Will a drought affect the price of ethanol?

Ethanol production is already a multi-billion dollar industry with an economic ecosystem that includes farming, manufacturing, transportation and other sectors. Since so much money and so many jobs depend on this still-expanding industry, many people have studied the conditions that could benefit or harm the ethanol business.

One of the biggest concerns is what would happen if anything disrupted the supply of corn, a major feedstock for ethanol. Drought -- an unusually prolonged, extreme lack of rain -- poses one obvious threat.

In fact, a seminal study on the matter suggests a strong correlation between drought, low corn yields and higher ethanol prices. In that March 2008 study, Iowa State University researchers found that: 

[source: McPhail and Babcock]

Even as the government tries to encourage ethanol, farmers and corporations push back by lobbying Congress for special considerations. Here's a simplified look at some of that give and take: Alternative energy producers argue that they need price subsidies -- in other words, tax breaks -- on their output to compete in the marketplace with coal, oil and other entrenched fuels (all of which get their own taxpayer-funded subsidies). The government listened. The Energy Act of 2005 grants tax credits for an assortment of fuels, including a 51-cent per gallon tax credit for companies that make ethanol.

In addition, the Energy Independence and Security Act of 2007 (EISA) sought to stoke the farmers' demand for ethanol. Under EISA, the government requires fuel producers to introduce nine billion gallons of biofuel into the nation's fuel supply in 2008. What is biofuel? Biofuel is the catchall term for fuels that can be grown or renewed from biological sources, including ethanol, biodiesel and fuels refined from solid wastes.

­The EISA mandate ramps up expectations on fuel producers annually, culminating in a 36 billion gallon biofuels requirement in 2022­. The idea is to eventually make ethanol a significant portion of the U.S. transportation fuel supply. Policy makers say this will reduce the United States' dependency on foreign sources of oil.

Iowa State University researcher Bruce Babcock further told the U.S. Senate Committee on Agriculture, Nutrition and Forestry in August 2008:

Babcock's testimony, however, downplayed a contingency mentioned in the research paper he co-wrote earlier in the year. A severe drought, the paper said, would increase corn prices by 50 percent if fuel producers still had to meet the EISA biofuel mandate. That's because food manufacturers would be competing even more feverishly with fuel producers to buy corn.

Throughout most of recorded history, humankind has regarded droughts and other weather catastrophes as unavoidable "acts of God." But some scientists say we could be inviting severe and lengthy droughts upon ourselves. To find out why, go to the next page.

Corn growers, understandably, dread the prospect of a drought.

So, when government forecasters projected strong possibilities of a drought in 2008 because of prevailing "La Niña" weather patterns, the U.S. agricultural world went on high alert. That's because La Niña, a companion weather phenomenon to the better-known El Niño, is responsible for bringing periodic drought conditions to the southwestern United States.

­La Niña is believed to be responsible for the 1930s Dust Bowl -- stirringly chronicled by John Steinbeck in The Grapes of Wrath -- as well as severe droughts during the 1950s [source: Swaminathan].

Although we didn't experience such extreme weather in 2008, corn growers in the southwestern U.S. did have a scare early in the growing season, when June flooding submerged a good portion of low-lying fields there. However, near-perfect weather for the remainder of the summer contributed to what the USDA and farmers' groups say could be a near-record crop.

That sounds good, but here's the bad news: Scientists caution that Dust Bowl-like droughts could hit regularly this century as a result of human-induced climate change. According to models developed by scientists at Columbia University's Lamont-Doherty Earth Observatory, permanent drought could settle over Mexico and a large swath of the southwestern United States sometime around 2020. Two of the dozen or so major corn producing states, Kansas and Nebraska, fall under the atmospheric swath the scientists said is in danger of permanent drought [source: Seager, et al. ]. The Corn Belt, an area that includes major producers Iowa, Illinois, Nebraska, Minnesota, Indiana, Wisconsin, South Dakota, Michigan, Missouri, Kansas, Ohio and Kentucky, is no stranger to periodic devastating droughts. Arid weather in 1988 and 2006 left farmers in this region reeling and making comparisons to the 1930s Dust Bowl. But overall, farmers have come to rely on adequate rainfall to produce an overabundance of corn.

