In the fall of 2006, the world awakened to the astonishing realization that agriculture was undergoing a major structural change. The US farm price of corn, having averaged US$2.00 per bushel in the 2005-2006 crop year, soared in the middle of the 2006 harvest from US$2.09 per bushel in August to US$3.00 in December and to a peak of US$3.50 in June 2007. The crop was about 4 percent smaller than the US Department of Agriculture had forecast in August, but the major reason was a frenetic effort to expand ethanol plants around the country. In September, Bill Tierney, then Executive VP for Research and Marketing for John Stewart and Associates, a financial trading company specializing in commodities and biofuels, reported that the ethanol production of existing plants and those under construction and probable would reach 8.0 billion gallons by August 2007--nearly 17 billion gallons by August 2008 and 19.0 billion gallons by August 2009.
To put this expansion into perspective, ethanol production in the 2006-2007 crop year was about 6 billion gallons and used 2.1 billion bushels of corn, which was 20 percent of the crop. The 2009 corn crop will likely be about 12.3 billion bushels. Had ethanol production been ramped up to 19 billion gallons, this would have taken 6.8 billion bushels--over half of the projected crop. There is the prospect that ethanol production in the 2009-10 crop year will reach about 12 billion gallons and use almost a third of the corn crop.
Ethanol production in the United States had been expanding gradually from the early 1980s through 2001; it was given a boost by the Clean Air Act of 1990, which mandated oxygenated gasoline fuels in certain cities with unhealthy levels of air pollution. The competing oxygenates were ethanol and methyl tertiary butyl ether (MTBE), a petroleum product. The use of both oxygenates continued to expand until leaking underground storage tanks for MTBE were found to have contaminated water supplies in California and several other states. This led to bans in several states, thus shifting the demand for oxygenates to ethanol. Since MTBE had been approved as an oxygenate in the Clean Air Act of 1990, the petroleum industry wanted a shield from frivolous lawsuits included in the Energy Policy Act of 2005 signed into law on August 8, 2005. However, provisions for this were dropped. Tight supplies of oxygenates in mid 2006 forced the petroleum industry to bid up ethanol prices well over gasoline prices at wholesale. Profit levels for ethanol plants well exceeded US$1.00 per gallon from May to August. This situation contributed to the optimism evident in the ethanol industry heading into the fall of 2006.
The major federal incentive for ethanol production has been a "blenders' tax credit" amounting to about US$0.50 per gallon that was recently dropped to US$0.45. A blenders' tax credit for biodiesel has been added to energy legislation in recent years at US$1.00 per gallon. The Energy Policy Act of 2005 introduced Renewable Fuel Standards (RFSs) or mandates for blending of renewable fuels for a period of 2006 to 2012. These mandates were enlarged in the Energy Independence and Security Act of 2007 which, in essence, allocates RFSs to specific renewable fuels such as ethanol from corn starch, cellulosic sources, and biodiesel. These mandates, which started in 2006, end in 2022 with a total of 36 billion gallons. Of these, 15 billion gallons are for "conventional biofuels" (mostly corn starch and could include biodiesel, which is set at a minimum of 1 billion) and 21 billion for "advanced biofuels," including 16 billion gallons for "cellulosic biofuels."
US Energy Legislation
In a speech before the Brookings Institution on March 13, 2006, US Senator Richard G. Lugar of Indiana expressed a concern that the world will need 50 percent more energy within the next 25 years and that the United States would spend US$320 billion on crude oil imports in 2006 if prices remained at US$60 per barrel. …