Corn-based Ethanol: Offering Some Relief from Globalization’s Merciless Quest to Replace Fossil Fuel

July 26, 2006July 27, 2006 coha

Corn versus sugar-based substitute fuels
Latin American corn producers could again become competitive
Brazil wants entry into U.S. ethanol market
U.S. agro-industry ultimate beneficiary of federal government’s promotion of corn ethanol

Contrary to the usual outcome of Washington’s subsidies to U.S. farmers, recent grants for ethanol producers could actually improve many lives, both at home and abroad. As the Bush administration aggressively encourages the production of ethanol, a renewable, more environmentally friendly biofuel, to replace increasingly pricey gasoline in automobiles, domestic and foreign corn markets will have to undergo some major adjustments. The U.S. hopes to decrease gasoline consumption by augmenting the production of compounds such as E-85 fuel, which is a mixture of 85 percent ethanol and 15 percent gasoline, that can replace regular gasoline in almost every vehicle sold today in the U.S. This could make a real dent in U.S. reliance on foreign petroleum as a result of a major shift to a domestic, non-hydrocarbon fuel source.

A Growth Industry
In the U.S., ethanol is made by distilling corn kernels, but for this country to make enough ethanol to keep foreign oil off its highways, half of the nation’s farmland would have to be devoted to growing corn for fuel. Realistically, U.S. farmers cannot grow enough corn to feed all U.S. cars, cows, and humans, as well as Washington’s close trading partners; farmers abroad should see this as a welcomed opportunity to reverse their present status and again see themselves as competitive. Currently, farm subsidies awarded by Congress to U.S. farmers to harvest bounteous corn crops allows for low domestic prices while also guaranteeing U.S. dominance in international corn markets. But as the need for growing ethanol production strains domestic corn supplies, U.S. corn producers may have to consider curbing their exports to Latin American countries in order to meet the increasing demand for domestic U.S. ethanol production. One thing is for certain: the ultimate beneficiaries of heavily subsidized U.S. corn-ethanol will be major agro-industries like Archer Daniels Midland and other agro-industry multinationals which are likely to join in its production at a later date due to its lucrative nature.

According to the USDA Foreign Agriculture Service’s report on 2006 corn exports, Mexico receives about 15 percent of the U.S. commodity while other Latin American countries such as Colombia, Costa Rica, Cuba, and Guatemala take in another 15 percent. With U.S. producers accounting for smaller amounts of corn shipments for export and asking for higher prices due to the resulting corn scarcity, corn farmers in these countries, especially those in Mexico, at some point will be able to compete on the world market and gain the revenues recently denied them due to their inability to compete. The extent to which these changes in the marketing of corn will affect Latin America depends on how strong the corn-ethanol demand remains. Although there are some potential threats to corn-ethanol’s much touted future, its general prospects look promising.

Shifting Priorities
The U.S. corn market is already feeling the effects of an expansion in ethanol production, as the newly created industrial demand for this category of corn makes up about 14 percent of this year’s corn harvest, according to the United States Department of Agriculture (USDA). The department also estimates that the quantity of corn used for ethanol manufacturing will double within the next 10 years, using about a quarter of total U.S. corn output. To satisfy the mounting need for corn, U.S. farmers can increase production by planting more acres and engineering better corn genetics. However, as the USDA has stated, increasing corn output may not be an attractive option because the equipment used to cultivate corn must operate on fossil fuel. More production normally means burning more oil, which contradicts the main reasons for producing ethanol in the first place. Farmers may have to displace soybean fields to plant more acres of “yellow gold,” as a New York Times article called it, because soybeans grow under the same conditions as corn. However, changing crop rotation to favor corn may damage soil quality, impairing corn production in the end.

Since vastly expanding the U.S. corn crop could have such negative consequences, U.S. farmers will probably not be able to increase the acreage devoted to corn in order to supply sufficient output to offset the increased demand. Warren R. Staley of Cargill, a multinational U.S. agricultural giant, expressed concern about corn supplies in a New York Times interview, “Unless we have a huge increase in productivity, we will have a huge problem with food production … and the world will have to make choices.” Corn is normally sold to food industries or exported to foreign countries, but with ethanol manufacturers buying so much of the crop, U.S. corn sellers may have to choose among their buyers and divert sales from traditional commodity purchasers toward those engaged in fuel production.

Corn across Borders
The USDA predicts that U.S corn farmers will continue selling to domestic food industries and cut back on exports in order to supply domestic ethanol producers. The U.S.’s cutback on exports could be a saving grace for Latin American farmers who have been battered by fierce U.S. competition. The U.S. has been dominating foreign corn markets with their heavily subsidized exports that make its crop relatively cheaper, against which disadvantaged Latin American farmers have been unable to compete. In Mexico, the North American Free Trade Agreement (NAFTA) of 1994 eliminated tariffs on U.S. shipments to Mexico, allowing U.S. farmers to export low-cost subsidized corn, effectively crowding Mexican farmers out of their own market. In 2002, Mexico’s Secretaria del Trabajo y Provision Social published a survey on national employment, where tens of thousands of Mexican corn farmers were forced to leave their land parcels throughout the 1990s as NAFTA took effect. The number of all agricultural producers fell 21 percent, renters and sharecroppers had dropped by 36 percent, and communal farmers by 21 percent. The impending Free Trade Area of the Americas (FTAA) and the recently enacted Central American Free Trade Agreement (CAFTA) call for similar tariff reductions which would inevitably hurt small farms throughout Latin America. On the other hand, corn farmers who had grievously suffered from free trade agreements are now likely to benefit from Washington’s new ethanol obsession, since U.S. corn shipments will be heading for Midwest ethanol plants, rather than displacing foreign producers in their own local markets.

