollar. And yes, biofuels production, although
experts have repeatedly pointed out that biofuels production is a
relatively minor cause of food price increases. I would note that the
prices of agricultural commodities that have little or no relationship
to biofuels, such as rice and wheat, have risen right along with corn
and soybeans. As Dr. Otlaw has testified, the study recently released
by Texas A&M University found that the primary underlying force driving
price increases in the agricultural industry, as with the economy as a
whole, is higher energy prices--$100 + per barrel oil in particular--
and that somehow freezing, rolling back or eliminating the RFS would
not result in significantly lower corn or food prices. In fact, Merrill
Lynch estimates that without ethanol, gasoline prices would be at least
50 cents higher than they are today, further exacerbating the pressures
on food and commodity prices.
There is another story that the media has not been telling so
effectively--the story of steadily increasing agricultural
productivity. We have seen a decade's long year-on-year crop yield
improvement. And, we are about to see a dramatic increase in that rate
of improvement in the near future. New plant varieties are steadily
becoming more drought and pest resistant and more efficient in their
use of fertilizer. Yields, the amount of corn, soybeans, or other
product per acre, are rising steadily. This is partly why we believe
there is no long term food and fuel tension. In the last decade global
production of corn has risen almost 35%, and soybeans over 50%. That
increased production was achieved with only a 6% increase in planted
acres--that is the power of increasing yields, which act like
compounded interest adding more production each and every year. In the
mid-1970s America was producing about 90 bushels of corn per acre.
Today, just 30 years later, that number has increased to 150 bushels
per acre, and we are on our way to 200 bushels per acre in the next
decade. In fact, McKinsey & Company estimates that if current biotech-
based yield trends continue, no more additional acres will be needed to
meet the 15 billion gallons of conventional starch based ethanol
required by the RFS.
Improving agricultural yields have not been uniformly achieved,
however. Many parts of the world are still using agricultural practices
that are many decades old, and have agricultural yields one quarter
that of the US. Indeed, the world wide average corn yield per acre is
50% of the yield in the US. In some countries, corn yields are below 30
bushels per acre, just one-fifth of ours. On Tuesday, the Wall Street
Journal featured a story on the food crisis. The story reported on new
thinking by development agencies that have refocused attention on the
need for increased investment in seeds and fertilizers in the
developing world. The real policy focus should be on how to help other
parts of the world such as Africa, Eastern Europe and Asia, expand
agricultural productivity. There is huge upside opportunity in
agricultural productivity from the existing acreage. We can grow our
way out of this if we can expand the distribution of agricultural
progress.
In addition to our contributions to increase yield, the US biofuels
industry is on the verge of commercializing second generation
technologies that will use non-food feedstocks, like corn stover,
switch grass and waste wood. Indeed, Genencor and DuPont have just
formed a joint venture to develop this technology and we hope to have
our pilot plant operational next year. Within five years, we expect to
be producing commercial quantities of cellulosic ethanol. Is there
enough biomass to produce a significant amount of second generation
biofuels? To answer this question, BIO recently produced a report on
the sustainable harvest of cellulosic biomass for biorefinery
feedstock. Based on published USDA data, it concluded that farmers
could supply over 200 million dry tons annually of corn stover, enough
feedstock to double ethanol production from America's corn acres. Much
of this biomass will be processed at existing ethanol facilities
retrofitted to handle cellulosic feedstocks in addition to grain.
That's why the infrastructure being developed for today's ethanol
industry is so vital to the next generation as well.
Everyone understands the impact of higher commodity input costs
that we all face. I am very concerned, however, that critics of
biofuels and the RFS are pointing the finger of blame at the wrong
culprit. If Congress over-reacts, our ability to bring next generation
biofuels to market could be badly damaged. We need the RFS to set the
floor for biofuels demand so companies like Genencor and DuPont will
continue to invest in second generation biorefineries. BIO's member
companies believe the RFS is the right standard, at the right time, for
the right reasons.
Of course, we can't simply depend on corn alone. In addition to
agricultural residues, BIO member companies like Ceres and Mendel are
developing dedicated energy crops like switchgrass and Miscanthus as
biorefinery feedstocks of the near future. In fact, Ceres just
introduced the first commercial switchgrass variety that will be on the
market at the end of this year. These crops will bring new revenue to
farmers, increase biomass yield per acre with the lowest possible water
and energy inputs per ton.
Cellulosic ethanol is on the verge of becoming a viable industry.
The long standing support of the US Government for basic research,
applied R&D and demonstration facilities will soon be paying off.
Congressional authorization and funding of the USDA and DOE, for
example, have made the transition to cellulosic ethanol possible. These
investments have laid the groundwork for a new, low-carbon economy.
This is an economy that uses renewable carbon from plants to replace
fossil carbon for the production of fuels and chemicals in addition to
food and fiber.
This is about more than just ethanol. Many BIO member companies are
working aggressively to commercialize other advanced biofuels, such as
the bio-butanol that DuPont is developing with BP. Existing ethanol
infrastructure can be retrofitted with this technology. Several
cutting-edge companies are developing ``renewable hydrocarbons'' to
make gasoline and diesel from carbohydrates and algae. In the future,
biorefineries will be scattered throughout the rural landscape
converting biomass into many different products, all with a reduced
life cycle carbon footprint. This is the promise of the biobased
economy.
Perhaps the history of the oil refining industry is informative to
the current biofuels debate. It was in 1853 that the first petroleum
product--kerosene--was produced from seep oil to replace whale oil. It
has taken over 150 years for the modern oil refinery to evolve from
that point to where it can take in a barrel of crude oil and produce a
myriad of downstream products.
Modern biorefineries are at about that stage of development. We are
at the beginning of the biorefinery journey--not the end. Twenty years
from now, modern biorefineries will use a variety of renewable
feedstocks and produce a variety of products and liquid fuels. But the
ethanol plants we are building today, and the infrastructure supporting
them, is the foundation we will build upon. Without a robust and stable
policy framework, the journey will be much more difficult, if not
impossible. We hope our Congressional leaders will not be stampeded by
the chorus of negativity that seeks to reverse the biofuels policy
Congress has worked so hard to develop and enact. We must keep the RFS
in place and stay on course to realize the great commercial and
environmental potential that a biobased economy can bring. Thank you.
Attachment.--Biofuels Myths and Facts
THE TECHNOLOGY
Myth: Ethanol takes more energy to produce than it provides in the tank
FACT: This anachronism has been disproven by a number of
researchers. According to scientists at Argonne National Laboratory,
today's ethanol production provides roughly 50 percent more useful
energy per unit of fossil energy input than gasoline. Cellulosic
ethanol is expected to provide a 10:1 return on fossil fuel investment.
Myth: The Renewable Fuels Standard (RFS) in the 2007 energy bill is too
aggressive
FACT: Over 13.5 billion gallons of ethanol capacity is either
already installed or under construction. The RFS does not reach 13
billion gallons until 2010 and caps conventional ethanol production at
15 billion gallons in 2015 and beyond.
Myth: Commercialization of cellulosic biofuels technology is still over
a decade away
FACT: The world's first commercial cellulosic ethanol plants are
already under construction and will come on line beginning in 2008.
Projects under construction include:
Abengoa Bioenergy (Salamanca, Spain)
Verenium (Jennings, Louisiana)
Mascoma (Rome, New York)
Range Fuels (Soperton, Georgia)
More than 20 other cellulosic biorefineries are in advanced
planning or permitting stages.
FACT: Commercially-ready cellulase enzymes have already been
introduced, and commercially available seed for switchgrass and other
next-generation energy crops will be available later this year.
Genencor, A Danisco Division, introduced Accelerase, the first
commercial cellulase enzyme, earlier this year. Ceres, Inc, recently
introduced Blade, the first commercial energy crop seed line, which
will include varieties of switchgrass and sorghum.
FACT: Six DOE-sponsored cellulosic demonstration biorefineries are
moving forward and will be on-line in time to meet the first modest
production requirement of 100 million gallons in 2010. Seven additional
pilot biorefineries have received DOE grants to prove out emerging
technologies. In total, 29 advanced biofuel refineries are planned or
under construction.
FOOD AND FUEL
Myth: Biofuels production is responsible for the global food crisis
FACT: The primary crops of concern for global food shortages are
rice and wheat, very little of which is used for biofuels. Poor
harvests and increased demand globally of rice and wheat have resulted
in tighter supplies.
FACT: Biofuels production has not reduced exports of food or feed.
U.S. corn exports reached record levels in 2007-08, and biofuels
producers added over 1 billion bushels of dry distillers grains (DDGs)
to the feed supply last year. Soybean exports are up as well. The U.S.
livestock industry is still the top user of corn, with more corn
expected to be fed to livestock this year compared to last.
FACT: With the help of biotechnology, corn crop yields have
increased over 30 percent since the technology was introduced in 1996,
and yield increases are expected to continue into the future. Soybean
yields have increased over 20 percent in the same time period.
FACT: Responsible, sustainable biofuels production will be an
increasingly critical component of global security in the coming
century, expanding global energy supplies, reducing dependence on
petroleum, cutting greenhouse gas emissions, and creating economic
opportunity in rural and developing regions. Biofuels are not a
panacea, but are a vital part of the global energy future.
Myth: Biofuels are causing a dramatic rise in food prices
FACT: Energy prices have been the largest single driver for higher
food prices and a new study from Texas A&M shows that other factors--
primarily skyrocketing prices for fuel and fertilizer, but also
drought, population growth, the weakening dollar, political
instability, and speculation by hedge fund and other investors--are the
primary causes of recent food price increases around the world.
FACT: In addition to the above factors, corn prices have increased
due to increased demand for animal feed in developing countries such as
India and China with growing middle class demand for meat.
FACT: In the United States, farm costs account for only 19 cents of
every dollar of retail food costs. Energy and labor are the dominant
food costs to consumers. In fact, Merrill Lynch estimates that without
ethanol production, fuel costs would be 15 percent higher than they are
today, driving the cost of producing food and feed even higher.
FACT: Biotechnology is already playing a role in helping to meet
growing demand for biofuels through increased yields of corn and
soybeans. Higher yields mean more grain for food and fuel. These year-
over-year yield increases are expected to continue or even accelerate
into the foreseeable future.
LAND USE
Myth: There's not enough land to produce food, feed and biofuels
FACT: A 2005 analysis by the Departments of Energy and Agriculture
found that there is enough biomass in the United States to displace
over 30 percent of U.S. gasoline demand without reducing production of
food and feed. Today's biofuels production represents less than 5
percent of the transportation fuel supply.
FACT: There are nearly 5 billion acres of agricultural cropland in
production worldwide. Less than 2.5 percent of that land is used for
the production of feedstocks for biofuels.
FACT: Bioenergy crops can provide food/feed, fuels, and other high-
value co-products from the same crop, making the highest possible use
of the land.
FACT: Advances in agricultural and industrial biotechnology are
constantly increasing biofuel yields, making increasingly efficient use
of existing lands. Introduction of biotech varieties has helped
increase corn yields 30% since 1996 alone. McKinsey & Co. estimate that
if current corn yield improvements continue, zero additional acres will
be required to meet the new Renewable Fuels Standard of 15 billion
gallons of conventional ethanol.
FACT: Many energy crops grow well in poorer soils, and can be
planted on less productive land, building soil and sequestering carbon
in the process.
Myth: Biofuels production is destroying the rainforest
FACT: Only one percent of arable land in Brazil is planted with
sugarcane. Sugarcane for ethanol is not grown in the Amazon rainforest.
The Brazilian government has laws in place to protect deforestation of
the Amazon rainforest.
FACT: Some critics (such as Searchinger) have recently suggested
that biofuels--by driving up grain prices--are making it more lucrative
to grow soybeans, and are therefore indirectly causing rainforest to be
chopped down to make way for agricultural land. Brazilian rainforest is
cleared for a complex mix of economic reasons, unrelated to ethanol
production. Sustainable biofuels production must go hand-in-hand with
sustainable land use policy.
SUSTAINABILITY
Myth: Biofuels increase greenhouse gas emissions
FACT: The vast majority of research from academia, NGOs, and
federal labs suggests that biofuels have a positive and increasingly
beneficial impact on climate. (See reference list.) Today's corn starch
ethanol reduces GHG emissions up to 30 percent compared to gasoline,
according to Argonne National Lab. Cellulosic ethanol is expected to
reduce emissions by 85 percent or more.
The ethanol produced in the United States in 2007 reduced
greenhouse gas emissions by approximately 10 million tons--the
equivalent of removing more than 1.5 million cars from America's
roadways--according to Argonne National Lab.
FACT: New fractionation and enzyme technologies are reducing
biorefinery energy inputs and delivering higher value co-products.
Biorefineries are also increasingly using renewable energy such as
stover or animal waste to power their facilities, greatly reducing
fossil fuel consumption. Cellulosic biorefineries are expected to
require little or no fossil inputs, and may even return power to the
grid.
FACT: Biotech corn varieties, collection of agricultural residues,
and use of non-food feedstock crops all allow for greater adoption of
no-till farming, which can increase carbon sequestration in the soil 2-
3 fold. Many non-food feedstock crops continuously sequester carbon
even as above-ground biomass is harvested.
FACT: No-till farming actually results in carbon sequestration
further improving GHG profiles.
Myth: Biofuels consume vast quantities of water
FACT: 87 percent of U.S. corn acres are non-irrigated, requiring no
water other than natural rainfall. Ag biotech companies are developing
new drought-resistant corn varieties, which will further reduce water
inputs.
FACT: Many non-food feedstock crops, such as perennial grasses, are
highly drought tolerant, and will require little or no water inputs.
FACT: One gallon of ethanol requires approximately 3 gallons of
water to produce today. This number is constantly improving as
biorefineries become more efficient. This is roughly the same amount of
water required to produce a gallon of gasoline. For comparison, a
gallon of beer takes 40 gallons of water.
Myth: Biofuels require massive amounts of fertilizer and pesticides
FACT: Ag biotech has helped corn farmers become far more efficient
in their fertilizer and pesticide applications. Insecticide usage has
declined over 80 percent per acre in the past 20 years. Nitrogen and
phosphate applications have declined roughly 30 percent per bushel in
the last 30 years. Increased use of conservation tillage has
substantially reduced runoff of all inputs.
FACT: Many non-food feedstock crop varieties would require little
or no fertilizer or pesticide inputs.
ECONOMICS
Myth: Ethanol subsidies are a huge waste of taxpayer dollars
FACT: The ethanol industry generated an estimated $4.6 billion in
tax revenue for the federal government in 2007, or $1.35 for every
dollar of federal investment.
FACT: Merrill Lynch estimates that U.S. gasoline prices would be 15
percent--roughly 50 cents a gallon--higher without current ethanol
production.
FACT: The 36 billion gallon RFS is expected to add more than $1.7
trillion to the GDP, create up to 1.1 million new jobs, and reduce the
outflow of dollars to foreign oil producers by $817 billion over the
next 15 years.
FACT: A typical 100 million gallon per year ethanol plant adds $367
million to local GDP and boosts local household incomes by an
additional $100 million.
ENERGY
Myth: Biofuels can only supply up to 10% of our transportation fuel
needs so they are not worth pursuing
FACT: According to the Natural Resources Defense Council, the
United States can produce enough sustainable biofuels to supply half of
U.S. transportation fuel needs--100 percent if vehicle fuel economy
doubles.
sample references showing lifecycle benefits of biofuels
http://www.transportation.anl.gov/pdfs/TA/271.pdf
http://www.nrdc.org/air/energy/biofuels/contents.asp
http://www.pnas.org/cgi/content/abstract/105/2/464
http://www.esajournals.org/perlserv/?request=get-
abstract&doi=10.1890%2F05-2018&ct=1
http://www.sciencemag.org/cgi/content/short/311/5760/506
http://www.bio.org/ind/biofuel/SustainableBiomassReport.pdf
http://www1.eere.energy.gov/biomass/pdfs/
final_billionton_vision_report2.pdf.
The Chairman. Thank you for your testimony.
Let me start and we will just have 5-minute rounds of
questions here. We have a lot of Senators that obviously are
interested and have questions.
Let me start by talking just a little bit about this whole
issue of corn production. Obviously, we are all very concerned
about the tragedies that we are seeing throughout the Midwest,
last night's tragic tornadoes in Iowa and Kansas, recent
flooding in the corn-producing areas of our country. I think,
Dr. Glauber, you referred to the fact that we have got some
reports coming out, one on the 30th of June and another later
than that, which are going to be closely watched because people
are concerned that perhaps some of these weather-related
factors, along with everything else, could substantially reduce
the corn crop this year.
I wanted to ask about the waiver authority that we have in
this RFS. When it was enacted, there was an effort made to
provide, I think, to the Administrator of EPA authority to
waive part or all of the RFS if certain determinations were
made. I would just be interested in your interpretation of that
waiver authority and, Secretary Karsner, yours as well, as to
whether or not this is a--I mean, depending on what these
reports say here later in the summer, is there a possibility
that there would be an action by the EPA Administrator in that
regard? Would it have any effect on the amount of corn that is
going for production of biofuels?
Dr. Glauber.
Mr. Glauber. Yes. Let me take a quick shot at it.
You are right. There is authority under section 211 of the
act to consider a waiver to the RFS. Indeed, I think it is
pretty well known there is actually a request from the State of
Texas to consider a waiver, and I believe by the 24th of July,
EPA, in consultation with DOE and USDA, will make a
determination on that waiver.
As far as the 2008 Renewable Fuels Standard is concerned,
the standard sets a level of 9 billion gallons of ethanol. If
you look at current production estimates by the EIA, the Energy
Information Agency, they are projecting somewhere around 8.9
billion gallons of ethanol being produced in 2008. If you add
to that potential imports that come in, also biodiesel
production which would be applied toward that, it would appear
that we are over the standard. So the waiver in effect, at
least from our projections right now, would have no effect on
whether or not that ethanol is produced.
Now, there is a caveat to that and that is what happens to
the size of this year's crop. It is anyone's guess right now. I
think it was reported by Joe and others currently while margins
have declined for ethanol producers, they still currently are
making money and still producing ethanol. At least by our
lastest estimates, it does not look like ethanol production is
being affected.
If prices were to rise extremely high because of a serious
floodings or droughts or something like that, unforeseen right
now, then if all of a sudden it were difficult or the margins
were not there to produce ethanol, a mandated level would--
indeed, you would have to have ethanol, and the price of
ethanol would get bid up such that they would continue to
produce over time.
I think that is the only circumstance and again fairly
rare, a small probability at this point, but a lot depends on
what we see in acreage. Right now we think 86 million acres was
planted. If that is substantially under that, that would be an
issue I think. If the corn yield looked substantially under
what we are carrying, then I think that would be a potential
cause for concern. But otherwise, we see this mandate as not
being binding.
The Chairman. Secretary Karsner, did you have a point of
view on this?
Mr. Karsner. Yes, sir. It is actually complementary to my
colleague's at USDA in the sense that their analysis is
focusing on the now. So when you talk about no real
interruption to the production of ethanol, you are really
talking about installed capacity of existing ethanol production
or planned production, if you will.
Our interest at the Department of Energy is in moving
forward with actual metrics, as you know, since this Energy
Committee put them in place, in terms of technological
achievement for next-generation cellulosic and advanced
biofuels. That actually means we need capital formation, equity
investment, and stimulation in the debt markets.
So while it might not affect the net production capacity of
already installed conventional corn-based ethanol, the simple
word to define what the impact would be from a waiver is
``devastation'' to capital formation for advanced biofuels if
we were to send an erratic or unreliable signal that we had
political risk or change of law risk and noncontinuity for the
projection going forward, which is actually not addressing the
installed current corn-based capacity. But you have got to go
through that precursor of production of ethanol today to get
capital markets to invest, as they are today, as you have heard
from these fine companies, in the ethanol sources from
nonedible waste streams that we are working on at DOE.
The Chairman. My time is up.
Senator Corker.
Senator Corker. I do not know that I was prepared to be so
quickly asking questions. It is very unusual being where I sit
on this committee.
Thank you, Mr. Chairman, for this hearing and for all of
the witnesses for being here today.
Dr. Pyle, I would like for you, if you would, to talk a
little bit about the lack of--focusing on one technology. To me
that was the major drawback in the provisions that we put in
place. We discussed, as you mentioned in the beginning of our
hearings here, about being agnostic as it related to
technology. We actually had some amendments looking at
addressing that. I wonder if you could expand just a little bit
more, knowing you only had 5 minutes to talk a little bit to
this committee, about the fact if we were not so technology-
specific, exactly what that would mean, if you will, about the
innovation and investment.
Mr. Pyle. As you correctly pointed out, Senator, it really
was the leadership of this group here that first proposed a
technology-neutral position for the RFS. I thank you for that.
Unfortunately, that is not how the legislation occurred.
Just to summarize the way that the current legislation
supports the introduction of renewables is virtually every
means by which you can produce ethanol as a fuel product from
all the various different possibilities, including farm food
products, cellulosic technologies, and a vague reference on
biomass-produced diesel. So, unfortunately, it does not expand
the concept of alternative fuels to basically any renewable
feedstock to produce a renewable fuel product.
When Sapphire proposed that we would provide the Nation
gasoline, there was a very specific reason why we proposed to
provide the Nation gasoline. It is because we use it right now.
We have the infrastructure to support the use of gasoline. It
became clear to us that the RFS does not support the
introduction of renewable gasoline as a renewable product. That
was quite upsetting to us, as it was to the many very visionary
both entrepreneurs and financiers that support these kinds of
projects.
When I talk about some of the visionaries, I talk about
people like the Wellcome Trust who are very concerned about
world food prices, like the venture capital organizations,
Venrock and ARCH, who are willing to support technologies at
risk, but we are really hoping that the wisdom of this is seen
clearly that we need to support all technologies that could
potentially lead to energy security.
