Brace for More Wild Swings in Biofuel Economics

Renewable fuels are one part of a puzzle that includes fossil fuels, new technologies and energy conservation.

Editor's Note: This is the third of a four-part series on renewable fuel issues written by Economics Editor John Otte from his trip to the USDA Outlook Conference recently.

The CHS system has been marketing ethanol-blended fuel since back in the gasohol days. That includes a long period when renewable fuels were not hot news.

"Given our more than three decades of experience, our knowledge of the ups and downs of renewable fuels and our long commitment to adding value for farmers, ranchers and rural America, you might think we’d be overflowing with enthusiasm for what has transpired over the past 18 months," says John Johnson, President and Chief Executive Officer CHS Inc.

"We are not," he states.

"We are involved. We're committed. We see tremendous opportunity for many, particularly our nation’s farmers. We're moving forward," he explains. "But we are also realistic."

Proceed prudently

As our nation strives to address both our energy needs and global environmental concerns, many questions remain.

President Bush proposed some ambitious goals for our nation’s energy supply, requiring 35 billion gallons of renewable and alternative fuels by the year 2017.

With U.S. production projected at a bit more than 9 billion gallons by 2008, Johnson was surprised by both the extent of the mandate and the timetable.

"Government clearly has a role in encouraging our nation’s energy producers and energy users to adopt alternative fuels," he says. "We support usage goals. We're active on the 25 by 25 Coalition. But we also recognize that mandates alone do not assure us a clear path to energy independence.

"Ultimately, whether you're an ethanol producer, a grain supply company or a farmer, to succeed in this industry and to sustain this kind of change, the economics must work," he explains. "Just as economics must work for any business."

Volatility breeds emotionalism

The past six months brought wild economic swings.

"When corn prices were $2 in mid 2006 and crude oil reached $70 a barrel, the economics were extremely attractive," says Johnson. "All types of investors raced to grab a share. Almost daily someone announced plans for new and expanded ethanol production. That includes many farmers and rural residents. Between 2004 and 2007, nontraditional investors pumped $1.9 billion into this industry.

"As corn hit $4 and crude oil prices sagged to the low $50s, the economic equation changed quickly," he adds. "Suddenly the picture became far less attractive to those seeking quick returns and who were unprepared or unwilling to be part of what essentially is a commodity business subject to market-driven highs and lows."

He urges caution on overly ambitious targets that result in too-much, too-soon and upset this industry’s economic equation through excess capacity or create other issues at a rate faster than we can address them.

So what is the answer?

Johnson believes it’s thinking broadly and realistically.

"We visualize our nation’s energy future not as a single pathway, but as a four-lane superhighway. Each lane represents one component of the solution, but all headed in the same direction. Each component has an important role to play.

He categorizes them as:
* Fossil fuels.
* Renewable fuels.
* Emerging energy technologies.
* Conservation.

"We need to be prudent, to continually revisit the big picture and to make certain we recognize and address all of the challenges along the way," says Johnson.

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