With less U.S. corn available for exporting, the price of U.S. corn both abroad and at home is bound to rise. Wealthier countries such as Japan, Taiwan, and Canada, where food comprises a small fraction of their foreign purchases, are unlikely to reduce imports on slightly more expensive U.S. corn, but poorer countries like Mexico, Guatemala, Costa Rica, and Colombia will be inclined to search for a cheaper option. This could give Latin American farmers the business they need since higher U.S. grain prices make cheaper domestic Latin American grain that much more attractive. The USDA expects that as the U.S. cuts back on exports due to domestic demand, corn exports from Mexico, Argentina, and Brazil will fill the gaps in the world corn market. For example, corn farmers from the state of Sinaloa in northwestern Mexico have been growing corn comparable to that of the U.S. product in quality, but Sinaloa is located quite far from most corn buyers in Mexico. Because of this, transporting the grain is expensive, and when Sinaloan corn finally reaches the market, buyers find that the price is much higher than U.S.-imported corn. However, if the price for U.S. corn continues to increase, shipping Sinaloan corn may become the cheaper option.

Brazil’s Sweet Advantage
A number of potential barriers exist to the success of corn-based ethanol, which could in turn limit its effects on Latin America. However, subsidies and protective tariffs from Washington and a slough of corn-ethanol investors can be expected to ensure continued growth of the industry.

Brazil’s ethanol program should be an inspiration to up-and-coming U.S. producers who hope to efficiently use ethanol-based fuel in the future; however, Brazil’s sugar-based ethanol can be expected to provide stiff competition to U.S. corn ethanol. Brazil has been developing its sugar-ethanol program since the world’s first oil scare in the 1970s. Since then, the program has facilitated cheap and efficient ethanol manufacturing, resulting in ethanol fueling about half of the country’s automobiles. With access to cheap farm labor and sugar’s high alcohol yield, production costs for Brazil’s ethanol are about 30 percent less than the U.S. corn-based product. Yet the U.S. lacks the surplus of sugar needed to supply a domestic fuel industry, and the Midwest is restricted by the facts of agricultural cultivation to using corn as an alternative source for ethanol.

Power Politics
Despite the fact that the U.S. strongly advocates free trade throughout the Americas, it has maintained restrictions on imported sugar products to protect domestic sugar farmers. Jack Roney of the U.S. Sugar Alliance claims that “when you import subsidized foreign sugar, you export U.S. jobs,” as cheaper Brazilian sugar would displace U.S. producers. Now U.S. corn farmers and ethanol producers share the same concern. With sugar’s relative efficiency and the government’s sugar subsidies, Brazil can provide cheaper and more effective production, and thus, hold its competitive advantage over the U.S. This makes Brazilian ethanol exports to the U.S. a menacing threat to corn-ethanol demand. However, the U.S. currently enforces trade restrictions on all foreign sugar products, which also limits Brazilian ethanol imports that could hurt corn-ethanol producers and the farmers who supply them.

At a recent Senate hearing for energy security in Latin America, Eduardo Pereira de Carvalho from the São Paulo Sugar Cane Agroindustry Union (UNICA), asked the U.S. to lower tariffs to create a more open world market, allowing Brazil to sell more ethanol to the U.S. Knowing that Brazil’s cheap sugar-based ethanol would competitively oust U.S. ethanol, the U.S. refused Brazil’s request, deciding instead to protect U.S. farmers and its own budding ethanol business. Carvalho stated that “the Brazilian private sector does not want to displace the foreign market,” specifically U.S. ethanol producers, but the amount of revenue Brazilian companies expect to receive by exporting to the U.S. shines much light on the true intentions of Brazilian ethanol producers. The U.S. has always been persistent in maintaining that its trade policies protect its farmers; as long as the Sugar Alliance and other farm lobbyists continue making noise in Washington, U.S. corn-based ethanol will carry on thriving domestically, handsomely protected against foreign competition.

Ethanol on the Rise
Technology for corn-based ethanol is still relatively undeveloped: it remains expensive to produce and using corn to distill ethanol is not the most efficient method. The actual cost of corn-based ethanol is higher than the current prices for gasoline, but subsidies from Washington have kept the prices low enough so consumers can pay less for ethanol than gasoline. Corn-based ethanol’s effectiveness in cutting fossil fuel usage is also uncertain, as the USDA estimates that it actually takes more than one gallon of gasoline to fertilize, harvest, transport, process, and distill corn to yield one gallon of ethanol.

A Way Forward
With ethanol plants sprouting up across the country, one can safely expect corn-ethanol production to soar in the next few years. According to the New York Times, around 40 new ethanol plants have been slated for construction across America’s Corn Belt this year. Archer Daniels Midland and other ethanol refining megaliths have been lobbying for Washington to subsidize ethanol, and their efforts have paid off with the Energy Policy Act of 2005. According to the Act, Washington will make certain that the U.S. is consuming at least 7.5 billion gallons of ethanol a year by 2012. That is 50 percent more ethanol than what the U.S. is currently producing. which means a huge increase in production and corn consumption is preordained in the next six years. The act also finances research to improve ethanol technology to eventually minimize corn-ethanol’s current inefficiency.

Although the economic practicality of corn-based ethanol is still questionable, it remains a hugely popular commodity in the U.S. and in the minds of its potential users because it can reduce dependency on foreign oil. Weaning the U.S. economy off of oil is Washington’s main priority in the near future, and that is why the U.S. Congress will continue to pour money into the ethanol industry to achieve this end. With Washington backing corn-based ethanol with subsidies and trade protections, the industry will continue to increase output, buy more of the Western Hemisphere’s corn, and inadvertently help undo some of the damage U.S. trade policy has done to Latin America in the past.