Gen 293

THE ECONOMICS OF PRODUCING ENERGY CROPS

Hosein Shapouri James Duffield

U.S. Department of Agriculture, Office of Energy Washington, D.C. 20250

Abstract

The U.S. agricultural sector has an immense supply of natural resources which can be used to produce energy. Production of energy from these resources could stimulate economic growth, improve environmental quality, and enhance energy security. However, producing feedstocks and converting biomass to energy require large amounts of capital, equipment, labor, and processing facilities. This paper looks at the costs and benefits of producing energy crops for fuel conversion. A review of studies and crop data show that the cost of growing and converting various feedstocks with current technology is greater than the cost of producing conventional fuels. Conventional motor fuels have a price advantage over biofuels, but market prices don’t always reflect the cost of negative externalities imposed on society. Government decisions to invest in alternative energy sources should be based on research that includes the environmental costs and benefits of energy production. The future of biofuels will depend on the continuation of government research and incentive programs. As new technologies advance, the costs of processing energy crops and residues will fall, making biofuels more competitive in energy markets.

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Introduction

U.S. agriculture has traditionally been a multiple product sector, but in the 1940s it began to lose many of its nonfood markets to the emerging petrochemical industry. For example, the original nylon was made from corn cobs and it is now all petroleum based. Latex paints have replaced paints that were made with vegetable oils and synthetic fibers have gained major inroads in textile markets. This trend has been turning around in recent years due to government policies and technological developments which are helping agribusiness and farmers derive new products from agricultural raw materials. In the near future, U.S. agriculture could greatly expand its production capabilities and transform itself into a more diverse producer of food, fuels, medicines and industrial products.

Surpluses of basic food commodities in the past few decades has also encouraged interest in developing new uses for agricultural materials. In addition, increased competition from abroad is making it tougher for U.S. grains. soybeans and other crops to compete in global markets. Farmers are searching for better ways to utilize agricultural commodities. Simultaneously, policymakers and consumers are demanding products that will reduce our dependence on petroleum imports and find substitutes for products that are harmful to the environment.

Processing agricultural products into energy may be on the verge of becoming a promising new industry. Advances in conversion technology discovered in the past 10 years has markedly increased the economic feasibility of replacing gasoline and diesel fuel with biofuels made from corn and soybeans. Research is also underway to develop new technologies that will allow the use of cellulosic material such as wood. grasses, and wastes to make alcohol fuels. The purpose of this paper is to; 1) look at agriculture’s ability to produce energy feedstocks; 2) present energy production cost estimates for a number of selected crops and residues: and 3) discuss the benefits of investing in alternative energy sources.

Background

The interest in commercial alcohol fuel dates back to the early 1900s with the production of ethanol for transportation fuel. The modern ethanol industry, however, began with the oil embargo in 1973. Concern over the nation’s dependency on foreign sources of energy and spiraling inflation driven by higher oil prices. initiated a search for more reliable domestic sources of energy. Ethanol production as an alternative supplement to gasoline gained public attention as a solution to the “energy crisis”. Although interest in alternative fuels waned in the 1980s with lower gas prices. the domestic ethanol industry continued to grow at a moderate rate. Currently, about one billion gallons of ethanol is produced annually -- less than 1 percent of U.S. motor fuel consumption (U.S. Department of Energy, 1992).

Today’s ethanol industry emerged from a combination of new conversion technologies and national policies related to energy, environment and agriculture. Ethanol and other biofuels have been supported through a mix of Federal and State incentives designed to narrow the competitive disadvantage of alternative fuel relative to conventional fuels. Legislation has established tax incentives and loan programs to develop and use domestically-produced biofuels in an effort to improve environmental quality, reduce dependence on foreign oil, and strengthen national security.

