More Biofuels Woes

That strong wind you might have felt earlier this week was just more air rushing out of the biofuel bubble. Monday’s statistics from the U.S. Department of Agriculture–that farmers expect to plant 8 percent fewer acres of corn in 2008, compared with 2007–is very bad news for the already struggling ethanol industry. It takes a lot of corn to make ethanol, and the feedstock is a major cost of creating the biofuel. U.S. farmers’ plan to plant less corn this year means that record-high corn prices, which are already above $5 a bushel, will likely stay high. It doesn’t take an economist to figure out what the grim numbers portend for ethanol manufacturers. Higher feedstock costs, at the same time that yet more ethanol production capacity is coming online, could mean another very tough year for the ethanol market.

Beyond being a pain for ethanol producers, the high corn prices will further exasperate the tensions between using the crop for fuel rather than for food. In a New York Times article, one expert issues a frightening warning:

“We’re hoping for good yields,” said David Orden, a senior research fellow at the International Food Policy Research Institute in Washington. “If we get bad yields and tight commodity markets are pushed even tighter, we’ll get food prices skyrocketing, inflationary pressures and food riots in developing countries, and countries cutting off their exports.”

No one knows, of course, whether it will be a good year or not for growing corn in the United States. If it is a bad year, look for even more criticism of ethanol biofuel and, in particular, the Renewable Fuel Standards that mandate that petroleum suppliers use nine billion gallons of ethanol this year. But even if it’s a good year for growing corn, expect the poor profit margins for ethanol producers to continue and more grumbling about the economics of biofuels.