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Ethanol's ties to oil price could spell trouble for farmers
Minneapolis-St. Paul Star Tribune


March 26, 2007

After 70 years of efforts to stabilize farm incomes from the perils of swings in crop prices, government might have found a new way to inject risk into the business of farming - ethanol.

The consensus view is that corn growers are better off thanks to ethanol. It's a key reason, along with reducing oil imports, that billions in taxpayer subsidies are being devoted to the alternative fuel.




But a number of economists and financial market observers have started to second-guess the assumption that ethanol is nothing but good news for corn growers.

Their argument, in short, is that farmers, who have always been beset by droughts, floods, insect invasions and other caprices of nature, now must also contend with the regular seesawing of oil prices.

"Tying a large part of agriculture to oil is to introduce vagaries and risks to an already risky business," said C. Ford Runge, director of the University of Minnesota's Center for International Food and Agricultural Policy.

Ethanol production was supposed to ease risks for farmers by giving them the opportunity to invest in plants that produce the alternative fuel. So far it has. Corn prices have soared and ethanol profits, boosted by federal and state subsidies, delivered what an analyst at A.G. Edwards of St. Louis called " a stellar year" in 2006.

More stellar years could lie ahead if oil prices stay high. But if oil comes down, demand for ethanol could fall as well.

"If you're a believer that oil prices are coming down to the $40 range, there could be headaches all around," said Ron Oster, senior associate analyst at A.G. Edwards. "By investing in ethanol, (farmers are) betting on higher oil prices."

The U.S. Department of Energy forecasts a downdraft in crude oil prices in the years ahead, with the price of a barrel of imported crude falling from an average of $59.49 this year to less than $50 by 2011 and less than $45 in 2014.

And the direction of corn prices could prove crucial, because farmers can make money from growing corn but lose money on their investments in the ethanol plants that must buy corn to make fuel.

Corn prices recently topped $4 a bushel, more than double the price of a few years ago.

"If corn prices get up to $5 a bushel, it's going to take quite a high price for oil for ethanol plants to make much money," said University of Minnesota economist Vernon Eidman. "Some people think they'll make money raising corn and from producing ethanol. That seems to me to be somewhat unrealistic."

Industry watchers have started to worry about a third alternative: Farmers harvest their corn crop profits but see their black ink turn red because of tumbling oil prices and an ethanol glut. If oil prices fall far enough, corn-based ethanol will cost more than gasoline, making producers reliant on government subsidies for profit. The 51-cent-a-gallon federal tax break on ethanol is due to expire after 2010.

"With ethanol, we've tied the price of corn to the price of oil," said Ben Senauer, co-director of the University of Minnesota's Food Industry Center. "We should be scared by that."

Gene Hugoson, Minnesota commissioner of agriculture, draws a distinction between ethanol plants about to come online and those already bought and paid for. In Minnesota, all but four of 16 operating ethanol plants are owed by farmers. Five more are under construction in the state.

The newcomers, who have mortgages to pay on their plants, might have a harder time than established operators, whose plants have been paid off in less than two years by ethanol profits, he said.

"If I were to give a personal prediction for the next year or two, I would suggest that the economic opportunity for an ethanol producer doesn't look that great," he said. "At the same time, they do look great for corn farmers."


Reach Mike Meyers 612-673-1746 meyers(at)
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