Recent policies related to energy use and alternative fuels include the Clean Air Act Amendment of 1990 (CAA) and the Energy Policy Act of 1992. The oxygen requirements mandated

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by the CAA spurred a market for oxygenates and created new market opportunities for ethanol. The Oxygenated Fuels Program targets 39 cities that do not meet National Ambient Air Quality Standards for Carbon monoxide (CO). CAA mandates the addition of oxygen to gasoline to reduce CO emissions. Control periods vary by city because most CO violations occur during the winter season. The average control period is about 4 months. The most widely used oxygenate in the market today is methanol-derived ether. MTBE which is made mostly from natural gas. However, the majority of major gasoline refiners are also using ethanol to meet gasoline oxygenate content requirements.

The Clean Air Act also requires the use of oxygenated fuels as part of the reformulated gasoline program for controlling ground-level ozone formation. Beginning in January 1995, reformulated gasolines are required to be sold in 9 ozone nonattainment areas. There are also provisions in the CAA that allow as many as 90 other cities with less severe ozone pollution to “opt- in” to the Reformulated Gasoline Program. Under a total opt-in scenario, as much as 70 percent of the Nation’s gasoline could be reformulated. This program could provide a major stimulus to ethanol production as a component in reformulated gasoline. However, certification procedures for reformulated gasoline has not been completed and the ethanol’s role in the program has not been fully determined.

The Energy Policy Act of 1992 was designed to improve energy efficiency, strengthen national energy security and reduce environmental degradation. It could have a profound effect on biofuel development through a series of regulations and incentive programs involving vehicle fleet standards, alternative fuels. energy conservation and tax credits. It ensures that the Federal government use alternative fueled vehicles (e.g., engines fueled with methanol, electricity, ethanol and other biofuels). The Federal fleet program begins in 1993 and by the year 2000. 75 percent of government vehicles will be capable of running on alternative fuels. A program was also established for the private sector, to promote the development and use of domestic replacement fuels in light duty motor vehicles. The goals of the program are to use at least 10 percent replacement fuels by the year 2000; and at least 30 percent by 2010. Section 2024 of the Act establishes a biofuels user facility to expedite industry adoption of biofuels technologies including production of alcohol fuels from biomass. It also establishes a program on the production and use of diesel fuels from vegetable oils or animal fats.

Agricultural policies and research are also playing a major role in biofuel development. The U.S. Department of Agriculture (USDA) is studying the effects of ethanol-blended gasoline on emissions and ethanol’s potential role in the reformulated gasoline program. A biofuels program has been initiated to increase the use of biofuels made from domestic renewable farm and forestry resources. The program focuses on the energy efficiency of converting feedstocks into biofuels, economic feasibility, rural development opportunities and job creation.

The U.S. agricultural sector may be on the threshold of becoming an important energy producer. There are many opportunities for using agricultural resources to improve our current energy situation and increase economic opportunities. The emergence of new technologies and government polices are creating new uses and new markets for agricultural products. The income generated from the sale of energy feedstocks and production of biofuels could make the United States less dependent on energy imports, contribute to rural development and stimulate the domestic economy.

Feedstock and Conversion Costs

Biomass consists of vegetation, residues, and waste materials containing large amounts of organic matter. Input materials used in making energy are called feedstocks. Feedstocks can be burned in direct combustion for process heat, steam and electricity. They can be gasified for heat or

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electricity. or processed into a biofuel such as ethanol and biodiesel. The primary sources of biomass for energy use are agricultural crops and residues, forestry products and residues, animal products and wastes. aquatic plants and municipal solid wastes. The energy stored in biomass may be converted to usable energy in several forms, including: 1) liquid fuels made from fermentation of starchy crops such as corn and wheat: 2) sugar crops such as sugarcane; 3) herbaceous crops such as switchgrass. sericae lespedeza and bermuda grass; 4) oil extracted from oilseeds and animal fat; and 5) short-rotation woody crops. In addition, agricultural residues can be used as a source of energy. Residues mainly consist of agricultural materials left in the fields after harvest such as corn stover, wheat straw. and tree prunings and thinnings. Wastes from agricultural processing are also used for energy production such as nut shells and sugarcane waste (bagasse). The largest biomass source used to produce energy is waste wood from lo gging operations and paper mills.