Prior to the increased demand created by ethanol a few years ago, U.S. corn growers typically raised enough corn to meet the year's demand, plus a substantial reserve that could be used in an emergency. One source of mild grumbling within the corn-growing community is that the reserve supply has been shrinking each year as the result of added demand from ethanol producers. Over the past couple of decades, nearly 16 percent of the total corn crop was held in reserve. In 2008, if Agriculture Department projections hold true, the reserve will be closer to 6 percent [source: Kub].

We know that corn plays a vital role in our nation's economy. When there's a problem with the corn crop, the effects of that problem are felt far and wide. For more on the many markets that rely on corn, go to the next page.

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­Ethanol production will grow in coming years for many reasons. Why? Because the law demands it.

The Energy Independence and Security Act of 2007 (EISA) sets mandates for making and using ethanol. The act also includes targets for solar, wind and coal energy production. Its goal is to reduce the amount of energy resources that the United States must import to meet its needs.

However, the attention to ethanol has also raised the ire of environmentalists and some leaders of international organizations who say ethanol production demand for corn is contributing to global hunger. New York Times columnist Paul Krugman has literally demonized ethanol, taking aim in a column that blamed ethanol production for food riots taking place around the world.

"Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels," Krugman wrote. He added, "Land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuel are a major factor in the food crisis. You might put it this way: People are starving in Africa so that American politicians can court votes in farm states" [source: Krugman].

More leading economists have come out against increased ethanol production. Economist Jeffrey D. Sachs railed against "the misguided policy in the U.S. and Europe of subsidizing the diversion of food crops to produce biofuels like corn-based ethanol" [source: Sachs]. Jean Ziegler, the U.N. Special Rapporteur for the Right to Food, went so far as to label biofuel production "a crime against humanity," for its role in raising global food prices [source: Cendrowicz].

Supporters of ethanol say such talk ignores the complex variables that determine food prices, of which cost of the actual grain (corn is a grain) is but a small portion. The National Corn Growers Association (NCGA) contends that there is plenty of food to feed the world. The problem is getting the food to where it's needed despite inadequate infrastructure or political unrest in nations where people are hungriest [source: National Corn Growers Association].

Corn happens to be the crop of choice in the United States when it comes to making ethanol, but it's not the only source that fuel producers can use. In fact, many agricultural products regarded as waste can be used for ethanol stock. Find out what they are on the next page.

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We're still a long way from making cars that can use household garbage for fuel. However, there may be waste products that allow for ethanol production without compromising corn use in food someday.

Scientists at the leading edge of ethanol research are investigating ways to make the fuel from biomass, organic by-products that might normally be considered useless.

This so-called cellulosic ethanol can be made from wheat and rice straw, switchgrass, paper pulp, and agricultural waste products such as corn cobs, citrus, algae and corn stover. (Stover is the name for leaves and stalks left over after corn is harvested.)

Environmentalists knock ethanol because they say it puts a misplaced emphasis on growing corn for fuel rather than food. They also say it does little to curb harmful atmospheric emissions, since fossil fuels must be burned to process ethanol.

But cellulosic ethanol, if fully developed, could alleviate those concerns. Proponents of cellulosic ethanol say it holds twice the energy potential of corn-based or sugar-based ethanol. That means less land would have to be devoted to harvesting crops for fuel. Furthermore, making and using cellulosic ethanol creates far fewer greenhouse gas emissions than corn-based ethanol. Whereas standard ethanol reduces harmful emissions by 20 to 30 percent compared to gasoline, cellulose-based ethanol cuts emissions by 80 percent [source: Energy Information Administration]. By 2008, a handful of companies, including Western Biomass Energy L.L.C. and Iogen Corp., had set up facilities to produce cellulosic ethanol, with several more announcing plans to follow suit [source: Fehrenbacher].

For more insight on ethanol, have a look at the links on the next page.