Focusing on one technology is going to be fraught with
problems along the way, as we have seen with the eruption of
this food versus fuel debate. This will just be the first of
them, I promise you.
What we need to do is open this up to what Americans do
best, and what we do best is innovate in the face of a
challenge.
Senator Corker. If you could--I am going to run out of
time--but, say, in 15 seconds or so, give the attributes of how
we might address that. In other words, if we said 36 million
gallons and we defined what we were using, what would we say?
Mr. Pyle. I think that what needs to happen is that we need
to define what exactly is renewable, and then we need to leave
it open to technologists and entrepreneurs to provide fuels and
processes that meet the definition of what is renewable, not
specify a technology or a fuel. That is kind of where we are
today. We have a specified fuel, which is ethanol, or a
specified set of technologies like the conversion of soy to
biodiesel. So we need to be more broad about what is renewable
and allow all things which are renewable into the fuel mix.
Senator Corker. I could not agree more, and I hope we can
work with you and other members of the committee to see that
that happens. That alone would be a way, would it not, of
addressing the issue we are talking about right now as it
relates to the relationship between fuel and food? That would
easily do that. Is that correct?
Mr. Pyle. I completely agree with that.
Senator Corker. That would be a responsible market response
to the issue today. Is that correct?
I see our Government officials are actually shaking their
head agreeing with an entrepreneur, which is most pleasant to
see.
As a matter of fact, one of the things that I think is most
awkward about talking about our energy policy here and most
unpleasant is the very thing we are talking about right now,
and that is we continue to pick winners and losers. To me, what
I saw last week with the climate change debate was an
opportunity--and hopefully that will come back up--to stop
picking winners and losers. Let us figure out what is
acceptable in this country as it relates to carbon, and then
let us quit picking winners and losers. Let us do away with
many of the subsidies. We have people who come in and out. I
know new technologies need some on the front end, and I do not
want you to frown, Dr. Pyle. I realize that.
But I want to ask the two Government witnesses how they
would feel about on ethanol in general, corn ethanol in
specific, but ethanol in general--we have tariffs today. We
have tax credits today. Yet, we had corn ethanol suppliers in
here telling us that they needed a floor on petroleum at $40 a
barrel in order to be successful. We are at $138 or so a
barrel. What would happen in the marketplace if we were to do
away with one or both of those in your opinion?
The Chairman. Why don't you answer those questions and then
we will take a short recess.
Mr. Karsner. Senator Corker, you are exactly right. I would
rather not comment on the precision of the mechanism, whether
it is cap and trade, whether it is taxes, whether it is
subsidies, but talk to the principles that you are asserting.
The Administration is in complete agreement with you that we
have got to get to a consolidated, single point of stimulus
that is technology-neutral, predictable, long-term, and that
includes the attributes that we seek as a Nation, the security
externalities, and carbon weighted. So whatever mechanism or
manifestation that comes in, those core principles of
simplification and consolidation into a single set that
cultivates the conditions for the results rather than selecting
the technologies is where we have to go.
I would call your attention to the original proposal of the
Administration for the ``20 in 10'' that was sent to the Hill
and included the 1992 definition of renewable fuels under the
Energy Policy Act which in fact was all inclusive and generally
technology-neutral. That may be something that could be
revisited in the days and weeks ahead.
Senator Corker. Thank you.
The Chairman. Dr. Glauber, did you want to make a comment?
Then we will adjourn.
Mr. Glauber. Sure. I do think it is important to recognize,
one, the recently passed farm bill actually brings the blender
credit down from 51 cents to 45 cents. My understanding is that
will get implemented in 2009.
There is no question at $130 oil, ethanol is probably
profitable without the subsidy. The real question is what
happens when the price of oil falls back to the levels that we
saw a year or 2 ago. There is no question that the blender
credit has been very instrumental in helping to establish an
industry.
So, yes, as far as the other duty and charge or the tariff,
so-called tariff, for the ethanol, certainly that is an outlet
to bring ethanol into this country. Ethanol made from sugarcane
tends to be at lower cost than corn. But as we develop these
new varieties and increase efficiency, there is no question
that corn-based ethanol has seen very large cost savings and
efficiency gains over the last 5-10 years.
The Chairman. Why don't we leave it at that? We will take a
short recess. I think Senator Dorgan went to vote early, and
when he comes back, he will reconvene the hearing. Thank you.
[Recess.]
Senator Dorgan [presiding]. We will call the hearing back
to order. As you know, there is a vote occurring and the
chairman will be back shortly.
Let me call on Senator Tester for inquiry.
Senator Tester. Yes, thank you, Senator Dorgan.
I will jump around a little bit. Mr. Karsner, you had
talked about emissions being 25 percent less on biofuels, could
be up to 52 percent. This is something that I am hearing a lot,
that the emissions on biofuels are greater, not less than
petroleum fuels. Do you have any idea where this misinformation
is coming from?
Mr. Karsner. Yes, and there are probably multiple sources.
Obviously, this is an area of hot interest. So there has been a
lot of recent work that has galvanized around it.
Primarily the recent surge in information on the subject
matter that we would find questionable comes from two of the
reports that were published in Science magazine. They go by
Searchinger and Tillman. Even the authors have said that some
of this has been taken out of context. We have actually seen it
rehashed almost verbatim through multiple outlets. It spread
like wildfire.
I am often amazed that very few people know that the
President and Congress have worked out a reduction plan for 20
percent of our gasoline, but within a week of this report
coming out on assumptions that we would find highly
questionable and, in fact, contrary to what is in the law and
including the protections that were built into the law, there
is sort of an implausible, extreme scenario that then has no
sensitivities run alongside of it. So our work at Argonne
National Laboratory and across the national laboratory system
rapidly went into a validation mode to work with that.
Forgive me for going a little long here, but there was an
interesting element that came out, which is the study and need
for indirect and direct land use as an element of emissions and
off-gassing. That work is also something that has been underway
at DOE and across the Government for some time, but it has
aroused a new level of debate. It is a matter that should be
included in the discussion, but we think across more plausible,
realistic assumptions and scenarios.
Senator Tester. Thank you.
Mr. Pyle, I have just got a few questions about the green
crude. What does it cost a barrel now?
Mr. Pyle. Obviously, we are not at full production, but the
projected production costs of this will be comparable to that
of existing means by which we can get new oil products. So when
I am speaking about those, I am speaking about deepwater
drilling, oil shale, oil sands. So we are looking in the range
of about $50 to $80 a barrel.
Senator Tester. Good. When you talk about being carbon-
neutral, I assume--correct me if I am wrong--that you are
taking into account tailpipe emissions also.
Mr. Pyle. Absolutely.
Senator Tester. Is it done inside, outside? How available
is it?
Mr. Pyle. This is done outside. It has a lot of
similarities to agriculture in the sense that it is an outdoor
kind of crop-like system, but does not use agricultural land or
agricultural products.
Senator Tester. Is the process so unique that--can it be
done on a smaller scale I guess is what I am asking. Can it be
done on a decentralized basis?
Mr. Pyle. It could be on a decentralized basis, but my
business is to do it on a very large scale to provide very
large supply to the existing infrastructure like pipelines and
refineries. But there is a potential to do it on a
decentralized basis.
Senator Tester. Mr. Huttner, very quickly. Cellulosic
ethanol is something that we have been talking about for a
while, and I think that corn ethanol has done its job as far as
establishing the market. Cellulosic is a direction we need to
go.
You talked about a pilot plant in 2009. When do you really
think that this will become a reality where we can talk about
cellulosic ethanol the same way we talk about corn ethanol?
Mr. Huttner. Our plant will be operational in 2009, but
over the course of the next 2 years, there is a number of pilot
and demonstration plants funded by the DOE's program that will
be coming on line. So I think in 2 to 5 years, you will start
seeing commercial volumes.
Senator Tester. Will it be as cost competitive as green
crude or corn ethanol as far as what Senator Corker talked
about, that, hopefully, once we get these industries off the
ground, we can pull back the support and they can stand alone.
Do you see that as the case for cellulosic ethanol?
Mr. Huttner. At some point as the market develops,
absolutely. That would be the intent.
Senator Tester. Thank you very much. I appreciate
everybody's testimony today. I appreciate the work you are
doing, and I just thank you.
Senator Dorgan. Senator Tester, thank you very much.
Dr. Glauber, I note that the former chief economist at
USDA, whom I have dealt with for years in various committees,
Keith Collins--I noted in the press that he has been hired by
Kraft to assist in the Grocery Manufacturers campaign against
biofuels. I note that he criticized your analysis of the
impacts of biofuels on food prices on behalf of his clients.
Can you explain to me the methodology that you used to
evaluate the impacts of biofuels on food costs and how that
might differ from the way Dr. Collins and his client would have
liked you to have calculated those effects?
Mr. Glauber. I have not seen his analysis.
Senator Dorgan. Have you heard of it?
Mr. Glauber. I am aware that he has been working with
Kraft.
I would say this, that our analysis, what we did--and
again, let me be very clear. It depends very much in terms of
what timeframe one looks at and what the actual analysis--you
know, the experiment, if you will, that you are looking at.
Senator Dorgan. That goes without saying.
Mr. Glauber. Yes. No, I know. But I think it is important
here.
For example, Dr. von Braun talked about IFPRI's analysis
showing a 39 percent impact on corn. I think that when I looked
at holding--when we looked at the impact on corn, we held
ethanol production constant over 2005 to 2007. Over that
period, we increased corn use for ethanol by about 2 billion
bushels. By my crude calculations, just as he was talking about
it, if you looked at what his analysis did, he assumed ethanol
growth rates over the 1990s applied to the current thing. He
would be getting very similar--I mean, he gets a higher number,
but if I were looking at a comparison between, say, 1 billion
gallons and 3 billion gallons, I would be getting a higher
number as well.
So I do not know exactly what Dr. Collins did. All I know
is we held it constant at 2005 and looked at the price effects,
translated those price effects into the CPI number, and derived
it that way.
Senator Dorgan. You know what? It is no clearer to me now,
but that is not necessarily your fault.
Dr. Pyle, I am chairman of the subcommittee on
appropriations that funds a lot of these, including Secretary
Karsner's operation. I included money for the first time. We
stopped research on algae about 15 years ago. Last year, I
included money in the fossil fuels account to begin that
research again. I am a big fan of algae. I know some look at it
and say it is way out in the sweet by and by, and it is kind of
fanciful in any event. But it just makes sense to me to find
ways to use algae.
Now, when you talked about what you are doing, are you
producing algae in greenhouses? Are you producing it in
vessels? Tell me how you produce the algae?
Mr. Pyle. So the overall process is a multi-stage process,
but the largest component of it is kind of an outdoor pond, for
lack of a better word.
Senator Dorgan. You could use the CO2 effluent
from a plant. Right?
Mr. Pyle. That is correct. Coal-fired flue gases.
Senator Dorgan. So it is beneficial use of something that
we want to get rid of.
Mr. Pyle. Absolutely.
Senator Dorgan. You produce the algae. The algae increases
in bulk in hours. It is an unbelievable product. It grows in
waste water, single-cell pond scum. It needs water and
CO2. We want to get rid of CO2. We grow
algae. You harvest the algae for your green oil or some harvest
it for diesel. I mean, there are various approaches.
This just makes a lot of sense to me. The reason I mention
this to you is I think in many ways if we look in the rear view
mirror 5 years from now, we are going to say, wow, I had no
idea this was going to happen.
A couple guys from Texas came to see me, and they are
taking off the flue gas--using chemicals to treat the flue gas
and they come up with three things, hydrogen, chloride, and
baking soda, and the baking soda contains the CO2.
Then they landfill the baking soda. Is that not interesting?
They have got two projects, demonstration projects. The
question is, do you take this to commercial scale? I do not
know the answer to that.
But I think there are a lot of things happening that are
interesting, and I think one of them is especially the use of
algae.
So tell me where are you in the process. You are in a
demonstration process?
Mr. Pyle. Yes, sir. We are moving right now to our
demonstration facility. We have a number of operations mainly
in San Diego, New Mexico, and Oklahoma. There are a number of
excellent places in the world and in the United States to
deploy this kind of technology. In the United States, it is
primarily in the southern States and ideally in New Mexico.
Senator Dorgan. One quick question of Mr. Karsner. I wanted
to ask all of you questions, but we are limited in time. Mr.
Karsner, you and I visited NREL out in Golden, Colorado, and
they showed us what they were doing with respect to cellulosic
ethanol. There are others who tell me that the private sector
is way ahead of NREL. I do not know if that is true or not.
Give me your assessment of where we might get to cellulosic
in a commercial scale in any reasonable timeframe.
Mr. Karsner. First of all, let me say I hope it is true.
You know, first past the post. It should not be that the
Government has to be exclusively the leader. We can be the
leader by catalyzing commercial feedback loops. We can find out
that we are not doing enough in algae and open up our program
with enough agility to begin including those things and
catalyzing more private sector capital. We are doing that at
NREL and at Sandia now, opening them up to work with Chevron
and others on algae.
But we think that our original metric was to get commercial
scale process integration by 2012. We actually think, now that
we have a couple projects that we have measurably stage-gated
and some of them that have already achieved financing and
groundbreaking, that it is likely, as you heard earlier, that
some of these might achieve commercial openings by 2010 or
2011. Again, they will be reacting to the price signal. Our
2012 metric was established when we were estimating gasoline
based on an EIA baseline of $30 to $35 per barrel. So the price
signals are going to affect our urgency and it is going to
affect the amount of money coming in if we have policy
predictability.
Senator Dorgan. Thank you very much.
Senator Bingaman, let me thank you for putting together a
really terrific panel. I thought that you contributed a lot to
this discussion. I appreciate the work that all of you have
done.
Senator Barrasso.
Senator Barrasso. Thank you very much, Mr. Chairman. Thank
you for putting together this panel.
Dr. Outlaw, if I could visit with you. The chairman asked
earlier one of the other witnesses about the tough year on
crops in the Midwest, the impact on corn, and the specifics of
the waiver authority with the EPA. From where you are sitting
in Texas, could you add a little bit to what your thoughts are
on the best way to accomplish these things and where we ought
to be going now?
Mr. Outlaw. Clearly, our Governor asked for the waiver. He
did not ask for the particular research that I reported on
today.
But the question becomes what are you trying to achieve. If
you are trying to achieve a slowdown in ethanol production
which would eventually relate to lower farm prices, our
research would suggest that this is a very slow way to get to
that answer because, as most of us said, we do not believe that
the RFS is going to be binding. So if you relax the RFS, you
just relax something that was not really the driving force
anyway.
Taking it a second step, I would like to make sure you know
that we do not have any idea what the investment community is
going to do if that waiver is reduced. I suspect that they
would have second thoughts about putting a lot of money in
something that was not going to be supported. But again, I do
not know that for a fact.
Senator Barrasso. Thank you.
For any member of the panel or several that may want to
comment, wholesale ethanol right now is about $1 cheaper than
wholesale gasoline. So this could indicate that now ethanol is
an established substitute in the fuel market. If this is,
indeed, the case, why is continued support, be it Government
protected demand or a Government subsidy, justified at this
point?
Mr. Karsner. Let me say it is not fully established in the
market because the price metric you just spoke to, Senator, is
a temporary blip in time. The price signals are dynamic and
constantly moving in time. So at times that ethanol price is on
the floor and cannot support debt payoffs and servicing of the
facilities that we install, let alone the much higher capital
cost facilities that we seek to install for cellulosic
biorefineries, and at times, ethanol price is high. Sometimes
it is high; sometimes it is low.
Now because it is low, it is constraining the price that we
pay at the pumps. We would be paying 20 to 35 cents more per
gallon were ethanol not being pumped out in the volumes it is
now, displacing 7.2 billion gallons of gasoline in this
country, a million barrels per day of production, 17 million
metric tons of greenhouse gas emissions, let alone the amount
of money we are exporting abroad. So it is providing an
enormous service that we need to get to the definition you are
talking about and establish a place where it can stand on its
own. It can only do that when the market becomes defined.
Right now we have defined production with a mandate. We
have not defined the market that it gets delivered into, and
until we get intermediate blends in place that allow ethanol to
rise to E10 and up above it, then you will have an established
market. Until then, it is just a production mandate with an
incentive to build.
Senator Barrasso. Anyone else want to comment on that? I do
not see any takers on it. Yes, sir?
Mr. Glauber. I will weigh in.
I do think that if you look at the studies that have been
done--and there have been several studies over the last couple
of years. I would be happy to provide a summary of some of them
for you. But the ones that look at elimination of the blender
tax credit show substantial drop-off in fuel production. There
is no question about that. Now, most of these also assume the
assumptions on oil prices are considerably lower than the
current prices. I think, again, there is no question that at
$130 oil you can make money without the blender credit. But
most of the studies, again, are focusing--I would say offhand
that probably the average oil price considered is in the $60 to
$70 range in their baseline assumptions--would suggest that
there be a fairly large drop-off in production.
Senator Barrasso. Dr. Pyle, there is a front-page article,
business section of the New York Times today, Commodity Prices
Show No Let-Up. We talk about not just the pain at the pump,
but clearly the pain for people who are doing their grocery
shopping. I see it in Wyoming every weekend when I am home.
I have cosponsored legislation with Senator Hutchison from
Texas that would limit just the proportion of ethanol mandate
derived from corn to 9 billion gallons a year. What would the
impact of this legislation have on the ethanol industry today?
Mr. Pyle. Kind of following what Secretary Karsner and
something that Dr. Outlaw said that we have to be very careful
about here is this is not an established industry. The biofuels
industry is not established. It is very nascent in investors'
minds. People are very worried about the future of it. From
where I sit, even though I provide a fuel product which is, as
I said, does not use agricultural land nor agricultural
products, I am very concerned about investors' appetite and
investors' perception of the future of biofuels in this
country.
So kind of following, I agree with Secretary Karsner. It is
the wrong thing to do to send a signal at this point that
jeopardizes that future in investors' minds because what we
really want to do is transition to a market economy that
provides biofuels and substitute renewable fuels competitively
with oil. We are not there yet.
Senator Barrasso. Mr. Chairman, my time has expired. If I
could have a statement put in the record, I would appreciate
that.
The Chairman [presiding]. We are glad to include that in
the record.
[The prepared statement of Senator Barrasso follows:]
Prepared Statement of Hon. John Barrasso, U.S. Senator From Wyoming
Mr. Chairman and Ranking Member, thank you for holding this hearing
today.
I think it is important that Congress explore and address
unintended consequences from adopted legislation in all arenas.
The topic of today's discussion--renewable fuels effect on food
prices--is timely and very important to my constituents.
I am aware of the lingering questions that have been raised about
the impact of our biofuels policy on our water supplies, our land use,
and grain inflation.
Corn prices are on the rise.
This is due to:
Rising transportation and fertilizer costs;
World growth; and
Many argue that increased ethanol production mandated by
Congress has contributed to today's higher prices.
A quick review of some congressional incentives to promote biofuels
is include:
the volumetric ethanol tax credit, now at 45 cents per
gallon;
the biodiesel tax credit, o the small agri-biodiesel
producer credit,
a host of guaranteed loans which could be used for biofuels,
a range of grants through both the Department of Energy and
Department of Agriculture,
biomass research and development initiative, and
a protective ethanol tariff; and
of course, the renewable fuels mandate.
These policies are not without cost:
To the taxpayers and
To buyers of corn, especially the nation's livestock
producers.
I believe that it is of utmost importance for our nation to develop
all sources of energy available to us.
We need biofuels, wind, solar, coal, gas and nuclear--we need it
all!
However, our policies should not provide extraordinary advantage
for any one source.
We should carefully consider any ramifications of the selected
policies.
There is no doubt the combination of federal policies has more than
spurred increased investment in corn-based ethanol.
But, government policies to promote any one source of energy move
us away from market efficiency.
The renewable fuels standard expanded and extended by Congress in
2007 is affecting the grain markets today.
There is dispute over the magnitude of the impact, but the
inflationary effects are clear.
This nation has developed the market demand and infrastructure for
the ethanol industry to take off and prosper.
The combination of mandates, subsidies and tariffs are:
resulting in market inefficiencies;
frustrating other agriculture and food industries; and
contributing to inflationary pressures on American families.
We need to take a hard look at energy policy in this country.
I hope we can focus on ways to reform these unintended consequences
and do what's best for all American people.
Thank you very much, Mr. Chairman.
The Chairman. Next, Senator Craig.
Senator Craig. Mr. Chairman, thank you.
To all of you, thank you. I have found all of your
testimonies interesting, and of course, to those of us who
spent a near lifetime here focused on energy and the dynamics
of the new markets that are out there and the potentials, what
you say is very exciting.
I am pleased to hear that you speak about stability because
we are not necessarily a stable crowd around here when the
politics of push get to us. The politics of push are on us
right now, whether it is from the food supply side or the $4.50
gas at the pump. We tend to sometimes mix things up in the
wrong way. I have oftentimes thought that as we advance or
assist in the advancement of technology, we ought to be looking
at the market and saying where is the breakeven point. Where do
we floor this and protect it so that it does not get denied by
some movement in the market or by a valve being turned over in
the Middle East to affect the market and shut down a technology
if in fact we are to become more independent? So I appreciate
your thoughts on that.
Secretary Karsner, you have, in part, answered a question.
I think you were referring to it in passing a few moments ago,
or I should not say in passing. It was a pretty clear
statement. But EIA does say that absent ethanol in the market
today and in the blends, the price at the pump is 25 to 30
cents per gallon higher. Is that not correct?
Mr. Karsner. Twenty to 35 cents. That is the DOE's estimate
which is, by most measures, conservative.