Presently the energy generated form biomass accounts for only about 2.8 quads or 3.5 percent of total U.S. energy production. About 2.7 quads are from wood feedstocks and ethanol (mostly from corn) provides about .l quads of energy. However, the United States has a vast supply of untapped renewable: resources that some day may be economically feasible to convert into various forms of energy. There are a variety of energy crops produced annually in the United States in addition to native forest and grasslands. Availability of energy crops vary by regions due to differences in the climate and soil types (figure 1). Also, agricultural and forest residues with energy use potential are located throughout the country (figure 2).

Grains

Feed grains (e.g.. corn. barley. and milo). and food grains (e.g., wheat and rice) can be used as feedstocks in ethanol production. The U.S. is the world’s largest producer of grains, producing about 353 million tons in 1992. Grains are produced in almost every state, however corn is concentrated in the upper-midwest states like Iowa, Illinois, and Indiana. Major wheat producing states include Kansas, North Dakota. and Oklahoma. Among the grains, corn is by far the largest source of biofuel feedstock produced in the United States -- more than 95 percent of ethanol fuel produced is made from corn. Corn has several advantages over other grains. It is by far the dominant grain produced in the U.S. and farmers often produce annual surpluses (table 1). Corn yields have increased from 38.2 bushels in 1950 to about 130 bushels per acre in 1992. The corn retining industry has adopted the most advanced technologies to process corn starch into high fructose corn syrup and ethanol (table 2). The coproducts of corn ethanol such as distillers dried grains (DDGS) corn gluten feed, corn gluten meal, and corn oil are high value by-products which reduces the net cost of alcohol production (table 2).

In 1992. about 400 million bushels of corn were used to produce alcohol fuel -- accounting for less than 5 percent of total corn production for the 1987/88 to 1992/93 growing seasons. The two main processes by which alcohol fuel is processed from corn are wet and dry milling. Each process produces 2.5 to 2.6 gallons of ethanol from a bushel of corn. Wet millings accounts for 60 percent of the total fuel alcohol production in the United States. Dry-milling plants cost less to build but the value of coproducts is less (Hohmann and Redleman, 1993). Dry-milling produces about 17.5 pounds of distillers dried grains (DDGS) for every bushel of corn converted to ethanol. Wet milling produces about 2.65 pounds of corn gluten meal. 13.5 pounds of corn gluten feed. and 1.56 pounds of corn oil. DDGS. corn gluten feed. meal. and oil are substitutes for soybean meal and oil. These coproducts represent an important source of revenue for the ethanol industry, averaging over 50 percent of the cost of corn.

Costs of corn-ethanol production can be divided into 4 categories: feedstock cost. net feedstock cost. capital. and operating costs. Feedstock cost is the price ethanol producers must pay

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Figure 1.

Locations for Promising Biomass Energy Crops N-

Hybrid Poplars

i

Hybrid Poplars Eucalyptus

Screening Hybrid Poplars Black Locust

Ongoing Black Locust Hybrid Poplars Silver Maple Silver Maple

Tropical Grasses

Source: U.S. Department of Energy, 1993

Figure 2.

Locations for Agricultural and Forest Residues k NW1-l

lm!zzl ? Wood resources and residues

q Agricultural and wood residues

0 Low Inventory

Agricultural residues

lm!zzl ? Wood resources and residues

q Agricultural and wood residues

0 Low Inventory

Source: U.S. Department of Energy, 1993

Table 1 - -U.S. grain, soybean, and sugar crop prices, production, yield, and biofuels conversion rate

1989- 92 average Ethanol Soydiesel Feedstock Grain ___--_---- _______ ---___----~~~---- average average cost per share of

