[UNITED STATES] Floods give more fuel to critics of ethanol As corn prices climb, Texas governor is expected to urge EPA to amend rules

Floods give more fuel to critics of ethanol. Already under siege from many sides, the U.S. ethanol industry is facing further pressures as recent Midwest flooding pushes corn prices to new highs and federal regulators weigh calls to reduce required use of the fuel.

One of the people calling for that is Gov. Rick Perry, who has scheduled a news conference on the subject today in Washington. Fearing the effects of high corn prices on the state's cattle and poultry industries, he has called on the federal government to suspend or reduce its mandate setting minimum levels of ethanol in the nation's fuel supply.

He is expected to urge the Environmental Protection Agency to amend the ethanol requirement this year, citing its damaging impact on Texas' economy. An EPA comment period on the proposal formally ended Monday.

Agency spokeswoman Cathy Milbourn said it's too early in the process to speculate about what action the EPA may take.

A reduced mandate could shrink the market for ethanol at a time that the rising price of corn, the main ingredient of most U.S.-produced ethanol, and other higher operating costs have made ethanol more expensive to produce.

Some producers have shut down operations or halted new projects.

The flooding in Iowa and other Farm Belt states has temporarily taken other plants out of commission.

That reduced output is starting to drive up ethanol prices. And since ethanol often is a component of motor fuel, a rise in the price of ethanol could send the price at the gasoline pump even higher for millions of U.S. drivers.

But the ethanol industry is downplaying the situation, saying that even if ethanol prices remain high, blending ethanol into the nation's gasoline supply still keeps gasoline prices lower than they would be without it.

Paying at the store

Ethanol skeptics, however, say Americans are paying in other ways. The growth of ethanol output in recent years has sent corn prices soaring, increasing the cost of livestock feed, food on store shelves and many other items, they contend.

Weighing in on that side, Perry proposed in April that the government cut by half this year's federal requirement for blending ethanol into the fuel supply.

Federal law requires that the nation use 9 billion gallons of renewable fuel this year and 11 billion gallons in 2009, most of which is expected to come from corn-based ethanol.

Today, ethanol is blended — typically at levels up to 10 percent — into more than half the gasoline sold in the United States, including in Houston and other cities struggling with the worst air-quality problems.

But the catastrophic flooding in the Midwest has spurred more debate about the wisdom of using corn to feed America's driving habit.

Early estimates suggest up to 3 million acres of the nation's corn crop could be destroyed as a result of flooding in Iowa, Illinois, Wisconsin and Missouri, according to the Renewable Fuels Association, an ethanol industry trade group.

The threat of such massive losses sent corn prices to nearly $8 a bushel last week, almost double year-ago levels. Corn futures closed at $7.24 a bushel Monday on the Chicago Board of Trade.

The ethanol industry warns special interest groups against overreacting and trying to dismantle the federal ethanol mandate.

'Knee-jerk reactions'

"Knee-jerk reactions to this unprecedented weather event would do even more harm to the nation against the backdrop of the current oil and economic crises it faces," said Bob Dinneen, president of the Renewable Fuels Association.

The Energy Department recently estimated that gasoline prices would be 20 to 35 cents higher if ethanol were not available for blending. Even if the price of ethanol rose 20 percent from current levels, it still would be lower than the wholesale price of gasoline, the Renewable Fuels Association said.

What's more, cutting the 2008 mandate in half — to 4.5 billion gallons — would have little impact on corn prices now or later and might require more foreign oil imports to meet U.S. fuel needs, Dinneen said.

The group estimates that 400 million gallons of ethanol production capacity, or about 5 percent of U.S. supply, may be temporarily shut down because of Midwest flooding.

Those still producing will likely struggle as rising corn and energy costs wreck the economics of making the fuel, said David Anderson, an economist at Texas A&M University who has done research on biofuels.

"It's a pretty tight margin for ethanol producers right now," he said.

Even so, a recent study by Anderson and several colleagues suggested the negative ripple effects of producing corn ethanol may be overstated by critics. It shows higher food and feed prices have more to do with record crude oil prices than with ethanol.

Corn in Texas

Whatever's causing the rise in the price of corn, it could have a significant impact on what Texas pays for the huge quantities of corn the state imports to feed livestock, said David Gibson, executive director of the Corn Producers Association of Texas. To make matters worse, drought conditions in Texas threaten to sharply reduce the state's own corn harvest this year, putting further pressure on prices.

Gary Obenhaus, a corn farmer in Eagle Lake, said roughly a third of his 1,400-acre corn crop should be fine, but that yields for the rest will fall to as little as 30 percent of their normal 120-bushel-per-acre range. "Some may struggle to get 25 bushels per acre," he said.

While higher corn prices will likely offset his crop losses, the rising cost is hammering industries that rely on corn.

"Until the recent flooding in the Midwest began, it might have been acceptable to have a lengthy debate over ethanol mandates," said James Herring, president and chief executive of Friona Industries, the fourth-largest cattle feeder in the world, in a conference call with reporters last week.

"But to be frank, floodwaters and high corn prices have wreaked havoc on the cattle industry, and it is time to stop talking and take action," he said.

Source: Houston Chronicle | By BRETT CLANTON