Senator Craig. Yes. Therefore, as a multiplier, we do not
take that gross value on a daily basis and put it against the
rising cost of food because usually that person who is
acquiring food is also acquiring energy.
Mr. Karsner. Absolutely. It clearly compensates, and there
is a net offset there. So if you are talking about a 3 to 4
percent rise in food prices or protecting the strategic supply
of Doritos, if you will, when you talk about the larger
geopolitical questions of energy security, environmental, and
how it affects our pocketbooks at home, it dwarfs it relative
to the absolute savings.
Senator Craig. Yes. I think we need to put up a few
billboards on that one because there is a crowd out there who
does not like corn-based ethanol to begin with and their shout
is pretty loud at the moment.
Dr. Pyle, your discussion about RFS has been fascinating.
We never do anything around here quite the way it ought to be
done sometimes. There were some tradeoffs made there. RFS got a
little bit of political correctness adjusted to it in the
course of compromise. The chairman might disagree with me a
little bit or agree to some extent and then add more to it.
Sometimes when we get into conferences between the House and
the Senate--frankly, we had a much better version, and if it
were the version that we had, you might not be--your testimony
would be different today than it is because I think we ought to
be out there in this definition accommodating a much broader
base of technologies and not trying to be the market, but let
the market be the market. But we get caught up in that.
I thank you for making that clear. Do not be quiet about
it.
Mr. Pyle. Thank you, Senator.
Senator Craig. Stay with it and maybe we will make those
kinds of adjustments because we all know energy has become a
very dynamic issue in this country, and therefore, it is going
to cause us to make changes and adjustments over time.
Hopefully sooner rather than later.
Secretary Karsner, does the U.S. have enough biomass
resource to meet its Energy Independence and Security Act
mandate without competing excessively with food usage?
Mr. Karsner. Senator, as you know, we together with USDA
and six of the best DOE and USDA scientists across laboratories
like yours at INL, NREL, Oak Ridge, Nebraska, Tennessee, all
worked to produce the Billion Ton Study in 2005, which was
peer-reviewed. I am pleased to validate and affirm that. We
even put a display out in the hallway so that people would
understand where we are going with that. It was very
conservative in all the assumptions undertaken in that study,
which I could cite to separately and would be pleased to submit
for the record.
[The information referred to follows:]
``Biomass as Feedstock for a Bioenergy and Bioproducts Industry:
The Technical Feasibility of a Billion-Ton Annual Supply,'' a report
jointly sponsored by the Departments of Energy and Agriculture, was
published in April 2005 and is available on DOE's website at http://
www1.eere.energy.gov/biomass/pdfs/final_billionton_vision_report2.pdf.
But you should know that Oak Ridge is planning very shortly
to release an update that would show an even greater yield. We
estimated at 30 percent by 2030 was possible, conservatively
discounting and excluding all the conservation resource land,
but we think with even more data that we have had in the 3
years since, that the updated Billion Ton Study will validate
that we are exceedingly plentiful in our capacity to have
nonedible food sources for biomass cellulosic.
Senator Craig. Thank you for that work, and I will keep
asking that question as long as I am here so that my colleagues
will listen to it a little more.
I ran into a dairy farmer in Pennsylvania recently who put
100 acres into switchgrass to create a hunting preserve for
upland game birds. I thought it fascinating that the types of
switchgrass that do meet what we are after in cellulosic he
found had a rigidity so they withstood the first snowfall so
they did not come down so you could hunt through them. But once
the hunting season was over, you could cut them and take them
off, if you will, to--I said brewery. It is a distillery
actually--for the purpose of cellulosic. Of course, next year
they returned with the value of the hunting preserve. He was
focusing on it in a very fascinating way, and I said, well,
then you need to be more clear with our conservation friends.
Maybe they would buy that if we first use it to protect birds
and second to run cars.
But there are some dynamics out there that are reflected by
many of you today that really do fit, and I hope that we let
the marketplace work by opening up to it wide open and letting
it decide who the winners and losers are going to be in this
business of energy while not trying to get too politically
correct around here.
Thank you all much.
The Chairman. Thank you very much.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Let me thank the
witnesses for their testimonies.
Secretary Karsner, let me ask you. I think Senator Tester
may have plowed some of this ground, but I would like to visit
it again.
When we look more broadly about the environmental impacts
of the Renewable Fuels Standard, some scientific studies have
argued that converting grassland to grow corn results in a
spike in greenhouse gas emissions because of fertilizer use and
other factors. In addition, using acres to grow fuel here can
encourage growing more food crops in places like Brazil,
putting pressure on deforestation rates.
Is producing over 8 billion gallons of ethanol a year under
the RFS actually reducing greenhouse gas emissions, or when we
follow the impacts all the way through, does it exacerbate
global warming?
Mr. Karsner. According to our studies, it is a net
reduction.
With respect to the indirect land use question and the
valid questions that you are asking with respect to
sustainability up and down the food chain and how it affects
wells to wheels analysis, I should note that this committee put
into the legislation demands that we actually perform those
studies ahead of some of the reports that had come out in the
community. So that was well thought through in the Energy
Independence and Security Act, specifically section 232, and
those studies are underway.
Senator Menendez. Have you done those studies? You have not
done those studies yet.
Mr. Karsner. We are performing them now.
Senator Menendez. You are performing them now. So the
testimony that you have given to the committee does not include
an analysis of those studies obviously because you are
performing them.
Mr. Karsner. We have detailed analysis of the studies that
were performed that are bringing these into question that I
think you are alluding to, the Searchinger study. We have
published our analysis of those studies online in great detail
on the front of our Web page and have spoken to what we think
of the validity of the assumptions.
Senator Menendez. But you are doing your own independent
studies.
Mr. Karsner. The Department, yes, has commissioned the
studies----
Senator Menendez. What I am saying is the testimony that
you gave before the committee today obviously does not have the
results of those studies yet, the ones that you are performing.
Mr. Karsner. The studies that are underway we have not
included the conclusions of in our testimony. That is correct.
Senator Menendez. All right.
So let me ask you, Dr. von Braun. I heard your testimony
and I also read it. Your testimony states that biofuel
production accounts for 30 percent of the recent increase in
commodity prices. World Bank economists have blamed that same
cause as 65 percent of the rise. Yet, Dr. Glauber said it is
only 3 percent of the price rise. How do we explain the
differences? Are we all comparing the same items, or are we
having very fundamentally different calculations? Because that
is a pretty wide swing.
Mr. von Braun. Senator, we have different models and
different assumptions. Let me refer to the international global
model. You need a global model which has all commodities, all
countries in there, and political reactions taken by countries.
The IFPRI model called IMPACT is a well tested model device in
15 years. It has predicted earlier the change in the world food
markets 3 years ago. So that is where the widely trusted price
effects are coming from, a simulation which is running the
model with past trends versus the increased expansion of
biofuels from both grains and oilseeds over the past 7 years.
We also look into the future. Some of the World Bank
studies are, as far as I understand, also future oriented. Our
analysis for the next 10 years suggests that if the current
plans are further implemented around the world, not just in the
U.S., we could expect another about 15 to 20 percent real price
increase. If you double those, it would be for corn an increase
closer to--more than twice of that, about 50 percent.
Senator Menendez. In what little time I have left, is there
one or two significant factors? You said there are different
parts of the equation that everybody is looking at. What is the
different part of the equation between the world one that you
just described and the U.S. one? You said you are working under
different assumptions and different parts of an equation and
that the world one that you just defined that has existed for
15 years or so is different than the one that I assume Dr.
Glauber who just told us earlier that 3 percent is the rise in
world food prices as a result of biofuels. What are the one or
two different elements that the world one includes that we do
not include?
Dr. von Braun. Our model is one which is a long-run
scenario model which factors in all policies and all
investments. We have run our scenarios for the long run which I
think is essential because you need to factor in the supply and
demand.
I understand the USDA scenarios are looking at last year's
or 2-year price effects, and that may not capture the final
adjustments. But I think it would be fair to ask the colleagues
from there to comment.
Mr. Karsner. Senator, if I may. The obvious difference is
inputs, what are the commodity inputs, and outputs, what are
the products going to. Here in the United States, we are almost
exclusively going to alcohols derived from corn. I am not an
economist, but the capacity for that corn to affect the rice
price in Asia is obviously disconnected. You can batch them
together for global meta-modeling purposes, but the subject of
the hearing on how are renewable fuels in the United States
affecting commodity prices is really focusing on actual, real-
time empirical data of what are our corn plantings doing, what
is the yield growth, what are the inputs, and then where are
they going.
In Europe, there is far greater use of biodiesel derived
from wheat straw by way of example. So it is going to affect
wheat prices. Palm oil used in Europe from Southeast Asia.
These are things we do not particularly have a strong presence
of in the United States. We are really about corn supply, for
better or for worse, going into alcohols as opposed to
biodiesel from the myriad sources being imported in Europe and
in other demand economies.
Senator Menendez. Thank you.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman, and thank you
to the panel for your comments here this afternoon.
I am not quite sure what I go home and tell my constituents
because right now we are facing the highest energy prices in
the Nation. The spring barges have just come in and some of our
villages and some of our regional hubs. I was just out in
Dillingham, a fishing community out in Bristol Bay, pretty
sizable by our standards, and they are paying $5.50 for gas
right now. Diesel is about $6.50. But they are paying 8 bucks
for a gallon of milk, 10 bucks for a carton of orange juice. We
are used to paying high prices for our food because our
transportation costs are what they are, and we deal with that.
But we can only deal with it to a certain point because right
now the fishing boats are not able to go out and leave the dock
and fuel up.
So as they are looking at their energy costs growing and
now they are looking at their food costs going through the
roof, they are like every other American out there. They are
saying, Lisa, what are you doing about it? What are you doing
about the high energy costs? If they think that the price of
their food, a carton of eggs or milk--actually we do not get
milk in a lot of our villages out there because it goes bad.
But if they think that the price of food is tied to the fact
that we are using it for fuels and we are not seeing any relief
for fuels, it is a tough explanation to folks out there.
So I am not sure what I am going to tell them. I will make
sure that I read again the comments from not only you folks
that have provided us your input to really try to understand
what is going on as we talk about the RFS.
Let me ask you, Secretary Karsner. I think most of us
believe that the real benefit from biofuels is going to be when
we take that transition from the corn-based ethanol to the
cellulosic. Given last year's legislation and the increase in
biofuels required, if we were to slow that for ethanol, what
kind of a ripple effect would that have, if any, on the
progress toward cellulosic?
Mr. Karsner. In terms of private sector capital formation,
Senator, I believe it would be devastating to have an erratic
switch turn in policy predictability. This was the first time
we had come out with a policy that goes beyond aspirations for
displacing oil with new technology and fuel sources. So all of
the capital that has galvanized is waiting with bated breath to
see whether Washington will affirm that policy for the long
term so that these multiyear investment plans can be lived out
that some of these companies are dependent on. So while the
Department of Agriculture stated in real time a net production
installed capacity may not alter dramatically in terms of the
new installed capacity for cellulosic sources, I think you
would see capital dry up to a trickle.
Senator Murkowski. Let me ask you to answer that, Mr.
Huttner. You spoke to the promise of cellulosic in your
testimony here. Do you agree?
Mr. Huttner. No, absolutely. I think the impact, if there
was a change in the Renewable Fuels Standard, it would have a
ripple effect certainly on our company's decision to invest
capital and the technology investment that is going to be
required to achieve the breakthroughs we need in the economics
of the conversion process. If there is no Renewable Fuels
Standard that we can predict is going to be there for the
market, we are going to depend on a development of a global
traded commodity of ethanol which I think is a long ways in the
future.
So the policy framework and the ability to predict what
that is going to be is very important to making investment
decisions today because it will take 2 years or more for us to
bring the full technology package to market, and we would not
be doing that if there was a doubt about the Renewable Fuels
Standard.
Senator Murkowski. Let me ask a question about the price of
gas. There is some implication, I guess, that perhaps motorists
are showing a reluctance to use the ethanol additive fuels
simply because of the lower gas mileage than the fuels without
ethanol. I had seen a GAO report earlier this month that seemed
to predict that the fuel costs will be higher because of the
RFS.
Secretary Karsner, what is your view as to the cost impacts
to motor fuel as a result of the renewable fuels?
Mr. Karsner. So we actually have two regulated products
available to consumers today, E10 on the blend side and E85.
E85 has a noticeable penalty in terms of the efficiency of the
use of the fuel, but as long as the pricing--that is, the price
per Btu--is commensurate, then you suffer no loss on a per-
gallon basis.
It is very much the same with the E10 blend, but you have
to remember that 10 percent, which is more than 99 percent of
all of the ethanol in the market, is actually displacing
oxygenates. So it is something that the oil companies and
blenders have favored themselves, and importantly, it is
allowing them to be in compliance with the Clean Air Act,
without which we begin to get into toxins like toluene, xylene,
benzene that begin to affect our air quality. So ethanol is
actually doing something for compliance in addition to the
economics.
But as I stated, the economic data at the Department of
Energy, 35 cents savings per gallon today, more than
compensates for any minor incremental loss from using the
blend.
Senator Murkowski. Do you think that that is being
communicated to the consumer, though?
Mr. Karsner. No. I think the consumer is subject to an
overwhelming amount of misinformation today on this.
Senator Murkowski. How do we correct that misinformation?
Mr. Karsner. I think this hearing will go a long way,
Senator. I think your leadership in bringing out the facts. We
cannot compete with the budgets of those who would like to
misinform. I was asked a question about the source of the
misinformation. The more important question is the pace of
misinformation. This seems to be highest whenever commodity
prices and price spikes on oil are highest.
We have to keep our eyes on the prize and not get
distracted. We have got to erode the addiction and blending,
stepping up that incremental blending to E10 and E15 at a time
that it is lowering the price--I mean, Alaskans get hit hardest
when Americans get hit hard. So the difference of an extra 50
cents if we were not blending it would be enormous. So we have
got to get that message out.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. I think it has been
an excellent panel and you are testifying at a key time.
I have a couple of questions for you, if I might, Secretary
Karsner, and then you, Dr. Glauber.
It seems to me that the Renewable Fuels Standard, as it is
written today, just defies common sense and, in many respects,
is just totally arbitrary. I want to dig into one very specific
area.
Obviously, when our country is so concerned about these
skyrocketing food prices, we ought to be using as much
cellulosic material as we possibly can for biofuels. But you
really cannot do that because anything grown on Federal land is
out for the purpose of defining biomass and the Renewable Fuels
Standard. So in my part of the world where people are just
hungry to use wood waste, for example, for satisfying the
biomass definition--I know that there is great interest in
agricultural communities about various kinds of straw, wheat
straw and others--there would be an opportunity for us to get
this cellulosic material, take steps that would be good for our
natural resources, good for our economy, and would hold down
food prices if the country goes back and looks at this
Renewable Fuels Standard, particularly as it relates to these
areas I am talking about, anew.
So my question for you, Dr. Karsner, does it make sense to
you to categorically exclude biomass from Federal lands?
Mr. Karsner. No, it does not. Absolutely it does not. I do
not know how that happened. I think it was something on the
trimming room floor at the time that the bill was getting into
its final----
Senator Wyden. I will tell you exactly how it happened.
What happened was Chairman Bingaman and Senator Domenici, to
their credit, when we were debating this in our committee,
allowed us to go off and bring together people from the
agriculture production side and forestry and environmental
folks, and we got the right definition of biomass so that we
could get this material from Federal lands, cellulosic
material. Then it went over to the House of Representatives and
ended up in the trash can. So we are going to try and----
Mr. Karsner. I do not want to touch that one, sir.
[Laughter.]
Senator Wyden. You can handle it just that way.
Mr. Karsner. I would, if I may, Senator, say it is the very
first project that has broken ground in Soperton, Georgia that
has relied on forestry products, It estimated in its original
economics, one that we are funding with taxpayer cost share, a
20- to 50-mile radius where it could access Federal lands.
Under that provision, it now has to aggregate these and
introduce new logistics of 100 to 200 miles to import, to go
around the Federal lands where they originally sited. So there
is not a good, rational reason why we should exclude woody
biomass from Federal lands that we are aware of.
Senator Wyden. The same question for you, Dr. Glauber. Does
it make any sense to exclude biomass?
Mr. Glauber. No, I do not believe it does. I would agree. I
know the Administration in its own farm bill proposals oriented
some on the development of ethanol from forest products. So,
yes, it does not make any sense.
Senator Wyden. We are going to need you two because--we are
going to let you spare the House of Representatives for
purposes of this afternoon's conversation, but we are going to
need you two to help us get back the language championed by
Chairman Bingaman and Senator Domenici because it made sense.
It was the subject of an extraordinarily long negotiation. I
think we got it right. It would provide an opportunity, for
example, to be sensitive to old growth trees, which was
something of great concern, of legitimate concern in the
environmental community. We got it right, and then it
disappeared when it went to the House. We have got to get it
back, and you all have helped us make the case. So we thank you
and we will need you to champion that down the road.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Lincoln.
Senator Lincoln. Thank you, Mr. Chairman. I apologize for
being late. It has been a crazy day. But we certainly are very
appreciative to you and Senator Domenici for bringing the
committee together to really discuss our Nation's renewable
fuel policy in the context of rising food prices and, without a
doubt, something that is on the mind of every one of my
constituents at this juncture. Just having spent that week at
home after Labor Day--or Memorial Day, I guess--you know, you
travel across the State and it is mostly what you hear,
particularly when you represent a State like I do with a large,
disproportionate share of low income working families who are
really getting squeezed.
But we should all be concerned about both of these rising
costs in fuel and food. As the Senator from one of those rural
States that certainly can make a contribution in terms of
renewable fuels and certainly in terms of food, but also a
State that, having a lot of low income working families, also
gets hit. You mentioned Alaska. We are number 48 in terms of
low income. But we want to work hard to figure it out.
I just had a visit in my office today from a sheriff from a
county that is tremendous in forest lands, but they are not
going to be able to meet their county budget come September
with the median income of less than $14,000. It is tough out
there, and when these kind of things get heaped upon them, it
makes life extremely difficult.
So I hope that we will work together with this committee
and the other committees of jurisdiction to make sure that we
are doing everything we can to accelerate and move our Nation
forward in terms of renewable fuels lessening our dependence on
foreign oil but maintaining a critical food supply, which I
know we are certainly capable of. We worked hard on the farm
bill and were able to secure new tax incentives and other
things in renewable fuels areas, but also to maintain the
integrity of a safety net. That was important.
I know most of my questions have probably already been
asked and I will not be redundant, nor will I keep the chairman
here much longer.
But I just had one quick question. If it has been asked, I
apologize. As I said before, I do believe strongly that we can
balance a biofuels industry and policy with other critical
economic interests. I think we have to look at the practical
ways to do that.
But I do think the circumstances we are in right now
present us all great concern. Livestock, poultry, and dairy
producers in my State are already feeling a tremendous impact
of higher grain prices, and it could lead to constrictions in
those industries. It is inevitable that higher feed costs will
ultimately be passed on to the consumers on staples like
chicken and pork and beef. We have got great concerns over
that.
We have set ambitious goals for renewable fuels, but I also
think that Congress was right to provide flexibility in
temporarily being able to adjust some of those goals as
conditions warrant.
I guess one of the questions mostly for--is it Dr. Glauber
with USDA? When is the right time to make adjustments so that
other industries and consumers are not unduly damaged? I think
that is a question that we have to answer not just today but
over time. Maybe you can elaborate--and I apologize again if
you have already done it--what USDA's view of the waiver
authorities in the 2005 and 2007 energy bill is and at what
point would USDA support adjusting mandates on a temporary
basis to ease the cost pressures and mitigate some of those
unintended consequences.
The other thing would be does USDA have a contingency plan
for dairy, livestock, poultry operations, should the feed
crisis become even worse. We obviously know that you all made a
projection that the corn harvest is going to be 10 percent less
than it was last year, and that could pose us some serious
problem. It is not good news for that much, the livestock and
poultry industry.
I do not know. Due to heavy winters and wet weather that we
have had, we have had wheat crops under water for weeks and
weeks and weeks and a slowness in getting into the fields and
planting our crops. There are predictions that it will be as
low as the late 1980s if that becomes another issue.
What do you feel like is the authority at USDA that you
have and are there any, again, contingency plans for what we
look for down the road?
Mr. Glauber. Most of the things you are talking about are
real short-run issues.
Senator Lincoln. Right.
Mr. Glauber. I mean, here we are in the middle of a crop
year that is still unfolding and admittedly, as I went into a
little earlier, certainly USDA has already taken down its
projected corn yield. We will know more in August when we have
firm numbers from our objective yield surveys. We have an
acreage report that comes out at the end of this month. That
will be closely watched because want to know. You know, all we
have right now to go on is what people told us they wanted to
plant back at the beginning of March. So we know there are
reports of land that is still under water, the late plantings,
and so all that again will get reflected. We will know a lot
more in a month.
Senator Lincoln. Not to mention the weather during the
growing time.
Mr. Glauber. No. That is right. We are not even into the
summer----
Senator Lincoln. We do not know if there are going to be
droughts or a wet summer.
Mr. Glauber [continuing]. So all that will be closely
watched.
What makes it so critical is the fact that we have very,
very low stocks. So the volatility is there in the market. We
have seen the price increases within the last week alone, a
dramatic price increase for corn.
As I mentioned earlier, USDA, of course, is involved with
the waiver request. We are consulted, as well as DOE is, in
that.
I also said earlier that I did not believe that the mandate
would be binding this year. That is, we will probably be
producing more ethanol than the 9 billion gallons that are
called for in the Renewable Fuels Standard. Again, that is
predicated on a reasonable corn crop this year. But I do not
think that it will be binding, and I think Dr. Outlaw here also
had a similar conclusion.