Unit Area Yield/acre Production Price conversion conversion gallon production

------

mil acres millions

per unit per unit __------______________________

dollars gallons gallons $/gal

Wheat Bushels 63.14 36.48 2303 3.15

Rice Cwt 2.85 56.69 162 6.88

Corn Bushels 68.28 118.70 8105 2.28

Sorghum Bushels 10.60 62.65 664 2.09

Barley Bushels 26.66 55.58 1482 2.17

Oats Bushels 5.50 57.68 318 1.29

Soybeans Bushels 59.28 34.55 2009 5.63

Sugarcane Tons 0.87 34.60 29 29.60

Sugarbeets Tons 1.40 20.03 27 41.13

2.74

3.98

2.60

2.70

2.05

1.05

17.30

24.90

1.15

1.73

0.88

0.77

1.06

1.23

1.6 1 .46

1.71

1.65

percent

19

2

62

5

10

1

Table 2 - - Biofuel production costs per gallon by lype of feedstock ----------_-~~-------~~~~-------~~~-------~-------~~~~~--~------~~~~~~~~~~~~~~~~~~~~~

Ethanol

DDGs .

Soydiesel Capital

Price Coproduct conversion conversion Net & Total ----___________- per value rates rates feedstock operating costs

Production Price unit per unit per unit costs costs --------_-_--~--------~~---~~~---~~-------~~~~~---~~~~~~-~~~----~~~~~~~~~~~~~~~~~~~~~

Ib/bu $/ton $/bu lb ton $/bu gallons gallons $/gal $/gal $/gal

DDGs 125 Corn 18.5 2.28 1.16 2.60 0.43 0.81 1.24 Grain sorghum 17.3 2.09 1.08 2.70 0.37 0.81 1.18 Wheat 20.3 3.15 1.27 2.74 0.69 0.81 1.50 Soybean oil I/ 0.21 1.6 1.34 0.25 1.59 Sugarcane 29.6 17.30 1.71 NA NA

Sweet sorghum 1.15 NA NA ___-__--_______--________________ --___---__------_--_------~~~~~~---~~~~~~~~~~~~~----

DDGs = Distillers dried grains.

NA indicates not available.

I/ Includes expenses for soybean oil, other input materials, capiatal and operating costs, and credit for glycerol sales

(($1.46+$0.12+ $0.25 - ( .6 * $0.40)) = $1.59/gallon.

Sources: USDA, Crop Production, Agricultural Outlook, Agricultural prices, Agricultural Statistics, and Small- Scale Fuel Alcohol Production

for feedstock. In the case of corn. the feedstock cost is ($0.88) per gallon of ethanol assuming an ethanol yield of 2.6 gallons per bushel (table 1). Net cost of corn is the price ethanol producers have to pay minus the value of coproducts. The net cost of corn at a wet mill plant has varied from $0.10 per gallon in 1987 to almost $0.70 per gallon in 1981 and 1984. Average net corn costs over this time period is $0.34 per gallon of ethanol (Hohmann and Redleman). Capital costs include cost of plant. depreciation. and rate of return to investment. For a stateof-the-an wet mill the capital cost is $0.43 per gallon of ethanol. The capital cost of building a dry mill is much cheaper because it doesn’t need the recovery equipment for the coproducts, i.e., removing the germ, oil, and fiber from the corn kernel. Operating costs consist mainly of energy use. enzymes. labor, management, taxes, and insurance. Total operating cost for a wet mill plant is $0.37 per gallon.

When adding up all the costs, the estimated full cost of production for a new wet-milling plant using corn feedstock is $1.24 per gallon (table 2). This is a relatively high cost, considering the wholesale price for a gallon of premium gasoline is about $0.70 per gallon. However, Federal and State tax incentives are set up to encourage the demand for renewable alcohol blended fuels such as ethanol. A $0.054 per gallon exemption from the Federal excise tax on gasoline is allowed on the sale of an alcohol fuel mixture that consists of lo-percent alcohol fuel and 90 percent motor fuels. The minimum 10 percent blend requirement translates into an effective $0.54 tax exemption per gallon of ethanol. In addition, 16 States currently have a tax exemption for ethanol, ranging from S.01 to SO.40 cents per gallon.

