Energy (51).(Previewing a 2007 Farm Bill)

Agriculture-based renewable energy production--especially biofuels and wind power--has expanded dramatically during the past two years, with profound implications for the U.S. agricultural sector. Most notably, the escalating demand for corn as a feedstock in ethanol production has driven grain and oilseed prices sharply higher since September 2006. (52) Prices for oilseeds and other grains that compete with corn for cropland also experienced similar sharp price rises during that period. As agriculture-based energy production expanded, so has the level of support provided under federal and state programs. Total federal and state biofuel subsidies have been estimated in the range of $5.5 to $7 billion per year.

Prospects for continued growth in biofuel production and related strong commodity prices have been greeted in some quarters as the long-awaited economic breakthrough for the agricultural producers and small towns, but many market watchers, policymakers, and producers from other agricultural sectors question the potential consequences of continued rapid growth of U.S. biofuel production.

Biofuels are liquid fuels produced from biomass. The major U.S. biofuels are ethanol (98% from corn), and biodiesel (90% from soybean oil). Fuel ethanol is generally blended in gasoline to reduce emissions, increase octane, and extend gasoline stocks. Biodiesel is used directly as an alternative diesel fuel. The potential development of a cellulosic-based ethanol industry is presently impeded by the state of cellulosic conversion technology, which still is expensive relative to corn-based production. However, the enormous potential supply of low-cost cellulosic plant material available in the United States makes it an attractive prospective feedstock.

U.S. ethanol production has been expanding rapidly, rising from about 175 million gallons in 1980 to 4.8 billion gallons per year in 2006. Ethanol now dominates U.S. biofuel production. Biodiesel production is at a much smaller level, but has also shown growth, rising from 0.5 million gallons in 1999 to an estimated 75 million gallons in 2005. U.S. ethanol production presently is underway or planned in 22 states located primarily around the central and western Corn Belt, where corn supplies are most plentiful. USDA estimates that 20% of the 2006 corn crop (or 2.15 billion bushels) will be used by the ethanol sector to produce nearly 6 billion gallons of ethanol during the 2006/07 crop year. Ethanol production is projected to continue growing rapidly through at least 2010 on the strength of both market forces as well as the extension of existing and the addition of new government incentives. Those incentives include a per gallon tax credit of $0.51, a mandate to use renewable vehicle fuels of 7.5 billion gallons by 2012, and a tariff on imported ethanol of $0.54 per gallon.

By mid-December 2006, the pace of ethanol plant expansion was well on its way to exceed the RFS goal (7.5 bil. gal. by 2012) with 5.3 billion gallons of annual ethanol production capacity currently in operation and another 4.4 billion gallons of capacity under construction and potentially on-line by early 2008. (53) Based on a conversion rate of 2.75 …