In terms of short-run effects, I think one thing that USDA
has done is allowed haying and grazing on CRP land, again after
the nesting season is over I think in the southern portions of
the State. That will begin somewhere on the order of July 1st
or so. Then from that period through I think about November 10
or 11 or so farmers who have CRP land will be able to allow
grazing on that or haying on that for a nominal fee per
contract. That could provide some relief to livestock
producers, obviously, who might have an opportunity to graze
or----
Senator Lincoln. So that is your contingency plan?
Mr. Glauber. Frankly, Senator, in the short run there is
not a lot one can do. One watches this crop and harvests it.
Senator Lincoln. I am wondering if USDA is having
conversations about what would be a contingency plan.
Mr. Glauber. No, we certainly are. We are looking at
longer-run issues, but in terms of the short run, all I am
saying is there is very little one can do. You cannot make rain
or you cannot make it dry up.
Senator Lincoln. I am a farmer's daughter. I can guarantee
you I know that.
[Laughter.]
Senator Lincoln. But I also know you still have to think
about the month ahead because----
Mr. Glauber. Yes. No, I understand, and I think----
Senator Lincoln [continuing]. You still have got to make
payroll.
Mr. Glauber [continuing]. That the Secretary was keen on
getting an announcement out on CRP early so that farmers and
ranchers would be able to take advantage of that.
Senator Lincoln. Dr. Outlaw, just so I can make sure I
understood your testimony, you had mentioned or you stated in
your study that you detected no statistically significant
effect of corn on retail meat prices to date.
Mr. Outlaw. To date.
Senator Lincoln. But you are saying that is short-term
evidence.
Mr. Outlaw. For sure. We expect, with the research we have
done on feeding margins and the cost of gain, there is no way
that the animal feeding industries are going to sustain these
losses much longer.
Senator Lincoln. I will guarantee it.
Mr. Outlaw. So there are going to be changes. They are
coming and they are going to be significant. We cannot say that
we have found them yet.
Senator Lincoln. Right. So you are just predicting that
everything staying constant, that is what is going to happen is
a decline in meat supplies.
Mr. Outlaw. Right.
Senator Lincoln. So I hope that we do not just predict it
but that we try to work toward preventing that crisis, knowing
that we cannot predict rain and we cannot predict weather
circumstances, but there are contingency plans to figure out
how we are going to be able to support those industries because
it is not just our country. We provide the safest, most
abundant, and affordable supply of food and fiber for the
world. So I think it is a critical issue.
Thank you, Mr. Chairman. You have been extremely patient.
The Chairman. Thank you for your good questions.
Let me ask a couple of questions before we conclude the
hearing here.
There seem to be a lot of variables in this equation as we
are talking about this RFS. Although there are significant
problems with the final version of the RFS that we passed and
we need to try to address those, identify how to do that in a
way that is acceptable, one good thing about the RFS, as I
understand it, is that although we have a mandate for how much
biofuel is to be blended each year, we do not have a mandate
for how much of it is to come from corn. I mean, there is a
maximum that can come from corn, but there is not a requirement
that anything comes from corn. So it is very possible that
instead of us getting to 15 billion gallons of renewable fuels
from corn being blended by 2015, I believe it is, instead of
doing that, we would wind up meeting the mandate from other
sources. At least that is theoretically possible.
I wondered, Dr. Glauber or Secretary Karsner or Dr. Outlaw,
any of you, have you tried to look ahead and make a calculation
or a prediction as to how much of the RFS you expect to
actually come from corn as we move through these years of
mandate that we have described here, anything that you have
predicted with regard to future corn prices?
Another question, which is pretty obvious I guess. I saw a
report out of the Department of Agriculture a week or two ago
about the percentage of the corn crop that was going to produce
ethanol. I think there was something about it being 25 percent
last year and now it is going to be 30-plus percent. Do you
have a prediction as to where that is going? I mean, are we
talking about over half of our corn crop going to ethanol at
some point, or if not, why not?
So let me stop with those questions and see if you have a
thought about any of that.
Mr. Glauber. Let me just speak to the longer run. I think
this is a very important issue.
One is that certainly USDA's forecast, the 10-year
projections that we make, and I would say most of the other
institutions that do this sort of analysis pretty much expect
the capacity in the corn ethanol industry to reach 15 billion
and to pretty much stabilize there. We have seen 2 years of
very rapid growth from 2005 and 2006 to current levels. We are
projecting another year of rapid growth in that capacity
building, but that it should level off next year and start
leveling off toward the 15 billion. What will determine that,
what will drive that is, again, the profitability of producing
ethanol out of corn. Right now, again, based on our
projections, it looks profitable to produce ethanol from corn.
In regards to prices, I hesitate just in the sense that
even when we did our long-term projections, that was based on a
lot of material back in November. That was even before the
energy bill, of course, was passed. But what our projections
showed then--and I would not think that they would change
much--is that high prices right now would come down a bit.
The Chairman. High prices of corn?
Mr. Glauber. High prices of corn. I am sorry and that they
would begin to moderate some as stocks were rebuilt. Now,
clearly, we are in a very tight situation right now. A lot will
depend on this year's crop to see how fast those stocks are
rebuilt.
Again, assuming yield growth, fairly modest yield growth,
over time we should be able to rebuild stocks such that prices
fall back into the mid-$3 range. That at least is what our
projections show.
In terms of the amount of corn made into ethanol as a
percent of the total crop, that in out-years is projected at a
third or so of the crop, a third to some 35 percent of the
crop. But those are large crops too, far larger than--because
of yield growth, because of a substantial number of acres going
into corn production, that is a lot of corn, and the amount of
corn available for other uses such as feed and exports is also
supposed to remain at fairly high levels. So we are not cutting
into the amount going to feed, for example.
The Chairman. Do any of the others have a comment on this?
Mr. Karsner. I am going to talk more simply and simply say
that we will assume that whatever the maximum mandated level
is, that corn can and will rise to it.
I think it is very important because of, Senator, your
great leadership on what this was all about to focus back on
the key question, which is how do we alleviate carbon-based
fossil fuels and not be contained in the discussion about how
do we perfect the individual ethanol. We cannot get to the
advanced biofuels that these companies represent or the
advanced cellulosic ethanols that we are programmed for and
investing in as a Nation without going through corn-based and
conventional ethanol, which is already yielding pricing merits
on a microeconomic basis at the pump, on a macroeconomic basis
in alleviating the amount of capital that we send abroad to
nations that are sometimes hostile to us and, of course,
already to the environment. All that we are talking about in
programming technologically are improvements on that.
But the perfect is the enemy of the good. We have got to
work on today transportation, logistics, retail outlets, engine
optimization, terminaling facilities, et cetera. So we are
working on that through blending alternative alcohols or, in
the case of diesel, alternative biodiesels so that we can scale
those in a way that we can integrate them to displace our oil
addiction. That has to be the primary thing, and we cannot get
stuck between those who would want to distract us and only
compete one form of biofuel against another. We are after the
better nonedible sources, but not at the cost of bringing this
all to a screeching halt with an erratic reaction to short-term
ramifications.
The Chairman. Dr. Outlaw, did you have a comment?
Mr. Outlaw. I would just add that when we have been looking
at these different technologies, clearly the answer to your
question is it depends on the relative costs. If the gentleman
to my left can move the cost of production of producing fuels
low enough, substantially lower than corn-based ethanol, then
they would be the major driver in the market. Right now, I know
that there are a lot of things in planning, but I believe their
costs are significantly higher than the cost of production with
corn-based. But I do know that there are a lot of people that
think they can get them lower, significantly lower.
The Chairman. Dr. von Braun, you had indicated you would
like to comment.
Mr. von Braun. I think it is important to keep in mind that
the competition between food and fuel does not just work
directly, but anything that competes with food, whether you
produce biomass or corn or soy for energy use, is the central
issue. So the hope that technology, which goes toward biomass
production and thereby would resolve the issue, overcome the
issue of food-fuel competition, is misleading as long as this
biomass is not produced somewhere where it does not compete
with food because farmers will go for the highest return.
The second aspect related to this discussion is we have
looked with our models in these competitions between food and
fuel very carefully and the spill-over effects between the
grains, between corn and wheat and corn and rice and so on.
These spill-over effects of high prices here, when you take 100
million tons out of food and feed production, for worldwide
markets are very large. They are very large. So there can be no
doubt that these stipulations of the RFS have impacts on poor
people and on hunger. Whether a waiver for cause of hunger
should be considered may be as legitimate as considering the
biofuel feed market competition, which has been discussed
earlier.
The Chairman. Let me ask you just to clarify for myself. If
Dr. Pyle is right and you can produce green crude from
essentially--as I understand it, the feedstock is
CO2. I think that is what you are suggesting to us.
It is not biomass. It is CO2----
Mr. Pyle. That is correct.
The Chairman [continuing]. That would be used to produced
algae or to stimulate the growth of algae which would then
become a fuel. Now, that would not directly compete, I would
not think. I mean, that would not entice all of the farmers in
the country to switch over to production of algae rather than
crops.
Dr. von Braun. Senator, these are the opportunities for the
future, which require a lot of support, but currently the world
uses a lot of grain and oilseeds and biomass which clearly
competes with food. So the faster we can move to technologies
that do not compete, the better it is.
The Chairman. Right.
Dr. von Braun. We cannot give a grace period to these
technologies because poor people do not have that time.
I think at this point we need a dual strategy, to push and
invest in these types of technologies which clearly do not
compete, and at the same time, accelerate the investment in
agriculture productivity for food crops because the treadmill
on both sides is running faster and there has been too little
investment in agriculture, crop productivity. The yields have
to come up. Then we could bring the world food system back into
balance, which currently is not.
The Chairman. I think that is a very good summary of the
situation.
Thank you all very much. I think it has been a useful
hearing. We will conclude the hearing at this point.
[Whereupon, at 4:25 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of Alexander Karsner to Questions From Senator Bingaman
Question 1. Many second-generation biofuel technologies have been
proven in the lab and are ready to scale up to commercial production.
Securing financing for first-of-its kind commercial production remains
a major obstacle from many in this emerging industry. Please update us
on the progress with the Department's loan guarantee program, which
Congress enacted in 2005 to address exactly this problem.
Answer. The two principal goals of the Title XVII Loan Guarantee
Program are to encourage commercial use in the United States of new or
significantly improved energy-related technologies and to achieve
substantial environmental benefits. Supporting renewable energy
technologies such as those that have been developed by the biomass
industry is critical to achieving these goals. The final regulations
for the Loan Guarantee Program were issued on October 4, 2007 and since
then a remarkable amount of work has been accomplished. In addition to
the Department inviting sixteen pre-applicants, including six biomass
projects, from 143 that responded to the first solicitation in 2006 to
submit a full application, the Loan Guarantee Program Office (LGPO)
staff has grown from one permanent employee to eleven permanent
employees, including investment officers with ten to twenty years of
worldwide project financing experience. The LGPO is also in the process
of finalizing a credit subsidy model, as required by FCRA, has
instituted policies and procedures to initiate the application and due
diligence process and is developing accounting and processing systems
that will allow the office to monitor and manage the loans for which
guarantees are issued over the life of the projects. Regrettably, none
of the project sponsors of the six biomass projects invited to submit
full loan guarantee applications have yet done so. The LGPO has
received its first three applications from the sixteen invitees, with
projects involving solar energy, improved efficiency in electricity
generation, and electric battery powered cars, and is proceeding with
the due diligence necessary to assess the technical and financial
soundness of the proposed projects.
Additionally, on April 11, 2008, the Department of Energy submitted
an ``FY 2008 Implementation Plan'' to Congress. The Implementation Plan
outlines the Department's plans to issue new loan guarantee
solicitations in two stages this summer for up to $38.5 billion for
projects that employ advanced technologies that avoid, reduce, or
sequester emissions of air pollutants or greenhouse gases. The first
stage will be in the areas of energy efficiency, renewable energy and
advanced transmission and distribution technologies; nuclear; and
'front-end' nuclear power facility projects, and the second stage will
be for advanced fossil ebergy projects. These planned solicitations
will mark the second and third rounds of solicitations for the
Department's Loan Guarantee Program, which encourages the development
of new energy technologies and is an important step in paving the way
for clean energy projects.
Question 2. DOE has been very supportive of enzymatic hydrolysis
pathways for cellulosic ethanol, awarding grants to companies that plan
to use this pathway. Please describe how the Department is supporting
other second-generation biofuel technologies.
Answer. DOE plans to continue supporting technological development
to spur the cellulosic ethanol industry through all major pathways. DOE
has announced investments of up to $592.7 million aimed at reducing the
cost of advanced biofuel technologies through its applied research
program. These opportunities included DOE investments in advanced
biofuels for four commercial scale pioneer biorefineries and nine
biorefineries at a smaller demonstration scale that involve
biochemical, thermochemical, and hybrid technologies for the production
of cellulosic-based biofuels. These investments also include projects
for improved enzymes and fermentative organisms for more efficient
biochemical conversion and syngas and pyrolysis projects for reduced
thermochemical conversion costs. DOE also recently closed a university
solicitation focusing on improving conversion of biomass to advanced
biofuels via any conversion route.
DOE will continue to evaluate the potential of a wide range of
biofuel technologies (e.g., pyrolysis, gasification, hydrothermal
liquefaction, catalysis, and fermentation) as well as a wide range of
feedstocks for the production of advanced biofuels beyond cellulosic-
based ethanol. Algal derived fuels, biobutanol, Fischer-Tropsch
liquids, green diesel, and green gasoline are just a few of the non-
ethanol biofuels included in DOE's plans and investments. Advanced, or
second generation cellulosic feedstocks such as algae, perennial and
annual herbaceous crops, and woody crops are also being developed in
partnership with the Sun Grant Initiative\1\ and USDA to enable future
biorefinery development.
---------------------------------------------------------------------------
\1\ All reports are available through the National Sun Grant web
page (www.sungrant.org). The direct link to the regional feedstock
partnership reports is http://www.sungrant.org/Feedstock+Partnerships/.
---------------------------------------------------------------------------
Through its three new DOE Bioenergy Research Centers--led by Oak
Ridge National Laboratory, Lawrence Berkeley National Laboratory, and
the University of Wisconsin-Madison in partnership with Michigan State
University--DOE is providing major support for advanced basic
scientific research aimed at achieving the transformational
breakthroughs needed to overcome the limitations of current production
methods and develop decisively more efficient and cost-effective means
of producing cellulosic biofuels on a commercial scale. Together, these
three Centers--each of which brings together a multi-disciplinary team
of top scientists and researchers--are attacking the problem on
multiple fronts, utilizing the powerful new tools of genomics-based
system biology to re-engineer both plants and microbes for efficient
biofuels production. The Centers are already engaged in promising
research, including experiments with a wholly new and potentially far
more effective pretreatment method for lignocellulose (plant fiber) and
early production of hydrocarbon fuels by both microbial and chemical
catalytic means. The latter work could eventually enable the Nation to
move beyond cellulosic ethanol, to cellulosic gasoline, cellulosic
diesel, and even cellulosic jet fuel.
Responses of Alexander Karsner to Questions From Senator Domenici
Question 1. What percentage of petroleum consumption is offset by
biofuels?
Answer. In 2007, assuming no differences in cost per BTU between
gasoline and ethanol, U.S. production of 6.5 billion gallons of ethanol
helped to reduce gasoline consumption by approximately 4.3 billion
gallons.\2\ This amount represents about 2.1 percent of U.S. demand for
petroleum liquid fuels\3\ in 2007 and roughly 3.1 percent of the
Nation's gasoline demand.
---------------------------------------------------------------------------
\2\ BTU equivalent conversion calculation from ethanol gallons to
gasoline gallons = 6.5 billion gallons of ethanol x 2/3 = 4.3 billion
gallons of gasoline. 2007 ethanol production numbers are from the
Renewable Fuels Association.
\3\ Total U.S. Liquid fuels demand equates to 140 Billion Gallons
of Gasoline and 67 Billion Gallons of Diesel and Jet Fuel, based on EIA
data.
---------------------------------------------------------------------------
Question 3. What would be the short-term and long-term effects of
relaxing the RFS mandate?
Answer. DOE does not believe that there would be any short term
energy benefits of relaxing the RFS mandate. Further, the removal or
reduction of the mandate would likely result in a short term increase
in gasoline prices as additional gasoline must backfill the decrease in
ethanol availability. The primary reason for this is that high crude
oil and gasoline prices provide favorable ethanol blending economics
for refiners. Therefore, even with relatively high corn and ethanol
prices, refiners find it economically attractive to continue increasing
their use of ethanol as a gasoline blending component.
Creating a stable, predictable policy environment for investors, as
established by the expanded RFS, is conducive to scaling up biofuels
and deploying next generation biofuel technologies. Any efforts to
repeal or relax that mandate should be carefully evaluated in terms of
progress toward reducing the Nation's dependence on imported oil, and
reducing greenhouse gas emissions.
Reducing market uncertainty to the renewable fuels market--such as
that established by the RFS--is critical to ensuring growth in all
parts of the biofuels supply chain, from feedstocks, to biorefineries,
to infrastructure, and including pipelines. In both the short and long-
term, relaxing of the RFS will undercut private sector investments in
new capacity of both conventional and advanced biofuels as well as in
research, development, and demonstration necessary to usher in the
large scale deployment of cellulosic ethanol and other advanced
biofuels.
Responses of Alexander Karsner to Questions From Senator DeMint
Question 1. Mr. Karsner, last year's energy bill requires the
Department of Energy to be consulted by EPA when evaluating waiver
requests for ethanol mandates. Food prices are complex, but when you
burn 25 to 35 percent of a crop--it is a straight forward [sic] concept
to understand the severe harm that dairy, livestock and poultry
producers are feeling. In your communications with EPA, can we expect
you to support or remain neutral on the waiver request that EPA is
evaluating on the food-to-fuel mandate?
Answer. The waiver requirements of Section 211(o) of the Clean Air
Act requires EPA to consult with the Secretary of Agriculture and the
Secretary of Energy in determining if the RFS requirements would
severely harm the economy or the environment, or if there is inadequate
domestic supply of fuel. The Department of Energy assisted EPA in
evaluating the energy supply impacts of the RFS as part of the
evaluation of the economic impacts and adequacy of domestic fuel
supply. The assessment of the RFS impacts on dairy, livestock, and
poultry producers and other agricultural commodities was the
responsibility of EPA in consultation with USDA. As described in the
Federal Register Notice, signed on Thursday, August 7, 2008, EPA
determined that a waiver of the RFS mandate was not appropriate at that
time. After weighing all of the evidence before it, EPA determined that
the evidence did not support a finding that implementation of the RFS
would harm the economy of a State, region, or the United States,
because the evidence does not reach the generally high degree of
confidence required for issuance of a waiver under Clean Air Act
section 211(o). DOE supported EPA's decision on the Texas waiver
request.
Question 3. Using current average prices, if the price of E20
ethanol and regular gasoline (without ethanol) were compared based on
energy content and not by volume, how much more would E20 cost in
comparison?
Answer. DOE is currently evaluating fuel economy effects of varying
ethanol and gasoline blends. Preliminary estimates indicate that
vehicle fuel economy tracks closely to the energy content of fuels
tested, which is consistent with recent similar analysis performed by a
major automobile manufacturer.\4\ E20 and El0 have approximately 7 and
3.5 percent less energy per gallon respectively, than gasoline without
ethanol. Using the average East Coast retail reformulated gasoline
(RFG) price of $4.127/gallons\5\ for the month of June 2008, and
assuming that an E20 gasoline blend was priced the same as an El0
gasoline blend (East Coast RFG) on a volumetric basis, a consumer would
pay approximately $0.14/gallon more for E20. This estimate assumes a
consumer must purchase 3.5 percent more E20 to travel the same distance
as El0.
---------------------------------------------------------------------------
\4\ Kevin Cullen GM Powertrain Engineering Compliance &
Certification, Presentation, Emissions & Fuel Economy: Ethanol Blends
vs. Gasoline, 2008 National Ethanol Conference, February 2008.
\5\ Energy Information Administration, Weekly Retail Gasoline and
Diesel Prices, (Cents per Gallon, Including Taxes) Form EIA-878,
``Motor Gasoline Price Survey'' Last Updated 07/28/2008.
---------------------------------------------------------------------------
______
Responses of Joseph Glauber to Questions From Senator Bingaman
Question 1. Please explain the relationship between U.S. biofuels
policy and the world food crisis. Is the root cause of the food crisis
based on the price of agricultural commodities, or the physical supply
of those commodities?
Answer. The rise in price of agricultural commodities is due to
both an increase in the demand for commodities as well as supply
disruptions. Higher incomes and population growth are increasing the
demand for agricultural commodities. On the supply-side, drought, dry
weather, and flooding have lowered production and reduced stocks; and
some countries have imposed export restrictions. In addition, record
prices for gasoline and diesel fuel are increasing the costs of
producing, transporting, and processing food products.
Biofuels represent an added source of demand for agricultural
commodities and therefore contribute to the upward pressure on the
price of agricultural commodities. We estimate that in the absence of
any growth in biofuel production in the United States over the past
year, the International Monetary Fund (IMF) global food commodity price
index would have risen by 40.6 to 42 percent as opposed to 45 percent
from April 2007 to April 2008.
Question 2. U.S. agricultural yields have increased dramatically,
while yields in developing countries have not improved at all. It seems
that something in the international system is broken, when developed
countries are producing more than they can consume, while developing
countries are becoming ever less able to feed themselves. How has this
happened, and what can we do to reverse this trend?