Only a small amount of ethanol in the U.S. is produced from grains besides corn. Corn has dominated the ethanol fuel market because of its abundance and it costs less per gallon of ethanol compared to other grains. For example. wheat has a higher conversion rate but the price of wheat is much higher than corn. The feedstock cost of wheat is about $1.15 per gallon of ethanol compared to $0.88 for corn (table 1). Also, corn has a higher fermentable content than most lower value grains such as barley and oats. The feedstock cost per gallon using barley is about $1.06 and about $1.23 for oats. Although, the feedstock cost of sorghum per gallon of ethanol is only $0.77, it’s production is limited by short supplies. Sorghum only accounts for 5 percent of U.S. grain supplies (table 1). The ability for other grain feedstocks to compete with corn will probably depend greatly on the value of coproducts. For example. wheat feedstock may have economic potential since coproducts from wheat ethanol include a large amount of quality protein that can be sold in the form of high value food products.

Sugar Crops

Sugar crops with potential use for energy feedstock include sugarcane, sugar beets, and sweet sorghum. The 2 sugar crops grown for commercial use in the U.S. are sugarcane and sugar beets. Most U.S. sugar cane is grown in Florida but it is also grown in Hawaii, Louisiana, and Texas. Sugar beets are grown throughout the country. The average feedstock cost per gallon of ethanol is $1.71 when using sugarcane and $1.65 for sugar beets. Sweet sorghum is rarely grown for commercial use in the U.S.. but experimental crops have yielded relatively high levels of ethanol production per acre and sweet sorghum residues have a high animal feed value. Preparation of sugarcane and sweet sorghum for fermentation requires relatively low equipment. labor. and energy costs. since the only major steps are milling and extracting the sugar. Unlike. grain ethanol, enzymes are not needed to turn the starch into sugar glucose. i.e.. saccharitication.

To reduce hauling costs, more processin g would likely take place in the field in the case of sugar crops (Marsh and Cundiff, 1991). For example. Marsh and Cundiff analyzed a hypothetical field processing system in the Southeastern Piedmont on marginal croplands. Sorghum would be chopped and passed through a press to extract the juice. with the residue immediately placed in a silo.

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The juice would be transported by tanker truck to a centralized ethanol production plant and fermented directly or concentrated into syrup for storage. The total cost for this system (excluding fermentation cost), assuming silage and rind-leaf hay are sold for animal feed is $2.59 per gallon of ethanol. If silage and rind-leaf hay is sold for cellulose conversion to ethanol, the estimated total cost is S2.98 per gallon of ethanol. This compares to $2.50 per gallon of ethanol when using sugar cane as a feedstock and assuming current processing practices in Louisiana sugar mills with a zero value for sugar milling coproducts (Marsh and Cundiff).

Oilseeds and Animal Fats

The U.S. is one of the world’s largest producers of oilseeds. specifically soybeans. About 2 billion bushels of soybeans are produced in the U.S. each year. Oilseeds are produced mainly for the production of vegetable oils used for cooking, and high protein meal for livestock feed. Vegetable oil and animal fat can also be used to make biodegradable engine oil, lubricants and a fuel substitute for diesel called biodiesel. Biodiesel can be produced from a wide variety of feedstocks including: soybean oil; the oil from minor oilseed crops such as rapeseed, sunflower, canola. and crambe; and waste vegetable oil, such as deep fat-frying oil (yellow grease). Animal fat. lard. tallow, and butter can also be converted to biodiesel. Biodiesels are made by removing glycerine from oil or fats thorough a process called transesterifrcation. Fuel grade esters from these fats and oils are made by adding alcohols like methanol and ethanol to the oil and reacting them with the aid of a catalyst.

Fueling engines directly with biodiesel and blending it with various mixtures of conventional diesel fuels is currently in the experimental stage. However, recent changes in Federal clean air policy has spurred interest in commercializing alternative fuels for use in areas that fail to meet national air quality standards. New regulations will restrict emissions from diesel vehicles such as urban buses, small utility engines, and large marine engines. These regulations may encourage engine manufacturers and equipment operations to convert to alternative fuels, such as biodiesel, that are cleaner burning than conventional diesel fuel.

Performance data on biofuels are limited but preliminary test results suggest that biodiesel have some environmentally related advantages over conventional diesel fuel. Biodiesel appears to reduce particulate emissions, volatile organic compounds (VOC), and sulfur without significantly reducing horsepower, gas mileage or engine durability. In addition carbon monoxide (CO) emissions from biodiesel are one-third the level of diesel fuel (Gavett and Van Dyne, 1992). Information on nitrogen oxide emissions is inconclusive at this time.

Currently biodiesels are not economically competitive with diesel fuels. For example, the feedstock cost of using soyoil to produce soydiesel varied between $0.15 per pound and $0.30 per pound from 1976 to 1992. Capital and operating costs range between $0.25 and $0.30 per gallon of soydiesel. And the coproduct value for glycerol has varied between $0.15 and $0.48 per gallon of soydiesel. Thus. the total cost of producing a gallon of soydiesel varies from $1 .OO per gallon to over S2.00 per gallon. Future commercialization of biodiesels will depend on market placement and cost reduction. Potential users of soydiesel will likely come from companies and local governments that operate fleets of vehicles and are looking for economical alternative fuels to meet the new clean air standards.

Herbaceous Energy Crops

Herhaceous energy crops have more variety and greater versatility then many other energy crops. Some are annual crops with thick stems like sorghum and others are perennial with thin-stems like SNitchgrass. Depending on conditions. they can be either grown in mono-culture or inter-seeded

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with more than one species in a stand. They can also be double-cropped with other energy crops or with conventional agricultural crops. Herbaceous energy crops include many of the grasses farmers use to feed livestock such as bahiagrass, bermudagrass. eastern gamagrass. reed canarygrass, napiergrass. rye, sudangrass, switchgrass, tall fescue, timothy, and weeping lovegrass. Also included are legumes such as alfalfa. birdfoot trefoil, crownvetch, flatpea, clover. and sericae lespedeza.

A number of grasses and legumes are being evaluated for their potential as energy crops at a number of sites around the country. There are several advantages of using these crops for energy production. Management and production practices and the equipment needed to grow these crops are already part of the farmers’ knowledge and capital base. Also. these crops can grow on marginal soils and still achieve moderate yields and protein levels. Fertilizer, energy, and water requirements are low, and year-round ground cover slows erosion. However, bulkiness. post harvest losses, and other intensive cultivation practices hamper the economic feasibility of producing these crops for energy.

Growing herbaceous crops for ethanol production is not economically justifiable at this time. With current technology, experimental data indicate that 1 ton of feedstock can be converted to about 60 gallons of ethanol. Feedstock costs for grasses and legumes range between $0.66 and $1.50 per gallon (Bransby and Sladden. 1991; and English and Bhat. 1991). The capital and operating cost have been estimated at $1.50 per gallon (Ackerson et al., 1991). Thus, the total cost for ethanol production using grasses and legumes would range between $2.16 to $3.00 per gallon.

Short Romtion Woody Crops

Species of trees suitable for energy crops must produce large quantities of wood in a short period of time with possibility of 1 to 2 coppicing after the first cut. Scientists call such species “short rotation woody species” because they are grown and harvested within 5 to 10 years. USDA and DOE are field testing several short rotation woody species, including hybrid poplar, black locust. eucalyptus, silver maple. sweetgum. and sycamore. Research projects-are being conducted in many regions of the United States to develop trees that are adapted to specific locations. Experimental systems are yielding about 82 gallons of ethanol per ton of wood. The feedstock cost of wood ranges between $30 to $50 per ton. And estimates for capital and operating costs are about $1.50 per gallon.

There are a number of improvements that must be made before short rotation woody species become an economical source of energy: higher yield per acre, increase number of coppicings, increase resistance to insects and weeds, and better harvesting and handling techniques. In addition research is needed to address problems such as soil erosion, high production costs and long term capital investment in new machinery and equipment. Also there are higher risks associated with the production of woody crops because of the start-up-time -- it takes 5-10 years before the crop is established and can be harvested.