Answer. At the recent United Nations Food and Agriculture
Organization High-Level Conference on World Food Security, Secretary
Schafer identified several ways to address world food security,
including: improving agricultural productivity, alleviating market
bottlenecks, and promoting market-based principles. Secretary Schafer
called for greater investment in scientists and research institutions,
market information, distribution networks, and improved access to rural
credit. The IMF has suggested a similar policy approach. The IMF noted
that ``the most effective response for developing countries is to seize
the opportunity and step up efforts to encourage expansion of domestic
agricultural production by improving infrastructure, distribution, and
storage systems; increasing competition; providing a stable regulatory
environment and access to financing; and removing trade barriers. This
will increase productivity and food supply (http://www.imf.org/
external/np/exr/faq/ffpfaqs.htm).''
Question 3. The link between oil prices and U.S. food aid is
troubling, as U.S. food aid is diminished by every uptick in world oil
prices. The U.S. is giving less in aid just as people need the aid the
most. How can we break this link between oil prices and food aid?
Answer. Higher world oil prices increase the cost of transporting
food to people in other countries who face starvation due to crop
failure caused by drought, flooding, or other natural disasters. The
link between food aid and world oil prices could be partially broken if
Congress followed through on the Administration's request to authorize
the use of up to 25 percent of food aid funds for the procurement of
food from selected developing countries near the site of a food
security crisis and abandoned the ``hard earmark'' for development
assistance that was included in the 2008 farm bill.
Responses of Joseph Glauber to Questions From Senator Domenici
Question 4. In your opinion, is the sharp increase in corn prices
due to ethanol production, or are other factors major contributors to
the price?
Answer. In my opinion, the sharp increase in corn prices reflects a
combination of factors with one of these factors being increased
production of corn-based ethanol. Over the period covered by marketing
years 2005/06-2007/08, the average price of corn more than doubled. We
estimate that over this period, increased production of corn-based
ethanol in the United States accounted for about 30 percent of the
increase in corn prices. A partial list of other factors also
contributing to the sharp increase in corn prices include:
Higher incomes and population growth are increasing the
demand for processed foods and meat in rapidly growing
developing countries, such as India and China. These shifts in
diets are leading to major changes in international trade. For
example, U.S. corn exports are projected to reach a record of
2.45 billion bushels in 2007/08 despite record high corn
prices.
Drought, dry weather, and flooding have affected grain
production in Australia, Canada, Ukraine, European Union, and
the United States. These weather events have helped to deplete
world grain stocks. The tight stocks situation is leading to
increasing concerns that prices could move sharply higher if
this year's harvest falls below expectations. These concerns
are causing some importers to purchase for future needs,
pushing prices higher.
Many exporting countries have put in place export
restrictions in an effort to reduce domestic food price
inflation. By reducing supplies available for world commerce,
these actions have exacerbated the surge in global commodity
prices.
Record high prices for diesel fuel, gasoline, natural gas,
and other forms of energy affect costs throughout the food
production and marketing chain. Higher energy prices increase
producers' expenditures for fertilizer and fuel, driving up
farm production costs and reducing the incentive for farmers to
expand production in the face of record high prices. Higher
energy prices also increase food processing, marketing, and
retailing costs. These higher costs, especially if maintained
over a long period, tend to be passed on to consumers in the
form of higher retail food prices.
Question 5. In your testimony you mention that the expansion of
biofuels production appears to be a relatively modest contributor to
food inflation globally and in the U.S. Please explain.
Answer. The Department estimates that the expansion in biofuels
production in the United States accounts for a modest portion of the
increase in food price inflation in the U.S. and globally. We estimate
the IMF global food commodity price index would have increased by 40.6
to 42 percent from April 2007 to April 2008, assuming no expansion in
biofuels production, compared with the actual increase of 45 percent.
In the U.S., the CPI for all food would have increased by 4.55-4.60
percent during the first four months of 2008, compared with the actual
increase of 4.8 percent, assuming no expansion in U.S. biofuel
production.
Question 6. How many billion acres of land is used for agricultural
cropland? How much of that land is used for the production of
feedstocks for biofuels?
Answer. According to the Food and Agriculture Organization (FAO) of
the United Nations, there are about 3.5 billion acres of arable land in
the world. We estimate that worldwide about 60-65 million acres of
cropland are currently used for the production of ethanol and biodiesel
feedstocks, or about 1.7 percent of world's arable land is currently
used to produce feedstocks for biofuels production.
Question 7. In your opinion, as ethanol use stabilizes, do you see
annual increases in corn production outpacing increases in corn use for
ethanol? Why or why not?
Answer. We see corn production and corn use in about balance over
the next several years. Continued improvements in seed genetics and
cropping practices are expected to lead to increases in corn yields per
acre and corn production. On the demand side, continued improvement in
diets around the world, population growth, and other factors are
expected to lead to increases in domestic use and exports.
Responses of Joseph Glauber to Questions From Senator Menendez
Question 8. Although I asked Dr. von Braun this question during the
hearing, there was not sufficient time for a detailed response, and I
wanted to give you both the opportunity to respond in writing. The
International Food Policy Research Institute reports that biofuel
production accounts for 30% of the recent price increase agricultural
commodities. World Bank economists have made similar claims. Yet the
testimony of Mr. Glauber, based on USDA calculations, argues that
biofuels only explain 3% of the rise in food prices. How do you explain
the difference?
Answer. In his testimony, Dr. von Braun stated that ``The increased
biofuel demand during the period, compared to historical rates of
growth, is estimated to account for 30 percent of the increase in
weighted average grain prices.'' Grains account for about 22 percent of
the International Monetary Fund (IMF) food price index.
In contrast, we estimate the percentage increase in price of corn
from April 2007 to April 2008 would have been 23 percent lower in the
absence of any growth in biofuel production in the United States since
crop year 2005/06. Based on information from Dr. von Braun's prepared
testimony, IFPRI estimated that the increase in biofuel production from
2000 to 2007 accounted for 39 percent of the increase in corn prices.
The one difference between the two studies is the time period. While we
look at the growth in biofuel production in the United States over the
past two years, the IFPRI study looks at the growth in biofuel
production in the United States since 2000.
Question 9. Do either or both of your models account for indirect
impacts of increased corn production on wheat and soybean plantings?
Answer. Our model provides estimates of the impact of increased
corn production on soybean and wheat plantings. We do not know whether
the IFPRI analysis took into account the indirect impacts of increased
corn production on wheat and soybean plantings.
Question 10. Are different time periods for calculating baselines
or for making predictions?
Answer. We analyzed the effects on crop and livestock markets of
the growth in the amount of corn used for ethanol production and
soybean oil used for biodiesel production during marketing years 2005/
06-2007/08. We believe the IFPRI study looks at the growth in biofuel
production in the United States since 2000.
Question 11. Do differences between the IMF global food commodity
price index and domestic metrics like the Consumer Price Index
contribute to differing estimates of the impact of biofuels? Are there
real differences between the domestic and international marketplaces
which lead to biofuels having a disproportionate impact?
Answer. Differences in the IMF global food commodity price index
and domestic metrics like the Consumer Price Index (CPI) for food
contribute to the differing estimates of the impact of biofuels. The
IMF global food commodity price index is often quoted as an indicator
of the change in global food prices. The IMF global food commodity
price index includes a bundle of agricultural commodities, including
cereals such as wheat, corn (maize), rice, and barley as well as
vegetable oils and protein meals, meat, seafood, sugar, bananas, and
oranges.
Alternatively, the CPI for food is based on the prices of food
items purchased by consumers at retail establishments. The CPI for food
consists of two components--the CPI for food at home with a weight of
55 percent and the CPI for food away home with a weight of 45 percent.
The CPI for food at home includes a bundle of finished food products,
such as cereals and bakery products, meats, dairy products, and fruits
and vegetables, while the CPI for food away from home measures the cost
of meals purchased away from home. Because the farm value of
agricultural commodities accounts for a relatively small share of
retail food costs in the U.S., changes in farm commodity prices
contribute to substantially larger increases in the IMF food commodity
price index than the CPI for food. For example, while the IMF food
commodity price index increased by 45 percent from April 2007 to April
2008, the CPI for food in the United States increased by only 5 percent
over the same time period.
The impacts of higher commodity prices on consumers vary from
country to country depending on diet and the proportion of staples
versus highly processed food consumed. It is unclear how the list of
commodities and the prices used in the IMF index relate to the foods
purchased and the prices paid for food items by consumers in less
developed countries.
Responses of Joseph Glauber to Questions From Senator DeMint
Question 12. USDA's recent crop report indicate that producers
intend to plant about the same amount of acres as in years past and
about 7 percent less corn. Yet, prices for these crops are at
substantially higher levels. What explains this mismatch between the
higher prices and static production and less production for corn?
Answer. In 2006, farmers planted 304 million acres to grains,
soybeans, cotton, and hay. Planted area to those same crops increased
to 308 million acres in 2007. According to the Acreage report issued by
the Department at the end of June, farmers planted 313 million acres to
grains, soybeans, cotton, and hay in 2008. The Acreage report indicates
farmers planted 7 percent less corn, but the decline in corn acreage
was more than offset by a 17 percent increase in soybean acreage and a
5 percent increase in wheat acreage.
Strong increases in the prices of fertilizer and fuel likely
dampened the incentive for farmers to expand crop production despite
record high prices for most major crops. In March 2008, the prices
farmers paid for fertilizer and fuel were up 67 and 47 percent,
respectively, compared to one year ago.
Question 13. What was the total 2007 global supply of ethanol
derived from corn-based, non-cellulosic sources? Under current law,
when will the U.S. ethanol mandate exceed 2007's global supply of
ethanol derived from corn-based, non-cellulosic sources?
Answer. The United States accounts for nearly all of the global
production of corn-based ethanol. The renewable fuel standard (RFS)
established under the Energy Independence and Security Act of 2007 was
4.7 billion gallons for 2007. In 2007, 6.5 billion gallons of corn-
based ethanol were produced in the U.S. In 2008, the RFS increases to
9.0 billion gallons and thereby exceed 2007's global supply of ethanol
derived from corn-based, non-cellulosic sources.
Question 14. We have seen that in tight markets, even the smallest
changes in supply and demand can have dramatic affects on prices. And
we all know that corn, rice, and other food commodity reserves around
the world have been reduced over the past several years. Is it your
testimony that we are not in a tight market and that the diversion of
corn to ethanol production does not have an appreciable affect on food
prices?
Answer. We are certainly in a tight market situation for corn,
wheat, and some other crops. My testimony indicates that corn-based
ethanol has contributed to the increase in corn prices and to higher
food prices. There are also many other factors that have caused corn
prices to increase and have pushed food prices higher.
Question 15. Including both the growing cycle for corn and the
production cycle for ethanol, how many gallons of water are required to
produce one gallon of corn-based ethanol? Based on recent droughts and
other water shortages in the United States, have you studied the
impacts of water access and supply disruptions on other commodities as
resources are diverted to producing ethanol? Are you concerned that
water access will become an issue for farmers and ranchers? Please
elaborate as to why?
Answer. A recent study released by the National Research Council
(NRC) of the National Academy of Sciences titled ``Water Implications
of Biofuels Production in the United States'' presented an estimate of
the consumptive water use from an ethanol facility at 4 gallons of
water per gallon of ethanol produced. Therefore, a 100 million gallon
per year ethanol plant would use about 400 million gallons of water per
year. This estimate is similar to a study by the Institute for
Agricultural Trade Policy which estimated that Minnesota ethanol plants
in 2005 averaged 4.2 gallons of water per gallon of ethanol.
With respect to the amount of water used in the production of corn,
the most cited research indicates that it takes about 4,000 gallons of
water to produce each bushel of corn. Assuming each bushel of corn
yields 2.8 gallons of ethanol, it takes about 1,400 gallons of water to
grow the corn to produce each gallon of ethanol, but is much higher for
corn produced on irrigated land. Based on data from the 2002 Census of
Agriculture, about 14 percent of corn acres in the United States are
irrigated, representing 16 percent of U.S. corn production. Those corn
acres that are irrigated use, on average, 1.2 acre-feet of water
(almost 400,000 gallons) per harvested acre of corn. In States such as
Iowa, Illinois, Indiana, and Minnesota which currently supply much of
the corn for ethanol production, less than 3 percent of corn acres are
irrigated, and the amount of water used on irrigated cropland in those
States is about half the national average. The reliance on corn from
States such as Iowa, Illinois, Indiana, and Minnesota likely led to the
conclusion by the NRC that ``In the next 5 to 10 years, increased
agricultural production for biofuels will probably not alter the
national-aggregate view of water use.''
Continued growth in ethanol production as well as the introduction
of new feedstocks for cellulosic-based ethanol could, however, have
significant regional and local impacts. We recognize the importance of
issues related to both water availability and water quality, especially
as we continue to increase biofuel production as prescribed under the
Energy Independence and Security Act of 2007.
Responses of Joseph Glauber to Questions From Senator Burr
Question 16. What impact do you anticipate higher food prices will
have over the next few years on U.S. foreign aid, specifically
unilateral and U.S. contributions to international food aid programs?
Answer. The future level of food aid program funding depends on the
amount of money the U.S. Congress appropriates for food aid programs.
Assuming no increase in appropriated funding, higher food prices reduce
the volume of food that can be purchased for food aid. In response to
rising food prices and to improve the effectiveness of existing food
aid programs, the Administration has requested increased funding for
food aid programs and proposed allowing up to 25 percent of food aid
funds be used to procure food from selected developing countries near
the site of a food crisis.
Question 17. How do the expected 2009 U.S. corn stocks compare to
U.S. stocks of corn for the last ten years, in terms of weeks-of-
supply?
Answer. The Department projects U.S. corn stocks will be 673
million bushels on August 31, 2009 which is the equivalent of about 3
weeks of supply. Over the previous 10 years, ending stocks ranged from
a low of 958 million bushels to a high of 2,114 million bushels. In
terms of weeks of supply, corn ending stocks ranged from a low of 5
weeks to a high of 10 weeks over the previous 10 years. Question: What
would USDA expect to happen if an additional four billion bushels of
corn were introduced into the market tomorrow? In what ways would you
expect the price of corn to change as a result of a sharply increased
supply? Response: We would expect the price of corn to decline
appreciably if an additional four billion bushels of corn were
introduced into the market tomorrow.
Question 18. What analysis has USDA conducted to examine the
secondary and tertiary effect increased corn prices and reduced
production for 2008 will have on industries dependent on corn,
specifically US hog production? What were the results?
Answer. In 2008, the Department expects pork production to increase
6.6 percent due to expansion triggered by positive returns to producers
in 2006 and 2007 and strong productivity gains. The growth in
production is expected to slow later in the year as producers respond
to much higher feed costs. The most recent Quarterly Hogs and Pigs
report indicated that producers farrowed 5 percent more sows during
December 2007-February 2008, but intend to farrow 2 percent fewer sows
during June 2008-August 2008. In 2008, hog prices are expected to
average $46-$48 per cwt, compared with $47.09 per cwt in 2007.
In 2009, pork production is forecast to decline by 3 percent in
response high feed costs. Lower pork production, coupled with declining
supplies of competing meats, is expected to boost hog prices to $47-$51
per cwt in 2009. Higher hog prices will help to mitigate the effects of
higher feed costs on hog producers.
Question 19. Dr. Outlaw testified that there could be dramatic
financial losses amongst meat producers that use corn as feed, as a
result of the high corn prices. He expects that if current market
conditions persist, the industry would be hit ``with producer
attrition.'' Given the heavy presence of hog and poultry production in
North Carolina, can you quantify the negative impact these high corn
prices could have on the livestock, dairy, hog, and poultry industries
if the current market conditions persist? I am very concerned about
what 'attrition' means in real terms, including livelihood and jobs in
North Carolina and elsewhere, and think Congress needs to consider
possible unintended economic and employment impacts that increased corn
prices could be causing in the meat sector.
Answer. The effects of high corn prices on the livestock sector
depend on many factors. High corn prices increase livestock producers
feed costs. In response to high corn prices, some producers may be able
to substitute alternative feeds that are less costly than corn. Other
producers may be able to adjust their feeding rations to increase
weight gain per pound of feed fed to livestock. In addition, the
ability of individual producers to withstand high corn prices depends
on the duration of the increase in corn prices, the debt position of
the producer, the efficiency of the operation, and other financial and
managerial characteristics of the operation. Furthermore, strong
domestic and export demand may support livestock prices, helping to
offset the increase in feed costs resulting from higher corn prices.
Due to the complexity of the many factors that determine the
profitability of individual livestock operations and the ability of
operators to withstand the effects of higher feed and other costs, the
Department does not have estimates of the employment impacts of
increased corn prices on the meat sector.
______
Responses of Jason Pyle to Questions From Senator Domenici
Question 1. In your opinion, would there be an effect on non-food
based biofuels if a reduction to the RFS mandate was allowed?
Answer. Yes. The entire alternative fuel sector is a nascent
industry. Where many crop-based biofuel industries have demonstrated
outcomes on a commercial scale, non-food biofuel alternatives have yet
to prove themselves and as such are in a disadvantaged position. A
wide-spectrum RFS mandate reduction could severely hamper non-food
biofuel opportunities. Volatility in the RFS will directly impact the
development of non-food alternatives in the following ways:
The RFS, coupled with tax and investment subsidies, signals
to entrepreneurs and investors that the Government supports the
commercial benefits and domestic-security potential of
renewable fuel technologies. This support provides incentives
to investment in new processes and enables emerging
technologies to bridge the gap between development and
commercial production.
New fuel technologies are competing with the current
petroleum industry which already has significantly depreciated
capital equipment, low operating risk and has benefited from
decades of various subsidies and incentives.
The current RFS has been used by major US investors to
analyze cost, risk and profit models. It is the same capital
investors, using the same models, that non-food alternative
fuel companies rely on for capital investment.
Uncertainty in government policy is perceived as risk.
Concerns over a possible RFS retraction could already be
hindering investment in new technologies.
An ambitious RFS, especially one that is technology-neutral
by not favoring certain advanced biofuels with large carve-
outs, sends a threefold message: interest in a domestic and
renewable fuel source, stewardship for environmental stability
at a national and global scale, and support for
entrepreneurship and innovation. The United States have
historically pioneered new technologies and supported their
ideologies worldwide.
A reduction to the RFS mandate signals a lack of commitment
to a new energy future. The country has made the correct choice
by moving to a domestic and environmentally responsible energy
mix while there is still time. There will be many ups and downs
along the road to an alternative energy mix. These will be far
milder and far more manageable than a true oil shock or wide-
scale war for energy products.
Question 2. In your testimony you discuss Sapphire Energy's ``Green
Crude Production.'' Would you please explain the technology used to
make Green Crude and its benefits?
Answer. Botanical production of hydrocarbons is not a new
phenomenon. Petroleum is derived from ancient algal fields. In a very
real fashion, we are currently driving and flying on algal crude.
Unfortunately, wild algae growing in ponds, rivers and oceans are
not suitable for world-scale cultivation, nor do they produce large
quantities of useful fuel oils. This is similar to the fact that wild
grains, fruits and vegetables are not suitable for wide-scale
industrial farming--only the very specialized commercial varieties of
these plants feed the world.
Sapphire has perfected the science of developing algal strains
suitable for world-scale production. The result is Green Crude
Production, a process where a properly developed algal strain produces
hydrocarbon-rich oils nearly identical to petroleum crude oil.
Sapphire Energy has developed proprietary technology to develop
strains of algae that produce the petroleum-substitute `Green Crude'.
These are the stages of Green Crude Production:
Strain Development. Sapphire biologists develop an algal
strain that has a collection of vital traits, including
abundant oil production, crop protection properties, and
environmental tolerance.
Production. Sapphire Energy is now developing test-
production facilities that will enable cost-effective algal
growth at the enormous scale that will make in impact on U.S.
energy needs. The oil is extracted into Green Crude, while the
biomass serves a variety of uses, such as fertilizer or
livestock feed.
Refining. The resulting Green Crude can be introduced
seamlessly into the existing U.S. petroleum refining
infrastructure, replacing fossil fuel crude oil and producing
gasoline, diesel, and jet fuels.
The benefits of Green Crude are as follows:
Domestic. With adequate land and sunlight (of which the U.S.
has abundant resources), Green Crude can reliably reduce and,
ultimately, replace imported crude oil. The result is reduced
spending on imported oil (currently $200 billion each year).
Security. The U.S. relies heavily on imported petroleum
resources, many of which are buried beneath countries with
unstable or undesirable political climates. A renewable source
of domestic crude oil will liberate the U.S. from international
oil sources and ensure national energy security.
Economy. As Sapphire's Green Crude Production becomes more
efficient, the opportunity for less expensive oil will only
increase, resulting in lower fuel prices for military and
industrial applications, as well as for the individual consumer
at the gas station.
Food vs. Fuel. Algae are preferentially produced on non-
arable land, using non-potable water. Green Crude Production
requires no agricultural crops and no clearing of existing
plant growth. Capable of thriving on barren desert land, algae
can reduce the alternative fuel industry's need for valuable
food crops.
Infrastructure. Green Crude Production results in gasoline,
diesel, and jet fuels, the same products already in use today
in our existing military and civilian transportation fleet.
Sapphire's fuel requires no costly alterations to vehicles, nor
to refining and distribution technologies; the same systems in
use today will refine and distribute Green Crude fuels.
Environment. Algae absorb enormous amounts of carbon
dioxide, the most prevalent greenhouse gas. Green Crude
Production reduces carbon dioxide emissions. While the
combustion of the resulting gasoline in car engines will re-
emit some of this carbon, Sapphire's fuel will generate far
less carbon in its entire life cycle than existing petroleum,
ethanol, or biodiesel industries. In addition, algae use
pollutants found in many industrial water and waste streams as
nutrients. If collocated with industrial facilities, algae
ponds can ``scrub'' the effluents of industrial facilities and
remove contaminants and greenhouse gases before they reach the
atmosphere.