Crop Residues

Millions of tons of energy are stored in crop residues produced in the U.S. each year. They are byproducts of a variety of crops grown throughout the country and many can be collected with conventional harvesting equipment. Crop residues with a significant amount of energy are corn srover, wheat straw, stalks, sugarcane tops and leaves left in the field after harvesting. The major drawback of using residues for energy feedstock is their relatively low energy value per unit volume and the costs of handling bulky materials. For example. the energy content in corn stover is only about 12.5 percent of the energy found in a similar volume of wood (Keeney and DeLuca, 1992). To

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reduce hauling costs. crop residues should be converted to liquid at the farm and than transported to an ethanol facility.

Another major concern with removing crop residues is that it exposes soil to wind and water erosion. If energy crops and crop residues are to be renewable, minimum tillage and other conservation practices must be used to maintain sufficient soil cover. It is recommended that up to 1.000 pounds of crop residues per acre be left on the soil surface, in order to provide a sufftcient amount of erosion protection. This implies that a major portion of available residues should not be utilized for energy feedstocks.

Crop residues can produce energy through combustion or converted to ethanol. Crop residues ares composed mainly of cellulose. As with starch. cellulose must be broken down into sugar units before it can be used by yeast to make ethanol. The cost of collecting, transporting, storing residues varies by crop type, topography, labor availability and other inputs. Studies indicate that in some cases, residues can be collected and transported economically (Hall et al.. 1993). For example, a study conducted in Thailand found that it costs about $43 per ton to collect and haul sugarcane residue to a nearby factory (Jakeway. 1991). However. converting liquefied cellulose into fermentable sugars is very expensive and commercial equipment that can economically produce ethanol from residues is not yet available.

Benefits of Alternative Fuels

Government incentive programs and research funds are paving the way for alternative fuels. These programs are contributing to technological advances that are raising conversion rates and . economic efficiency levels of producing biofuels. Ideally, the efficiency of producing biofuels from corn and other agricultural feedstocks will reach a point where they can affectively compete in the energy market without subsidies. The issue is: will the benefits received from developing biofuels outweigh the costs?

Alternative fuels offer numerous benefits related to the environment, national security. and economic opportunity. One objective of the 1990 Clean Air Act Amendment and the Energy Policy Act is to encourage the us2 of alternative fuels to help reduce air pollution. When ethanol is blended with conventional gasoline auto emissions from CO are reduced. For example. when E-10 (10 percent ethanol and 90 percent gasoline) is used in place of conventional gasoline, emissions of CO are reduced by 15 to 25 percent. Switching to E-10 also reduces refinery emissions of potentially dangerous compounds such as benzene and butadiene. Biodiesels have the potential to reduce particulate emissions. VOC. CO, and sulfur. Biodiesel is also biodegradable and nontoxic.

The benefits derived from pollution abatement are hard to quantify because there are no market mechanisms to determine the price of clean air. In addition, since air is common property it has been treated as a free good. Until recently, individuals and businesses were not liable for polluting the air. Consequently. air pollution became a major problem in many parts of the country. Society pays the costs of air pollution in the form of health problems related to toxic air and environmental degradation. Economists refer to these costs as negative “externalities”. They argue that firms that generate negative externalities should have to pay for the entire marginal cost they

impose on society. When the price system fails to charge for resources, the government should impose taxes or use some other mechanism to internalize the costs of externalities. Society benefits from the Clean Air Act and other clean air regulations because they encourage people to use cleaner fuels and reduce the social costs of pollution by forcing firms to pay for their negative externalities.