Response of Jason Pyle to Question From Senator Lincoln
Question 1. Arkansas is well-positioned to be a leader in the
biofuels industry with the abundance of raw materials, including
forestry waste. I am very interested in the development of cellulosic
biomass technology. Would you describe for the Committee your
perception of the current state of cellulosic biomass technology? Where
do we go from here?
Answer. Sapphire does not refine ethanol; however, we are
supportive of the role that the ethanol industry contributes to the US
energy future. Ethanol will be a valuable component to a nationwide
renewable fuels plan. Ethanol is an excellent additive agent for
gasoline because of its oxygenating properties.
The future of non-food ethanol lies in cellulosic technology.
Logging and lumber waste, crop stover, leftover paper, switchgrass,
certain types of algae, and even some municipal waste contain abundant
cellulose that can be broken down into sugars to feed the ethanol
fermentation process. If the refining process for cellulosic input can
be worked out, there are many promising feedstock streams for
cellulosic processes. Cellulosic ethanol can be produced domestically
with renewable, waste feedstock, and as such should be developed as a
liquid fuel option. The most significant step, at this point, is to
develop a method for efficient conversion of cellulose to sugar.
The energy density of cellulosic biomass is relatively low; pound
for pound, even a dense cellulose source like lumber waste will produce
less energy than an equivalent weight of seed stock, such as corn,
petroleum, or algae. In order to effectively move the US energy mix
away from foreign petroleum, cellulosic fuel will not be sufficient. We
will need several additional alternative liquid fuel technologies to
meet the goals of energy security.
Though we at Sapphire Energy are commercially biased toward
hydrocarbon fuels derived from algae, we recognize that cellulosic
ethanol technology may prove to be a viable part of a national
renewable fuels mix.
______
Response of Jack Huttner to Question From Senator Domenici
Question 1a. In your testimony you mention that Genecor is on the
verge of commercialization of second generation biofuels.
When do you expect to be producing commercial quantities?
Answer. A number of second generation biorefineries will be coming
on line over the next 24 months. Most are pilot plants. Genencor, as
part of its Joint Venture with DuPont, has announced that it will build
its own pilot plant for operation in late 2009. We anticipate producing
commercial volumes in a demonstration plant two years, or so, after
that. At that point, the JV will be selling its integrated biorefinery
solution to the market for deployment around the country.
Question 1b. Will there be enough biomass to produce significant
amounts of advanced biofuels?
Answer. It is difficult to precisely quantify biomass availability
since there is currently no market for lignocellulosic biomass and
therefore no supply chain to harvest, collect, store and deliver it.
However, based on data provided by the USDA and other sources, we
estimate that there is near future (2020) potential of about 50 billion
gallons of ethanol from biomass. This estimate is based on moderate
improvements in yield but without any significant land use changes.
This estimate assumes use of corn stover, rice straw, wheat straw,
forest product residues and energy crops.
Response of Jack Huttner to Question From Senator Lincoln
Question 1a. In your testimony, you describe the U.S. biofuels
industry as on the verge of commercializing second generation
technology that will use non-food feedstocks such as corn stover,
switch grass, and waste wood in its process. You discuss retrofitting
existing ethanol infrastructure to handle the next generation of
biofules such as cellulosic feedstocks in addition to grain.
Could you elaborate on how the use of ethanol facilities serves as
a stepping stone to the development of additional biofuels?
Answer. We envision the first cellulosic ethanol plants will be
attached as a front end to existing dry mill corn ethanol plants. It
will utilize shared equipment, utilities and processes. As the
technology matures, green field second generation biorefineries will be
built. Obviously, the ethanol distribution systems and blending
facilities of first generation ethanol will be needed as the starch
based volumes are supplanted or expanded by cellulosic ethanol volumes.
Question 1b. How can Congress help transition the biofuels industry
from ethanol to cellulosic and other second generation biofuels?
Answer. Industry needs a stable regulatory regime to make the
investments in 2nd generation biofuels. Namely, the RFS needs to remain
intact. Of particular importance is the preferential incentive for
producers of cellulosic ethanol.
______
Responses of Joachim von Braun to Questions From Senator Bingaman
Question 1. Please explain the relationship between U.S. biofuels
policy and the world food crisis. Is the root cause of the food crisis
based on the price of agricultural commodities, or the physical supply
of those commodities?
Answer. The root cause is the low growth in physical supply
relative to growth in demand, and that is driving prices and price
expectations. As a result of underlying market fundamentals as well as
speculation, rising expectations, and hoarding food prices have surged
drastically. Therefore, the current food crisis is driven by surging
demand, aggravated by slow production response, and manifested in high
food prices.
Question 2. U.S. agricultural yields have increased dramatically,
while yields in developing countries have not improved at all. It seems
that something in the international system is broken, when developed
countries are producing more than they can consume, while developing
countries are becoming ever less able to feed themselves. How has this
happened, and what can we do to reverse this trend?
Answer. Yield growth has been slowing down throughout the world--
both in developing and in developed countries. This can be explained
with underinvestment in agriculture and agricultural R&D, as well as
the switch in agricultural research priorities in developed countries
away from productivity enhancement. For the long-run investments for
sustained agricultural growth should be made. These include expanded
public spending for rural infrastructure, services, agricultural
research, science, and technology. Also, developed countries should
facilitate the sharing of agricultural innovation and research that are
relevant to enhancing productivity and transforming small-farm
agriculture.
Question 3. The link between oil prices and U.S. food aid is
troubling, as U.S. food aid is diminished by every uptick in world oil
prices. The U.S. is giving less in aid just as people need the aid the
most. How can we break this link between oil prices and food aid?
Answer. Food aid is indeed hard hit by rising oil prices through
increasing food prices and freight costs. World Food Programme needs
further support and that support should be made more reliable. To
maintain a reliable food aid flow the food aid budget would need to
become price indexed, i.e. increase at the rate of international food
prices to protect the poor whose lives that depend on it. An additional
option to respond to this problem is to switch more to local purchase
of food for aid. Another option is to partly switch to cash transfers
to households in need of food aid where markets offer sufficient food.
Question 4. Could you describe the elements of a sustainable
biofuels industry that does not have negative implications for global
agricultural commodity markets?
Answer. A sustainable biofuels industry uses technologies that have
a positive energy balance and reduce greenhouse gas emissions. It does
not have negative implications for markets when the choice of
feedstock, cultivation practices, technologies employed does not
compete for land, water, and biomass for food and feed. Feedstocks,
cultivation practices, technologies should minimize the food-fuel
competition and ensure environmental benefits. Examples are sweet
sorghum, algae based technologies, jathropa, and sugar cane based
technology at appropriate locations, as well as the use of by-products.
Biofuel trade barriers should be removed to facilitate biofuel
production in countries with a comparative advantage for such
sustainable production that does not compete with food and feed.
Question 5. The current food crisis clearly requires the world's
immediate attention. However, over the long term, is it possible that
today's high prices could yield benefits for the agricultural sectors
of developing countries that have not been able to compete with
relatively inexpensive imports from developed countries?
Answer. Long-run benefits for farmers in developing countries are
possible, if they are given the opportunity to benefit from the rising
demand and prices for their products. This requires investment in
infrastructure and science. Short-term action to provide access to
seeds, fertilizers, and credit for the small farm sector, as well as
long term agricultural investments would be crucial in that respect to
facilitate early gains. Development aid to agriculture must increase.
Responses of Jack Huttner to Questions From Senator Domenici
Question 1. In your opinion, is the growth in global population,
global income, meat consumption, and corn and soybean consumption
related to the increased price of corn and soybeans?
Answer. Yes, all of these factors contribute to the increase in
demand for corn and soybeans and put an upward pressure to their price.
Question 2. In your opinion, how much of an impact is corn-based
ethanol having on food prices?
Answer. Our (the International Food Policy Research Institute,
IFPRI) estimates suggest that the increase of corn demand for ethanol
has contributed 39 percent to the total increase in the real world
price of corn (2000 to 2007). For more information, please refer to:
Rosegrant, M. W. 2008. Biofuels and Grain Prices: Impacts and Policy
Responses. Testimony for the U.S. Senate Committee on Homeland Security
and Governmental Affairs. Washington, D.C.
Question 3. What are the primary crops of concern for global food
shortages? Are those crops used for biofuels?
Answer. Staple grains are of primary concern for food shortages in
the world, in particular for the poor in developing countries. The
major grain used for ethanol production is corn (mainly in the USA) and
oil seeds (mainly in Europe). As demand and prices of these crops
increase, they affect the other crops through two channels: 1) on the
supply side, the switch to greater energy crop cultivation leaves less
resources available for the production of other crops; 2) on the demand
side, higher energy crops prices increase demand for other crops and
put upward pressure on their price as well. For instance the increase
in the price of corn due to ethanol is a significant factor for the
increase in prices of wheat and soy.
Responses of Jack Huttner to Questions From Senator Menendez
Question 1a. Although I asked Dr. von Braun this question during
the hearing, there was not sufficient time for a detailed response, and
I wanted to give you both the opportunity to respond in writing. The
International Food Policy Research Institute reports that biofuel
production accounts for 30% of the recent price increase agricultural
commodities. World Bank economists have made similar claims. Yet the
testimony of Mr. Glauber, based on USDA calculations, argues that
biofuels only explain 3% of the rise in food prices. How do you explain
the difference?
Answer. IFPRI's estimations (corn based ethanol contribution to
price increase total 30% for all grains and 39% for corn) refer to
accumulated real world grain price from 2000 to 2007 due to the
increase in world biofuel demand.\1\ The result is based on a global
multi-country and multi-commodity model. Only on such a comprehensive
basis a realistic price estimate is possible, due to the market
linkages.
---------------------------------------------------------------------------
\1\ For more information see Rosegrant, M. W. 2008. Biofuels and
Grain Prices: Impacts and Policy Responses. Testimony for the U.S.
Senate Committee on Homeland Security and Governmental Affairs.
Washington, D.C.
---------------------------------------------------------------------------
Related USDA statements: I am sure the USDA colleagues can best
address the question related to their estimates; I only note that the
USDA estimates seem to be based on a Council of Economic Advisors
statement. Quote: ``. . . total global increase in corn-based ethanol
production accounts for about 13 percentage points of the 37% increase
in corn prices, or about 1/3rd of the increase in corn prices over the
past year[2007]. But because corn only represents a small fraction of
the IMF Global Food Index, we estimate that the increase in total corn-
base ethanol production has pushed up global food prices by about 1.2
percentage points of the 43% increase in global food prices, or about
3% of the increase over the past twelve months.'' Quote from Testimony
of Edward P. Lazear, Chairman, council of Economic Advisors, before
Senate Foreign Relations Committee Hearing on ``Responding to the
Global Food Crisis'' May 14, 2008.
This seems to be the source cited by USDA's Chief Economist Joe
Glauber--see May 19 Briefing from USDA officials USDA www; the figure
that is comparable to other studies is the ``1/3rd of the increase in
corn prices'' mentioned above, which is in the range of our estimates
and those of others. We have not seen the details of a model analysis
behind these estimates. The expression relative to IMF Global Food
Index (the ``about 3%'') may have led to different interpretations of
the main finding which actually seems to be quite similar in regard to
the corn price effect (IFPRI: 39 percent over 2000-2007; USDA /CEA: 33
percent in 2007).
Question 1b. Do either or both of your models account for indirect
impacts of increased corn production on wheat and soybean plantings?
Answer. IFPRI's IMPACT model captures the cross-effects between the
major grains and other important crops, like soybeans, in terms of area
response to price changes--so that when one crop's area goes up (and
effects its own price through increased supply), then that price signal
is responded to by the area that is harvested in another crop. Thus,
the model does account for the effect of increased corn production on
wheat and soybean plantings. Example: a hypothetical moratorium
(closing down grain and oil seeds based biofuel production) could
reduce international corn prices by about 20 percent and wheat prices
by about 10 percent within 2 years.
Question 2. Are different time periods for calculating baselines or
for making predictions?
Answer. IFPRI's base year was 2000, while USDA estimates only refer
to 2007.
Question 3. Do differences between the IMF global food commodity
price index and domestic metrics like the Consumer Price Index
contribute to differing estimates of the impact of biofuels? Are there
real differences between the domestic and international marketplaces
which lead to biofuels having a disproportionate impact?
Answer. Since there are differences in global and national food
price indexes, it does matter which index is used for estimations of
the effects of biofuels on food price. Global prices are transmitted to
varying degrees from international to domestic markets.
______
Department of Energy,
Department of Agriculture,
June 11, 2008.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: Thank you for your May 12, 2008, letter
concerning the current and projected impacts of biofuels on food and
gasoline prices, among other issues. We emphatically agree with the
suggestion in your press release of May 15 concerning this letter that
``it's wise for folks to catch their breath and get better educated on
the complexities before charging ahead with changes.'' We appreciate
your leadership in this matter as well as this opportunity to address
the current debate over the role of biofuels in our Nation's energy
portfolio.
All of us recognize that high food prices and high gasoline prices
are important ``pocketbook'' issues for American consumers. We also
recognize the national and economic security importance of reducing our
dependence on imported oil as well as the urgency of developing new,
cleaner fuels to reduce greenhouse gas emissions. Our biofuels policy
makes important contributions to each of these goals.
The food and fuel pricing issues about which you have raised
questions are complex. We would again caution, therefore, against hasty
judgments driven by highly questionable, agenda-driven calculations,
some of which have been featured prominently in the popular press. Many
analysts both within and outside of government are currently working to
model these questions, and the one certainty is that our data will
improve substantially in the months ahead.
It is clear, however, that biofuels are already moderating gasoline
prices. That impact is likely to grow substantially as more biofuels
come to market. Our preliminary analysis further suggests that current
biofuels-related feedstock demand plays only a small role in global
food supply and pricing. Moreover, the impact of biofuels on U.S.
consumers is even smaller since the farm price of commodities accounts
for less than twenty percent of U.S. consumers' food costs.
Our shared vision is a sustainable domestic biofuels industry
centered in rural America. To that end, both our agencies as well as
the Federal Biomass Research and Development Board, co-chaired by the
Department of Agriculture's Under Secretary for Rural Development Tom
Dorr and the Department of Energy's Assistant Secretary of Energy
Efficiency and Renewable Energy Andy Karsner, are collaborating to
build an integrated biofuels action plan. In order to achieve these
goals, continued private sector investment is needed. Creating a
stable, predictable policy environment for investors, as Congress did
with the expanded Renewable Fuels Standard, is essential to scaling our
biofuels use and deploying next-generation biofuels. Efforts to repeal
that mandate would hinder progress toward reducing our dependence on
imported oil and reducing greenhouse gas emissions.
At the same time, our agencies are committed to collecting and
presenting accurate data, projecting potential impacts, and initiating
the necessary and appropriate actions to ensure the sustainable growth
of biofuels. To that end, both of our agencies have significantly
ramped up our analytical efforts to ensure that we proceed with caution
but also determination. Our agencies will continue to work closely with
the Environmental Protection Agency as we undertake our respective
responsibilities under Title II of the Energy Independence and Security
Act of 2007.
Enclosed please find responses to each of your questions.
Sincerely,
Samuel W. Bodman,
Secretary of Energy.
Edward T. Schafer,
Secretary of Agriculture.
[Enclosure.]
Joint Responses of the Departments of Energy and Agriculture to
Questions From Senator Bingaman
Question 1. How has increased U.S. ethanol and biodiesel
consumption affected domestic agriculture, and domestic food prices?
Answer. In 2007, the expansion in ethanol and biodiesel consumption
is estimated to have increased the Consumer Price Index (CPI) for all
food by 0.10-0.15 percentage point. In other words, ethanol and
biodiesel consumption accounted for approximately 3-4 percent of the
overall rise in retail food prices. During the first 4 months of 2008,
the all food CPI increased by 4.8 percent, with increased ethanol and
biodiesel consumption accounting for only about 4-5 percent of the
total increase while other factors accounted for 95-96 percent of the
increase.
Increased demand for biofuel feedstocks has benefited corn and
soybean producers. Higher prices have encouraged production increases
and some switching of acreage from soybeans to corn. More dried
distiller grains are available for feed, but higher grain prices are
also prompting adjustments by livestock producers. In future years,
production adjustments by livestock and dairy producers in response to
higher feed costs resulting from the expansion in ethanol and biodiesel
consumption could add a total of 0.6-0.7 percentage point to the CPI
for all food.
Commodities prices, both agricultural and nonagricultural, have
risen sharply in recent years for a number of reasons unrelated to
biofuels development. For agricultural commodities, higher incomes,
population growth, and depreciation of the dollar are increasing the
demand for food; drought and dry weather have lowered production and
reduced stocks; and some countries have imposed export restrictions.
All these factors contribute to higher commodity prices. In addition,
record prices for gasoline and diesel fuel are increasing the costs of
producing, transporting, and processing food products.
Question 2. Has increased ethanol and biodiesel consumption in the
United States contributed to increased global prices for agricultural
goods? And if so, to what extent?
Answer. As discussed in Question 1, many factors are contributing
to rising global prices for agricultural goods. From April 2007 to
April 2008, in the absence of any growth in biofuel production in the
United States, we estimate that the International Monetary Fund (IMF)
global food commodity price index would have risen by 40.6 to 42
percent as opposed to 45 percent.
It should be noted that the impact on consumers of increased
commodity prices, including increases driven by ethanol and biodiesel
production, is subject to considerable uncertainty. The IMF global food
commodity price index is often quoted as an indicator of the change in
global food prices. The IMF global food commodity price index includes
a bundle of agricultural commodities, including cereals such as wheat,
corn (maize), rice, and barley as well as vegetable oils and protein
meals, meat, seafood, sugar, bananas, and oranges. In the United
States, however, the farm price of commodities accounts for
approximately 20 percent of the retail food cost to consumers. This
percentage will vary from country to country depending on diet and the
proportion of staples versus highly processed food consumed. It is
unclear how the list of commodities and the prices used in the IMF
index relate to the foods purchased and the prices paid for food items
by consumers in less developed countries.
Question 3. How might increased biodiesel consumption, as required
by EISA beginning in 2009, affect domestic and international food
prices?
Answer. The estimated increase in the price of soybean oil due to
EISA would increase the CPI for all food by about 0.20-0.30 percentage
point if fully passed on to consumers in the form of increased prices
for foods containing soybean oil and other oils that compete with
soybean oil. This increase is likely to occur over a several-year
period since the EISA mandates a phased increase of biodiesel
consumption beginning in 2009/10.
The estimated increase in the price of soybeans and soybean oil
under the EISA would increase the IMF global food commodity price index
by 1-2 percent.
Question 4. How has increased ethanol and biodiesel consumption
affected gasoline and diesel prices?
Answer. Biodiesel use has had a negligible effect on diesel fuel
prices since biodiesel fuel production is so small compared to total
diesel fuel use. Without ethanol, gasoline prices would be higher. Even
during the period in which MTBE was being phased out (2006) and ethanol
prices were very high, had ethanol not been available, gasoline prices
would have been even higher. After the Renewable Fuel Standard (RFS),
established in the Energy Policy Act of 2005,\1\ ethanol use has helped
to reduce the price of gasoline to the consumer. Ethanol use has
exceeded the requirements of the RFS, demonstrating that refiners and
gasoline marketers have an economic advantage to use more ethanol than
is required by law.
---------------------------------------------------------------------------
\1\ The Energy Policy Act of 2005 also eliminated the reformulated
gasoline oxygenate requirement.
---------------------------------------------------------------------------
Table 1 (Appendix IV) shows the estimated reduction of gasoline
demand due to the use of ethanol. We estimate that in 2008 we will use
9 billion gallons of ethanol. Without ethanol, we would have to use 7.2
billion more gallons of gasoline (5% more gasoline) in order to
maintain current levels of travel. We would only meet the demand for
more gasoline without using ethanol mixtures by bidding up the price of
gasoline.
In addition, ethanol is less costly than the refiner's average mix
of gasoline components. The cost of ethanol to refiners (after
accounting for the $0.51/gallon ethanol blender's tax credit) has been
lower than the production cost of conventional gasoline.\2\ This
explains why ethanol demand has been higher than required by the RFS.
We estimate that, if we had not been blending ethanol into gasoline,
gasoline prices would be between 20 cents per gallon to 35 cents per
gallon higher.\3\
---------------------------------------------------------------------------
\2\ Based on OPIS data for spot prices of ethanol (after rebate)
and conventional gasoline.
\3\ This estimate relies on data on the current price difference
between ethanol and gasoline and the elasticity of supply for
petroleum. Consequently a range is presented.
---------------------------------------------------------------------------
Question 5. What prices levels for gasoline and diesel fuel would
be expected if biofuels were removed from the market, both in the
short-and long-term?
Answer. This question can be interpreted in two ways: (a) What
would happen to gasoline prices if the RFS were relaxed or eliminated?
(b) What would happen to gasoline prices if there were a disruption in
the supply of renewable fuels?
a) If we assume the mandates are relaxed, the short-term
price effect would likely be minimal given the near-term supply
economics for the renewable fuels and petroleum. Over 8 billion
gallons of ethanol production is in place, and an additional 6
billion is under construction. We can therefore expect that 13
billion gallons of ethanol will be available to the market as
long as these plants can recover their variable cost of
production and have the regulatory certainty of a continued
market. The RFS will not require this much corn ethanol until
2012, although it will, by 2012, require 2 billion gallons of
advanced biofuels, not made from corn. Consequently, we do not
expect that the RFS could appreciably raise gasoline prices
until after 2012 when the requirements for advanced biofuels
become significantly higher. After 2012, the price effect of
ethanol will depend on several factors including oil prices and
the availability of ethanol tax credits.
b) If we assumed a supply disruption of ethanol, we would
expect a fairly large increase in the price of gasoline until
ethanol supply were re-established or new market equilibriums
were achieved. We do not have an estimate of how large this
price increase would be. Because this is a hypothetical
scenario, without a well-defined physical cause, it is
difficult to produce with a meaningful price-impact estimate.
Question 6. What effects are biofuels expected to have on gasoline
and diesel markets as consumption increases to meet the targets laid
out in EISA?
Answer. Unless crude oil prices moderate dramatically, we expect
that the ethanol use will reduce gasoline prices through 2012. Impacts
after 2012 depend on a number of assumptions including the rate of
technology development for the second generation renewable fuels, the
supply and demand of transportation fuels and crude oil, the market
mechanisms that develop to ensure increasing market demand for
renewable fuels, the investment in second generation renewable fuel
production capacity, the availability of flexible fuel vehicles,
infrastructure for renewable feedstock and fuel transportation and
distribution, and whether Clean Air Act RFS fuel waivers are issued.
Appendix I.--Further Detail on Question 1
How has increased U.S. ethanol and biodiesel consumption affected
domestic agriculture, and domestic food prices?
The amount of corn converted into ethanol and soybean oil converted
into biodiesel in the United States is projected to nearly double from
the 2005/06 marketing year (September 1, 2005--August 31, 2006) to the
current 2007/08 marketing year (September 1, 2007--August 31, 2008).
The growth in biofuels production has coincided with rising grain and
oilseed prices. From 2005/06 to 2007/08, the average farm price of corn
more than doubled, and the price of soybeans nearly doubled, with both
reaching new record highs.
While increased biofuels production is partially responsible for
the increase in corn and soybean prices, many other factors have also
contributed to the sharp increase in prices for these commodities. Some
of these factors include:
Higher incomes, population growth, and depreciation of the
dollar are increasing the demand for processed foods and meat
in rapidly growing developing countries such as India and
China. These shifts in diets are leading to major changes in
international trade. For example, U.S. corn exports are
projected to reach a record of 2.5 billion bushels in 2007/08
despite record high corn prices.
Drought and dry weather have affected grain production in
Australia, Canada, Ukraine, the European Union, and the United
States in 2007/08. These weather events have helped to deplete
world grain stocks. The tight stocks situation is leading to
increasing concerns that prices could move sharply higher if
this year's harvest falls below expectations. These concerns
are causing some importers to purchase for future needs,
pushing prices higher.
Many exporting countries have put in place export
restrictions in an effort to reduce domestic food price
inflation. By reducing supplies available for world commerce,
these actions have exacerbated the surge in global commodity
prices.
Record high prices for diesel fuel, gasoline, natural gas,
and other forms of energy affect costs throughout the food
production and marketing chain. Higher energy prices increase
producers' expenditures for fertilizer and fuel, driving up
farm production costs and reducing the incentive for farmers to
expand production in the face of record high prices. Higher
energy prices also increase food processing, marketing, and
retailing costs. These higher costs, especially if maintained
over a long period, tend to be passed on to consumers in the
form of higher retail prices.
Estimating the effects of increased ethanol and biodiesel
consumption on domestic agriculture and domestic food prices
necessitates segmenting the portion of the increase in corn and soybean
prices due to the expansion in ethanol and biodiesel consumption and
the increase in corn and soybean prices due to other factors. Various
analytical approaches were used to estimate the effects of increased
ethanol and biodiesel consumption on corn and soybean prices. Table 1
(below) compares actual and estimated corn and soybean prices over the
period 2005/06-2007/08, assuming corn used for ethanol and soybean oil
used for biodiesel production in the United States remained unchanged
from the amount used in the 2005/06 marketing year.
Under the alternative scenario, lower com and soybean oil use
lowers the prices of com and soybeans. In addition, changes in relative
returns for com and soybeans cause producers to switch from planting
corn to planting soybeans. Lower com and soybean prices could also
result in increased plantings and lower prices for other crops and
lower feed costs to livestock producers.
The recent increase in com and soybean prices appears to have
little to do with the run-up in prices of wheat and rice. Com and
soybean prices began increasing during the fourth quarter of 2006. By
this time, producers had already planted the 2007 winter wheat crop.
Rice and spring wheat plantings could have been affected by increasing
com and soybean prices, but weather problems, low stocks, and strong
global demand likely had a much greater impact on wheat and rice prices
than increasing com and soybean prices in 2007/08. In 2008, U.S. wheat
producers indicate they intend to plant more acreage to wheat, while
rice acreage is projected to remain flat, suggesting that higher com
and soybean prices have not greatly altered wheat and rice producers'
planting decisions.
In 2007, the Consumer Price Index (CPI) for all food increased by
4.0 percent, up from 2.4 percent in both 2004 and 2005. In 2007, the
retail price of eggs increased by 29.2 percent, retail dairy product
prices rose by 7.4 percent, retail poultry prices posted a 5.2 percent
gain, and retail beef prices increased by 4.4 percent. It is very
unlikely that retail prices for dairy products, beef, poultry, and eggs
were greatly affected by higher corn and soybean prices in 2007.
Higher corn and soybean prices increase livestock and dairy
producers' feed costs. The increase in feed costs, with no offsetting
increase in livestock prices, reduces livestock producers' margins.
Livestock producers react to these lower margins over time by reducing
the breeding herd. In the short term, higher feed costs lead to an
increase in livestock slaughter and lower livestock prices. For milk
and eggs, higher feed costs may have lowered production somewhat 2007,
partially contributing to the increase in retail prices for these food
products. However, other factors, such as low returns in 2006, strong
demand, abnormally high international prices, especially for dairy
products, and increasing use of eggs for hatching to expand broiler
production likely contributed to the bulk ofthe increase in retail food
prices for these commodities in 2007.
To estimate the effects of higher farm commodity prices due to
growth in ethanol and biodiesel consumption in the United States on
retail food prices, we assume that all of the increase in farm
commodity prices is passed on to consumers through higher retail food
prices. In 2007, the expansion in ethanol and biodiesel consumption is
estimated to have increased the CPI for all food by 0.10-0.15
percentage point, or the expansion in ethanol and biodiesel consumption
accounted for about 3-4 percent of the increase in retail food prices.
During the first 4 months of 2008, the all food CPI increased by 4.8
percent, with increased ethanol and biodiesel consumption accounting
for about 4-5 percent ofthe increase in retail food prices. Over time,
livestock and dairy producers will adjust to higher feed costs by
reducing production. In future years, production adjustments by
livestock and dairy producers in response to higher feed costs
resulting from the expansion in ethanol and biodiesel consumption could
add a total of 0.6-0.7 percentage point to the CPI for all food.
Appendix II.--Further Detail on Question 2
Has increased ethanol and biodiesel consumption in the United States
contributed to increased global prices for agricultural goods?
And ifso, to what extent?
The International Monetary Fund's (IMF) global food commodity price
index is often quoted as an indicator of the change in global food
prices. The IMF global food commodity price index includes a bundle of
agricultural commodities including cereals such as wheat, corn (maize),
rice, and barley as well as vegetable oils and protein meals, meat,
seafood, sugar, bananas, and oranges. A complete list ofthe commodities
included in the index, the percentage change in each commodity price,
and the estimated contribution of each commodity to the overall
percentage change in the food price index from April 2007 to April 2008
are presented in Table 1 (below). It is unclear how the list of
commodities and the prices used in the IMF index relate to the foods
purchased and the prices paid for food items by consumers in less
developed countries.
The IMF global food price commodity price index increased by an
estimated 45 percent from April 2007 to April 2008. Sunflower oil and
rice exhibited the largest price changes, with prices for both
commodities increasing by over 200 percent. Prices for wheat, soybeans,
soybean oil, palm oil, and rapeseed oil also exhibited relatively large
price increases. Prices for wheat and soybeans increased by 82.7 and
78.6 percent, respectively, while the prices for beef and swine meat
actually fell by 11.8 and 6.5 percent, respectively.
The price ofcom increased by 61.7 percent from April 2007 to April
2008. Combining the change in com prices with the com weight of 8.1
percent, the change in com prices contributed5.0 percentage points to
the estimated 45 percent increase in the global food commodity price
index. Soybeans, soybean oil, and soybean meal exhibited larger price
increases and playa much larger role in the global food commodity price
index, a combined weight ofover 15 percent. The combined effects ofthe
increase in soybean, soybean meal, and soybean oil prices contributed
11.7 percentage points to the estimated 45 percent increase in the IMF
global food commodity price index from April 2007 to April 2008.
In order to estimate the impact of the increased production of U.S.
biofuels on global food prices, one needs to estimate the direct and
indirect effects of the increased use of com and soybeans on individual
commodity prices. Last month, CEA testified before the Senate Foreign
Relations Committee about com-based ethanol's impact on global food
prices using this strategy. The analysis below continues in this
spirit, but it considers a broader category of factors and costs and a
slightly different time period. Here the analysis is updated to the 12
months ending in April, and the analysis considers a broader mix of
biofuels-focusing on com-based and soybean oil-based biofuels.
Table 2 (below) presents the estimated effects of ethanol and
biodiesel production in the United States on global prices for com
(maize), soybeans, soybean meal, and soybean oil as well as the impact
on the IMF global food commodity price index. It is important to point
out that the price impacts reflect greater ethanol and biodiesel
production and not only ethanol.
The estimated impacts on global food prices are consistent with the
estimates in response to Question 1. We estimate that the percentage
increase in price ofcom from April 2007 to April 2008 would have been
23 percent lower in the absence of any growth in biofuel production in
the United States. Based on this analysis, we estimate that the price
of com would have increased by 47.5 percent assuming no growth in
biofuel production in the United States, down from the actual increase
of61.7 percent, from April 2007 to April 2008.
The growth in biofuel production in the United States also has
pushed up soybean, soybean meal, and soybean oil prices. We estimate
the percentage increase in the prices of soybeans, soybean meal, and
soybean oil from April 2007 to April 2008 would have been about 25 to
30 percent lower in the absence of any growth in biofuel production in
the United States. Assuming no growth in biofuel production, the price
of soybeans, soybean meal, and soybean oil in the global food commodity
price index would have increased by 54.2, 51.2, and 61.5 percent,
respectively, down from actual increases of78.6, 69.3, and 80.9
percent, respectively, from April 2007 to April 2008.
The effects ofbiofuel production in the United States on global
price for agricultural goods is estimated by combining the individual
commodity price impacts with their relative weights in the IMF global
food commodity price index. Assuming no growth in biofuel production in
the United States, the IMF global food commodity price index would have
increased by 40.6 percent compared to the actual increase of 45
percent, from April 2007 to April 2008. Lower com prices contributed
1.2 percentage points, lower soybean, soybean meal, and soybean oil
prices contributed 3.2 percentage points to the total reduction in the
global food commodity price index.
However, combining soybeans, soybean meal, and soybean oil in the
same index overstates the impact ofbiofuels on global prices. Soybeans
are processed into soybean meal and oil and by including the effects
ofbiofuels on the prices of all three commodities we magnify the
impacts of biofuels on the global price index. If we exclude the impact
of biofuels on soybean meal and oil prices, the IMF global food
commodity price index would have increased by 42 percent assuming no
growth in biofuels production compared to the actual increase of 45
percent, from April 2007 to April 2008.
Appendix III.--Further Detail on Question 3
How might increased biodiesel consumption, as required by EISA
beginning in 2009, affect domestic and international food
prices?
Under pre-EISA policies, USDA had projected that soybean oil use
for biodiesel would be4.2 billion pounds in 2009/1 0 and average 4.4
billion pounds over 2013-2018. EISA requires the use of 500 million
gallons of biomass-based diesel fuel by 2009; 650 million gallons by
2010; 800 million gallons by 2011; and 1 billion gallons of biomass-
based diesel fuel by 2012. This would raise soybean oil consumption for
biodiesel by about 70 percent by 2011/12.
To estimate the effects on soybean oil and soybean prices, we
derived price multipliers from a recent analysis ofthe EISA by the Food
and Agricultural Policy Research Institute (FAPRI). In estimating the
effects of the EISA on biodiesel use and soybean prices, the FAPRI
analysis shows that for a 10-percent increase in soybean oil use for
biodiesel, soybean oil prices were estimated to rise by about 4
percent, while soybean prices were estimated to rise by about 1 percent
(see Table 1, below). Based on these values, it is estimated that
increased biodiesel consumption could cause soybean oil prices to rise
by about 32 percent over pre-EISA baseline levels by 2012/13.
Similarly, it is estimated that soybean prices would rise by about 7
percent relative to pre-EISA baseline levels.
The estimated increase in the price of soybean oil would increase
the CPI for all food by about 0.20-0.30 percentage points if fully
passed on to consumers in the form of increased prices for foods
containing soybean oil and other oils that compete with soybean oil.
The total increase of 0.20-0.30 percentage points in the CPI for all
food could occur over a several-year period, especially as the EISA
mandate increases biodiesel consumption beginning in 2009/10. The
estimated increase in the price of soybeans and soybean oil under the
EISA would increase the IMF global food commodity price index by 1-2
percentage points.
Appendix IV.--Further Detail on Question 4
How has increased ethanol and biodiesel consumption affected gasoline
and diesel prices?
______
Responses of Joe L. Outlaw to Questions From Senator Domenici
Question 1. In your opinion, what is the underlying driving force
for changes in the agricultural industry?
Answer. There are a number of underlying driving forces of change
in agriculture. I am a co-author of one of the leading undergraduate
textbooks on agricultural policy. In our book we identify eight forces
of change in agriculture: instability of agriculture, globalization,
technology, food safety, environment, industrialization, politics, and
unforeseen events. While the importance of each of these factors varies
over time, in my opinion, over the past few years the most important
factors have been the instability of agriculture, technology and
unforeseen events. Specifically, this past year saw unforeseen weather
events negatively impacted crop production worldwide. Combining the
reduction in supply with the inelasticity of supply and demand of
agricultural products gives us huge swings in commodity prices due to
shifts in supply and demand causing the price and income instability we
have recently realized. And finally, improvements in seed and GPS
technology have perpetuated the technology treadmill effect where early
adopters garner most of the financial benefits of new technology that
decrease costs and induce others to follow in order to stay in
business.
Question 2. In your testimony, you state that a reduction to the
RFS mandate would not significantly reduce ethanol production or
prices. Why?
Answer. At the time of the testimony, our models indicated that
U.S. production of ethanol would easily exceed the RFS. Even though
corn prices had increased to $6.00 per bushel, our results indicated
that, on average, U.S. ethanol plants were still realizing small $0.06
per gallon profits at an ethanol price of $2.50 per gallon. This level
of profitability, while not high enough to encourage new plant
construction, is still positive so existing plants and those that were
expected to come online later in 2008 would continue and surpass the
RFS level.
Question 3. In your opinion, what is the long term viability of
biofuels as an energy alternative?
Answer. The answer to this question depends entirely on 1) the
level of oil prices and the corresponding gasoline and diesel prices,
2) the relative costs of production of each of the biofuels including
corn and cellulosic based ethanol and biodiesel. If the costs of
biofuels are relatively competitive with petroleum based fuels then
there will be a future. If not, there will not be a future for them
barring government subsidies.
Response of Joe L. Outlaw to Question From Senator Lincoln
Question 1. Based on your recent study, what is your opinion on the
potential negative impacts a Renewable Fuel Standard waiver may have on
second generation biofuels, such as the development of cellulosic
biomass?
Answer. My answer is strictly my opinion and unfortunately is not
backed up with the empirical analysis that was the basis for my answers
to the previous questions. We have all witnessed substantial investment
in ethanol and biodiesel that followed the enactment of the Energy
Policy Act of 2005 and Energy Independence and Security Act of 2007.
The question is how would potential second generation fuels investors
react to a one year removal of the RFS mandate? Again, in my opinion,
the removal of the mandate could be interpreted by potential investors
as the beginning of the decline in government support for biofuels
which may make them at least pause from going forward. Unlike, corn
based ethanol which is generally competitive without the subsidies,
most if not all of the cellulosic ethanol projects are not expected to
initially be competitive with petroleum based fuels so there would have
to be substantial government support for investors to move those
projects forward.
Appendix II
Additional Material Submitted for the Record
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Midwestern Governors Association,
Washington, DC, June 3, 2008.
Hon. Stephen Johnson,
Administrator, Environmental Protection Agency, 1200 Pennsylvania
Avenue, N.W., Washington, DC.
Dear Administrator Johnson: On behalf of the Midwestern Governors
Association (MGA), we respectfully urge you to uphold the new and
higher Renewable Fuels Standard (RFS) in the Energy Independence and
Security Act of 2007 as passed by Congress and signed by the President.
Granting waivers to the RFS would be contrary to your agency's mission
to protect human health and the environment.
A waiver would also contradict the President's ``Twenty in Ten''
plan that you worked on to pass. In his 2007 State of the Union
Address, President Bush announced the plan to reduce U.S. gasoline
usage by 20 percent in 10 years. One of the objectives of the plan is
to strengthen our nation's energy security by reducing foreign oil
dependency, and by promoting the development of homegrown, renewable
energy sources. The plan called for increased use of renewable and
alternative fuels, and set a goal of 36 billion gallons of renewable
energy sources to be used in the U.S., as is reflected in the Energy
Independence and Security Act of 2007.
The EPA's own analysis of the current RFS shows the increased use
of renewable fuels, like ethanol, will reduce traditional car
pollutants, such as benzene and carbon monoxide. Ethanol is non-toxic,
water soluble, and biodegradable. In addition, ethanol poses no threat
of contamination or degradation of surface or ground water.
The blame placed on ethanol for higher food prices is misguided.
Higher food prices are the result of many factors, including rising
transportation and production costs due to record oil prices, increased
demand for grains and meat from developing countries, increased
speculator investment and influence in all commodities markets, and
extended global drought. As a result, all food commodity prices are
high, not just the price of corn. In short, granting any waiver to the
RFS will not reduce current food commodity prices.
The RFS actually helps move the ethanol industry toward use of
cellulosic materials. The RFS will encourage the investment and
technological innovations needed to make production of ethanol from
cellulose a commercial reality.
When you addressed the National Ethanol Conference last year, you
stated, ``Bottom line--alternative domestic sources of energy are good
for our economy, good for our energy security ... and are good for our
environment.'' We could not agree more. We thank you for your time and
consideration.
Sincerely,
M. Michael Rounds,
Governor of South Dakota and Chair.
Jennifer Granholm,
Governor of Michigan and Vice Chair.
______
National Petrochemical & Refiners Association,
Washington, DC, June 27, 2008.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Bingaman: NPRA, the National Petrochemical & Refiners
Association, appreciates the opportunity to submit comments for the
record regarding the Senate Energy and Natural Resources Committee's
hearing on June 12, 2008 on the relationship between U.S. renewable
fuels policy and food prices. NPRA is a national trade association with
close to 500 members, including those who own or operate virtually all
U.S. refining capacity, as well as most of the nation's petrochemical
manufacturers with processes similar to those of refiners. We
specifically wanted to comment on answers the U.S. Department of Energy
(DOE) and the U.S. Department of Agriculture (USDA) provided to the
committee in response to your May 12, 2008 questions to both agencies.
The answers below highlight our views on some of the questions you
raised in that letter.
Question 1. How has increased U.S. ethanol and biodiesel
consumption affected domestic agriculture, and domestic food prices?
Answer. Increased ethanol production in the U.S. has resulted in
higher demand for corn. The U.S. Department of Agriculture (USDA)
estimates that the amount of corn used at domestic ethanol plants was
2.1 billion bushels in 2006/2007 (9/1/06--9/1/07) and 3.0 billion
bushels in 2007/2008, and the latest projection is 4.0 billion bushels
in 2008/2009. This represented 23.3% of domestic corn demand in 2006/
2007, 28.5% in 2007/2008, and 38.1 % in 2008/2009.\1\ This growth in
demand for corn to provide the feedstock for domestic ethanol
production plants is substantial. Several recently released studies
highlight the fact that this trend has significantly increased food and
commodity prices well above the 3-4 percent range noted by USDA and the
U.S. Department of Energy (DOE) in the June 11, 2008 response to your
May 12, 2008 questions.
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\1\ USDA, ``World Agricultural Supply and Demand Estimates,''
WASDE-459, June 10, 2008, p. 12. This is a monthly report. ``Year A/B''
is a marketing year beginning September 1 for corn: http://
www.usda.gov/oce/commodity/wasde/latest.pdf
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Global grain prices have increased dramatically over the last two
years. It is unlikely that this is just a coincidence with U.S.
biofuels programs. The chart below shows USDA data on wheat, corn and
soybean price changes before and after EPAct05 was passed.
The increase in corn demand by ethanol production plants is a key
factor in rising corn prices. As one recent study notes:
Between 2006/07 and 2008/09, USDA forecasts indicate the
increase in corn going to ethanol plants is expected to exceed
the increase in total U.S. corn use. Because corn stocks are
expected to fall to such low levels relative to total corn use
and expected corn prices are so high, any surge in corn demand
has an amplified effect on corn prices. In this environment, if
substantially less corn were to be used in ethanol production
than now expected, corn prices would be much lower. A
simplified analytical approach suggests that expected corn
prices may be 40 percent higher than they would be had corn
used in ethanol production remained at the 2006/07 level.
Expressed in an alternative way, the increase in corn expected
to be used in ethanol between 2006/07 and 2008/09 may account
for up to 60 percent of the increase in corn prices between
2006/07 and 2008/09.\2\
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\2\ Dr. Keith Collins, ``The Role of Biofuels and Other Factors in
Increasing Farm and Food Prices,'' June 19, 2008, p. 25.