Replacing oil imports with domestic energy sources could result in significant savings related to national defense. The more energy self sufficient the U.S. becomes the less military spending is needed to assure an uninterrupted supply of imported oil. In addition, substituting U.S. biofuel

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production for imported fuel improves the balance of trade account. Increases of biofuel production by 1 billion gallons leads to about $1 billion improvement in the balance of trade account. The 1 billion gallons biofuel production could replace 52 million barrels of imported oil valued at $19 per barrel

Developing alternative energy markets at home will stimulate the U.S. economy. particularly

in rural areas where energy feedstocks are grown. Using land for energy crop production, collecting agricultural residues and transporting biomass feedstocks to conversion facilities will increase farm income and stimulate rural industries and employment. For example, increasing annual ethanol production by 4 billion gallons is estimated to create 139.000 jobs nationwide; 34,000 direct and indirect jobs from ethanol processing, 14,000 temporary jobs from construction, and 9 1,000 jobs from added agricultural production.

Creating alternative markets for farm products can raise farm prices and diminish the need for Federal farm assistance programs such as the Acreage Reduction Program (ARP). The ARP was adopted in the early 1970s as a supply control measure using target prices and set-aside rates. To receive the target price. farmers were required to set-aside a certain percentage of their farmland. The goals of the program were to control agricultural surpluses and provide income support for farmers. Increases in ethanol production decrease farm program costs by raising grain prices. For every lOO-million-bushe! (250 million gallons of ethanol) increase in corn demand raises the price of corn by $0.04 to $0.06 per bushel. And higher corn prices translate into farm commodity program savings -- every I cent increase in the price of corn reduces deficiency payment and saves taxpayers $50 million in program costs. Furthermore, fewer farmers would participate in the ARP, reducing the number of acres idled by the set-aside requirements. About 19.7 million acres were included in the ARP in 1992193.

Developing biofuels could also have an effect on Federal payments to participants in the Conservation Reserve Program (CRP). The CRP was authorized by the 1985 farm act to remove highly erodible land from production. Producers are paid an annual rental payment plus half the cost of establishing a conserving land cover in exchange for retiring highly erodible or other environmentally sensitive land from crop production. Producers have voluntarily placed over 36 million acres in the program. Sinety three percent of CRP land is planted to grass or trees under 10 year contracts. CRP land covers 8 percent of U.S. crop land. Annual rental payments average $50 per acre, with and annual $1.8 billion dollar Federal government outlay (Osborn and Heimlich. 1993). Starting in 1993, the program was modified to let participants plant certain alternative perennial including walnut trees. shrubs. vines. and bushes. Nuts and foliage may be harvested only after the contract expires. Analysts have suggested that the program be modified further and allow producers to grow cover crops for energy production. With proper stewardship, renewable grasses and pastures could be produced for energy feedstocks without reducing environmental benefits. Revenue from harvesting crops on CRP land could be used to offset CRP rental rates and reduce the cost of the program. However. this option in still in the hypothetical stage and needs to be studied.

Summary and Conclusions

The U.S. agricultural sector has an immense supply of natural resources which can be used to produce energy. Production of energy from these resources could stimulate economic growth, improve env~ironmental quality. and enhance energy security. However, producing feedstocks and converting biomass to energy require large amounts of capital. equipment. labor. and processing facilities. Corn-ethanol conversion rates are increasing with advances in technology, however it still costs more to produce corn ethanol than conventional fuels. And biofuels made from oil seeds.

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herbaceous crops and other agricultural feedstocks are even further away from becoming economic alternatives. As a result. a very large share of agriculture’s biomass resources remain unutilized.

The environmental benefits of producing biofuels relative to fossil fuels have not been adequately addressed. Conventional motor fuels have a price advantage over biofuels, but market prices don‘t always reflect the true cost to society. Government policies for developing alternative energy sources should consider the environmental costs and benefits of biofuels compared to conventional fuels. The future of biofuels will depend on the continuation of government research and incentive programs. As new technologies advance. the costs of processing energy crops and residues will fall. making biofuels more competitive in energy markets. However, more research is needed to determine the economic feasibility of growing and marketing alternative energy feedstocks. The most productive and least cost feedstocks can be identified with farm budgeting tools and benefit- cost-analysis. And regional studies are needed to locate potential energy markets and coordinate energy production with energy use.

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References

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