Recent studies also highlight the fact that--contrary to USDA and
DOE's opinion--prices for products such as dairy, beef, poultry and
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eggs are in fact impacted by higher corn prices.
For example, since corn is mainly used as a feed grain,
higher corn prices in one year may not affect livestock prices
for up to several years. That is the case today as U.S. meat
production is expected to be record high in 2008 partly because
high feed prices are causing increased slaughter of beef and
dairy cows and sows. The consequence of this is more meat
production today, but the reduction in breeding animals and
herd sizes will mean lower meat production and higher meat
prices over next several years.\3\
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\3\ Ibid, p. 23.
Corn shortages from the recent flooding in the Midwest will likely
exacerbate this trend. In addition, such commodity inflation is locked
in by the RFS, given the dramatic increases in quantities required to
meet the mandate.
Energy prices are certainly a factor in rising prices for many
products. High energy prices are of particular concern to the refining
and petrochemical industry and are having a substantial, adverse impact
on our businesses and consumers. However, energy prices have
significantly less of an impact on food prices than commodity price
increases. The USDA ERS's own model of retail food costs show that
energy is three percent of the retail food dollar, and commodity costs
are 19 percent of the retail food dollar. So, when commodity prices are
rising at half again to more than twice the rate of oil, how can ERS
continue to argue that it is energy--and not biofuels policy--that is
driving food inflation?
Questions 4 & 5. How has increased ethanol and biodiesel
consumption affected gasoline and diesel prices? What price levels for
gasoline and diesel would be expected if biofuels were removed from the
market, both in the short-and long-term?
Answer. Hawaii, Minnesota, Missouri, and Oregon currently mandate
ethanol in gasoline. Minnesota currently mandates biodiesel in diesel
fuel and the state legislature recently required that the level of
biodiesel in diesel fuels be increased. States that require biofuels
with future effective dates are Florida, Montana, New Mexico, and
Washington. About 65% of gasoline supplies produced in the U.S. contain
ethanol today. Biodiesel is still a very, very small market (only about
1%) compared to petroleum diesel fuel. Several factors make price
comparisons of the fuel supply with or without ethanol or biodiesel
very difficult, such as:
The very small size of the biodiesel market
The extensive use of ethanol in gasoline
Current state biofuel mandates
Current subsidies and excise tax credits/reductions for
biofuels
The tariff on imported ethanol
The lower energy content of ethanol and biodiesel relative
to gasoline and diesel
Higher wholesale infrastructure costs associated with
ethanol use
The large new federal renewable fuel standard for 2008
All of these factors combined make conclusions on price comparisons
extremely questionable--particularly since many of these initiatives
represent real costs to consumers that are not always clearly apparent.
For example, lost tax revenue to the Highway Trust Fund from the
ethanol excise tax credit is made up through direct payments from the
General Treasury. These revenues are general taxpayer money and an
expense to consumers. In addition, since ethanol can't be shipped via
pipeline, it has to be trucked barged or railed. As discussed later,
this method of shipment is more than three times as expensive a
shipping gasoline via pipeline.
Ethanol prices are available at the following sites:
http://www.energy.ca.gov/gasoline/graphs/ethanol--10-year.html
http://www.energy.ca.gov/gasoline/graphs/ethanol 18-month.html
http://www.mda.state.mn.us/news/publications/renewable/ethanol/
marketnewsreport.pdf
These sources document that ethanol prices are volatile and ethanol
is not uniformly a very low-cost gasoline additive.
The ``Ethanol Market News,'' prepared by the Minnesota Department
of Agriculture, (http://www.mda.state.mn.us/news/publ ications/
renewable/ethanol/marketnewsreport.pdf) shows a relationship between
ethanol and gasoline prices. It is not evident from this chart that
gasoline prices would be higher without ethanol because gasoline and
ethanol prices are often close and ethanol prices are not always less
expensive than gasoline prices. This is particularly important in light
of the fact that a gallon of ethanol carries substantially less energy
than a gallon of gasoline.
Finally, this analysis was conducted before the flooding in the
Midwest, which wiped out a substantial portion of the corn crop. This
disaster highlights yet another problem with the RFS. This event
naturally limits the supply of corn for the rest of the year and could
make compliance with this year's 9 billion gallon mandate difficult.
Such a situation could create scarcity in the ethanol market, driving
up not only corn prices, but the cost of RFS credits. If such a
scenario comes to fruition, it could possibly lead to even higher fuel
prices for American consumers.
Question 6. What effects are biofuels expected to have on gasoline
and diesel markets as consumption increases to meet the targets laid
out in EISA?
The U.S. will progress rapidly to the use of ethanol in nearly all
gasoline. There will also be interest in expanding the E85 market and
EPA's future decision on whether or not mid-level ethanol-gasoline
blends meet the Agency's ``substantially similar'' definition of
gasoline.\4\
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\4\ For more information on ``substantially similar:'' http://
www.epa.gov/otaq/additive.htm For more information on the EPA process
to review mid-level ethanol-gasoline blends: http://www.ethanol.org/
pdf/contentmgmt/Dave_Kortum_EPA.pdf
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As previously mentioned, a gallon of ethanol has a lower energy
content than a gallon of gasoline. According to the Department of
Energy's Office of Energy Efficiency and Renewable Energy, flex fuel
vehicles (FFVs)--cars that can run on either gasoline or a mixture of
85 percent ethanol and 15 percent gasoline (known as E85)--get ``about
20-30% fewer miles per gallon when fueled with E85.''\5\ Similarly, a
gallon of biodiesel has a lower energy content than a gallon of diesel
fuel.\6\ Therefore, increased use of E85 and biodiesel is a RFS
compliance strategy, but will displace only a fraction of demand for
gasoline and diesel fuel because of energy content and fuel economy
differences. This difference in energy content highlights the facts
that as ethanol use increases dramatically because of the RFS,
consumers will be using a larger volume of transportation fuels and
paying more. An example highlighting this phenomenon lies in the fact
that the American Automobile Association (AAA) releases an ``E85 MPG/
BTU Adjusted Price'' in its daily fuel gauge report. It has not been
uncommon for this report to show an E85 adjusted price that exceeds the
price of a gallon of gasoline by as much as 80 cents per gallon.\7\
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\5\ U.S. Department of Energy, Office of Energy Efficiency and
Renewable Energy, Fueleconomy.gov: http://www.fueleconomy.gov/feg/
flextech.shtml.
\6\ EPA, ``A Comprehensive Analysis of Biodiesel Impacts on Exhaust
Emissions, Draft Technical Report,'' EPA420-P-02-001, October 2002:
http://www.epa.gov/otaq/models/analysis/biodsl/p02001.pdf
\7\ For daily price information from AAA, see http://
www.fuelgaugereport.com/.
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A June 2007 GAO report also highlighted the higher costs associated
with biofuels. Among several findings, the report noted: ``According to
NREL (National Renewable Energy Laboratory), the overall cost of
transporting ethanol from production plants to fueling stations is
estimated to range from 13 cents per gallon to 18 cents per gallon,
depending on the distance traveled and the mode of transportation. In
contrast, the overall cost of transporting petroleum fuels from
refineries to fueling stations is estimated on a nationwide basis to be
about 3 to 5 cents per gallon.''\8\ The dramatic increase in the
biofuels mandate under the new law will increase strain on our already
congested transportation infrastructure, which could very likely drive
the costs of shipping ethanol up even further. In addition to these
costs being passed on to consumers, strained transportation avenues
could create fuel supply problems.
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\8\ U.S. Government Accountability Office, ``Biofuels: DOE Lacks a
Strategic Approach to Coordinate Increasing Production with
Infrastructure Development and Vehicle Needs,'' GAO-07-713, June 2007,
p. 23.
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In order to achieve the enormous increase in ethanol consumption
required under EI SA, there will need to be significant increases in
Flex Fuel Vehicles (FFVs). These vehicles are the only ones capable of
running on blends greater than E10, which will be the nationwide
standard given the new RFS possibly as soon as 2010. The National
Ethanol Vehicle Coalition estimates there are about 6 million FFV s on
the road--a small fraction of the 240 million plus vehicles Americans
are driving today.\9\ While automakers have announced plans to make
more of these vehicles, they plan on producing gasoline-only vehicles
at substantially greater quantities. This situation means today's
legacy fleet (e.g. the gasoline-only vehicles currently in the
marketplace) and a large portion of the approximately 16 million
automobiles that will be produced annually over the next several years,
cannot or will not be able to run on blends greater than E-10. The
corrosive nature of ethanol eats away at automotive pipes and creates
engine problems in these vehicles. In order for blends between E-10 and
E-85 (i .e. blended gasoline that contains somewhere between 10 and 85
percent ethanol, called ``mid-level ethanol blends'') to be viable in
the fuel supply, automakers will have to certify that cars can run on
these blends and warrantee those vehicles. Engine and fuel pump makers
will not provide warranties for equipment if blends greater than E-10
are used with those products.
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\9\ National Ethanol Vehicle Coalition website: http://
www.e85fuel.com/e85101/faqs/number_ffvs.php
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Ethanol blends greater than E10 are already starting to create
disruptions in the fuel market. One boat owner in California recently
initiated a lawsuit against gasoline producers for problems ethanol
blended gasoline created in his boat engine--even though ethanol is
mandated to be used in the fuel supply.\10\
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\10\ Douglas, Elizabeth, ``Boater sues over ethanol laces
gasoline's effect on fiberglass tank,'' Los Angeles Times, April 15,
2008.
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In addition to challenges relating to vehicle fleets, the new
mandate will require greater use of E85 generally, which has economic
challenges related to refueling infrastructure. Because of the
corrosiveness of ethanol, an E85 retail pump is different than a
gasoline retail pump and, therefore, all gasoline stations do not have
equipment compatible with E85. Equipment concerns include the
underground storage tank, gauges, piping system, fittings, pumps,
nozzles, and hoses. A member of the National Association of Convenience
Stores (NACS) and the Society of Independent Gasoline Marketers of
America (SIGMA) testified on June 7, 2007 before the Subcommittee on
Energy and Air Quality of the House Committee on Energy and Commerce:
For all of these conversions, including tank cleaning, we
estimated the cost to be between $6,000 and $7,000. However,
this does not include the dispenser itself. The two dispenser
manufacturers each charge an additional fee for a new E-85
compatible dispenser--$8,000 for Dresser-Wayne and $7,300 for
Gilbarco. Thus, a typical E-85 dispenser can cost upwards of
$17,000 per unit. And this cost is for equipment that has not
yet been certified compatible with E-85 by Underwriters
Laboratories. . . . We have spoken with several retailers who
lament their decision to install E-85 equipment because they
have been unable to generate sufficient sales from these
fueling positions to support their overall business model.\11\
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\11\ http://energycommerce.house.gov/cmte_mtgs/110-eaq-
hrg.060707.Hubbard-testimony.pdf
Thank you again for the opportunity to provide comments for the
record. We look forward to working with you regarding implementation of
the RFS and other energy related issues before the Committee.
Sincerely,
Charles T. Drevna,
President.
______
National Cattlemen's Beef Association,
Washington, DC, June 12, 2008.
Hon. Jeff Bingaman,
Chairman, Energy & Natural Resources Committee, U.S. Senate, 304
Dirksen Senate Office Building, Washington, DC.
Hon. Pete Domenici,
Ranking Member, Energy & Natural Resources Committee, U.S. Senate,304
Dirksen Senate Office Building, Washington, DC.
Dear Chairman Bingaman and Ranking Member Domenici: The National
Cattlemen's Beef Association (NCBA) appreciates the opportunity to
present our thoughts with regard to your hearing on ``Renewable Fuels
and Food Prices.'' Producer-directed and consumer-focused, NCBA is the
largest and oldest organization representing America's cattle industry,
and it is dedicated to preserving the beef industry's heritage and
future profitability through leadership in education, marketing and
public policy.
Cattle operations are an important contributor to small towns and
rural economies across the United States. Taken in aggregate, cattle
production plays a significant role in our nation with $50 billion in
farm-gate receipts, which represents 20 percent of all U.S. on-farm
income. However, the U.S. cattle industry is currently experiencing
significant and unsustainable losses.
Many cattle feeders are currently losing about $150 per animal.
With 525,000 head of steers and heifers going to market each week, that
amounts to an average weekly industry loss of approximately $79
million. Cattle feeders are margin operators and these losses will be
passed on to the foundation of our industry, the cow/calf producer. For
every $1 per bushel increase in the price of corn a cattle feeder must
pay $22 per hundred-weight less for a 550 lb. feeder steer in order to
have a chance at maintaining the same income.
Ethanol production and support mechanisms, namely the RFS, the
ethanol blender's tax credit and the ethanol import tariff, are not
solely to blame for this precarious situation. Other factors including
the value of the dollar, elevated energy prices, increased
international demand for grain and meat products, and the weather
certainly play a role in determining food and feed costs. But, the
demand pressure created by the RFS and ethanol tax incentives is also a
contributor, and it is the only factor that Congress can control.
As a Committee of jurisdiction over this issue, NCBA strongly urges
you to reevaluate the mandate schedule established in the Energy
Independence & Security Act of 2007 (EISA) in light of the commodity
supply and price issues we are now facing.
ETHANOL INDUSTRY DEVELOPMENT AND PRODUCTION
While elimination of the oxygenate methyl tertiary butyl ether
(MTBE) along with high crude oil and gasoline prices have played a role
in the development of ethanol production, a number of government
policies have rapidly accelerated the investment, including: the
Volumetric Ethanol Excise Tax Credit (VEETC) of $0.51/gallon provided
to blenders of ethanol, a $0.54/gallon tariff on imported ethanol, and
the RFS which was amended and dramatically increased as part of EISA to
mandate the production and use of 9 billion gallons of feed-grain based
ethanol this year and 15 billion gallons by 2015.
As of June 9th the Renewable Fuels Association (RFA), the national
trade association for the U.S. ethanol industry, reported that the
United States has 154 operational ethanol plants with the capacity to
produce 8.8 billion gallons of ethanol per year. Additionally, RFA
reported 49 new plants under construction, bringing total expected
ethanol production capacity to nearly 13.7 billion gallons of ethanol
per year.
Once operational, these 203 ethanol facilities will require over 5
billion bushels of corn. This is not an inconsequential amount. Based
upon current expectations for corn plantings and yield, that will be
over 40 percent of the domestic corn supply in 2008--compared to the 13
percent of domestic corn supply that was devoted to fuel ethanol
production in 2005.
Overall growth in the corn ethanol industry has been impressive,
but it is important to recognize that it comes at a cost to livestock
producers. Corn is the primary feed stock utilized to feed cattle for
market, accounting for approximately 85 of every 100 pounds of cattle
feed. In total, of the nearly six billion bushels of corn fed to
livestock this year, roughly two billion will be fed to cattle. With
the Omaha cash corn price last week at $6.18/bushel compared to $3.79/
bushel one year earlier--an increase of over 60 percent from the
previous year and 280 percent from the year before that--the impacts of
corn-based ethanol development are being felt throughout the beef
production chain.
It is important to recognize that this is not a cost that the
cattle producer can readily pass along to the consumer. Although U.S.
beef producers have successfully worked to build demand, and maintained
it through increased retail beef prices over the past several years,
there is only so much that a consumer is willing to pay before they
begin to choose other protein sources. Therefore, in the short run, the
majority of these higher feed costs are borne by cattle feeders, and in
the long run, they will result in a contraction of the U.S. cow herd.
With the cost of their biggest feed input skyrocketing, and the
overall profitability of their business threatened, it is
understandable that many cattle producers have become skeptical of
government intervention in the ethanol market. Cattle producers simply
want to compete with the ethanol industry on a level playing field for
each bushel of corn.
COMMODITY SUPPLIES AND PRODUCTION
U.S. cattle producers are committed to continuing to provide the
safest, most affordable beef in the world, but given current
expectations regarding crop production, they have a growing anxiety
about the impact of renewable fuels policy on the prices of feed grains
and livestock. In 2007, USDA reported that 25 percent of the U.S. corn
crop was processed to produce ethanol. Compared to previous years this
is a dramatic increase in the amount of corn diverted to ethanol
production.
Even with strong corn prices in the marketplace USDA's most recent
Prospective Plantings report indicated that U.S. corn acreage was
expected to decline 8 percent from last year as some producers shifted
production to other crops whose prices have been driven higher. The
troubling news continued to accumulate with USDA's monthly Crop Report
released on June 10, 2008. USDA cut the corn yield estimate by a
whopping 5 bushels, down to 148.9 bushels/acre. This reduction projects
a corn crop that is 10 percent smaller than last year. Furthermore, in
order to maintain even ``pipeline'' supplies for corn, USDA was forced
to cut its estimates for feed and residual use by 150 million bushels.
This is a clear indication that USDA expects more corn to be directed
away from cattle producers.
Meanwhile, the percentage of corn acres rated good and excellent by
USDA fell by 3 percent during the first week of June, down to just 60
percent. Corn crop progress in the year 2002 was the worst in nearly
two decades, and this year's good-excellent percentage is just 6
percent ahead of the 2002 figure. This is especially concerning given
the major flooding and severe weather events that have continued to
plague key corn growing regions. USDA's next estimate for total corn
acreage will be released in the June 30 Acreage report; nevertheless,
as of June 8 only 89 percent of the corn crop had emerged, which still
leaves 2008 as the slowest year on record for corn emergence, lagging
the 99 percent emergence at this time last year and the 5-year average
of 95 percent.
NCBA recognizes that corn growers responded to increased demand
last year by producing a record harvest; however, cattle producers do
not operate in the past. Both the marketplace and Mother Nature have
created a drastically different scenario this year. Lower acreage and
below trend line yields can only mean one thing: less corn. This
decline in corn production will coincide with continued increases in
the siphoning off of corn to produce ethanol; a diversion driven by
both high oil prices and government policy.
ETHANOL CO-PRODUCT OPPORTUNITIES AND CHALLENGES
Cattle producers have not stood idle on the sidelines as these
market developments have occurred. As corn is being diverted to supply
the increasing demand of renewable fuels they are doing their best to
adapt by utilizing alternative feedstuffs, such as co-products of the
ethanol process like distillers grains, in rations. Distillers grains
can be used in their wet (35 % dry matter), modified wet (50%), or
dried (90%) form. Each bushel of corn used for ethanol production
returns about 18 pounds of dried distiller grains, and as ethanol
production continues to climb it will be increasingly important for our
industry to utilize this product.
When a feedlot can obtain them, some producers are attempting to
incorporate ethanol co-products at rates of up to 40 percent in the
feed ration. However, these co-products cannot entirely replace corn in
the ration, and there are other concerns with including them at high
levels. First, there are concerns about diminished cattle performance
due to increased sulphur content in the ration. Sulphur, which tends to
suppress appetite and tie up micronutrients that are essential to
cattle health, is often found at higher levels in distillers grains.
Producers are also concerned about the variability of the co-
products from ethanol production. It has proven difficult to get a
consistent product which, in turn, makes it hard to formulate a
balanced ration. Furthermore, we're keeping a close eye on any impact
that distillers grains might have on the quality of our end product.
The beef industry has worked hard for many years to improve beef
quality, and any changes to that quality could jeopardize a consumer's
willingness to purchase beef. Finally, because distiller's grains are
often priced at their energy equivalent to corn, they are not
necessarily a ``cheap'' replacement for corn.
SUMMARY
Cattle producers are very concerned about the increasingly tight
supply of key commodities. With U.S. wheat stocks at 60 year lows,
soybean stocks at their lowest levels since 2003, and corn ending
stocks, even with last year's record crop, well below the established
25 year average, the RFS is creating unnecessary pressure on feed and
food prices. With current and forecast oil prices well above $100 per
barrel, and with annual ethanol production capacity now at 13.7 billion
gallons, it is clear that the corn ethanol industry no longer a
`fledgling industry' in need of government assistance.
NCBA does not believe that freezing the RFS will immediately
reverse commodity price escalation, nor do cattle producers claim that
it will single handedly address the difficult marketing environment
that currently exists for our industry. But, the RFS is one factor
contributing to higher feed prices and Congress should revisit this
policy in order to bring about some relief for beef producers and
consumers.
It should be made clear that NCBA supports the nation's commitment
to reducing dependence on foreign energy by developing forms of
renewable energy like ethanol. Our interest in encouraging a
reevaluation of the RFS is not intended to undermine this objective;
rather it is meant to ensure that our nation's energy policy is
sustainable and consistent with the dynamics of today's marketplace.
Cattle producers recognize that federal support of the ethanol industry
helped to encourage the development of basic production technology, but
they also believe in a market-based economy.
Government driven demand for corn via an RFS and tax credits
unnecessarily intervenes in the market, decreasing the ability of
supply and demand to appropriately signal market participants. Cattle
producers have always depended on the free market to drive their
business, and as long as cattle producers have the ability to compete
on a level playing field with the ethanol industry for each bushel of
corn, the U.S. beef industry can and will remain competitive.
In a time of sharply escalating food and energy costs NCBA
appreciates the Energy and Natural Resources Committee holding a
hearing regarding ``Renewable Fuels and Food Prices.'' Cattle
producer's share a desire to diversify our energy supply, and feel
strongly that we must work together to meet this goal in a manner that
will not pit our food, feed and fuel needs against each other.
In light of the current food and commodity price issues we are
facing, NCBA urges you to reevaluate the RFS enacted as part of EISA.
Further, cattle producers believe that Congress should also allow other
ethanol support mechanisms, such as the blender's tax credit, to expire
as scheduled. NCBA feels that it is time to level the playing field and
allow market forces rather than government intervention to guide the
production and use of ethanol.
Sincerely,
Andy Groseta,
President.