President Bush visits the Virginia Biodiesel Refinery in 2005.

President Bush visits the Virginia Biodiesel Refinery in 2005.
Photo: whitehouse.gov

Biofuels won’t single-handedly solve the climate crisis, nor will they deliver energy independence. But a base of widely dispersed, farmer- and citizen-owned biofuel plants can displace significant amounts of fossil fuels — while also building local economies.

What follows is a strategy for tweaking existing federal energy and farm policy to create such an energy landscape. Before getting to that, though, given the scorn heaped on biofuels by many well-intentioned and not so well-intentioned commentators, I’ll make the case that biofuels have an important role to play in any realistic sustainable-energy vision.

First, a truly sustainable materials foundation demands that we use plants for more than food and feed. We can extract energy from the wind and sun, but where will the molecules needed to make physical materials come from? We have two choices: vegetables or minerals. Maximizing the reuse and recycling of existing materials can minimize our need for new materials. But raw materials will eventually be needed, and when they are, I suggest we rely on biology, not geology.

Second, the planet lacks the arable land area necessary to grow biomass in quantities sufficient to displace more than a minority of fossil fuels, let alone all minerals. There is more than enough existing plant matter to make biochemicals that displace all organic and inorganic chemicals. But there is only enough land available to grow plant matter sufficient to displace 25 to 35 percent of our ground transportation fuels. And under virtually any scenario, we can’t grow enough biomass to satisfy more than a tiny portion of electricity requirements.

Third, and following from proposition two, any initiative to aggressively increase the production of biochemicals and biofuels should be viewed as an agricultural strategy with energy-security implications. This is the opposite of the way policy makers currently approach the biomass issue. To them, expanding bioenergy is an energy-security strategy with agricultural implications.

Today, policy makers ignore the farmer because they assume a rising tide will lift all boats. Expand biofuels production, the logic goes, and rural areas and farmers will automatically benefit.

But farmers have learned from over 100 years of bitter experience that increased demand for their raw material does not automatically translate into higher personal incomes.

Before the recent jump in corn prices, the cash price of corn in mid-2006 was no higher than it was in 1974. Indeed, in 1974, a bushel of corn could buy about 5 gallons of gasoline. Today, even after the recent price rally, a bushel of corn can buy only about a gallon and a half of gasoline.

A recent study by the Institute for Local Self-Reliance concluded that the increase in ethanol production from about 1.5 billion gallons in 1990 to over 4 billion gallons today has had little or no statistically significant effect on corn prices at the national, state, or even county level. The recent run-up in corn prices reflects the enormous increase in plant construction, amplified by speculation in the futures markets. But traditionally, farmers have a collective way of undermining their own prosperity.

Most observers expect that high corn prices will result in about 8 million additional acres of corn cultivation in 2007, which would produce about 1.2 billion bushels, which could produce all by itself over 3 billion gallons of ethanol. Unless Congress dramatically increases the mandated level of ethanol production next year, we can expect corn prices to come back down by the end of next year, if not sooner.

On the other hand, if farmers own the bio-refineries, they do profit handsomely and possibly enduringly. Their annual return on their investment is often in the range of 30 to 75 cents per bushel. The data is skimpy and largely secondhand, but over the last 15 years, the average farmer investor in an ethanol plant probably earned annual returns of over 15 percent.

To date, public policy, at least at the federal level, has ignored the ownership structure of renewable-energy production facilities. That may be because until very recently America’s biofuels industry was largely locally owned. In 2003, some 50 percent of all existing ethanol refineries and perhaps 80 percent of all proposed plants were majority-owned by farmers. But in the last two years, that ownership equation has been reversed. Today, 80 percent or more of new ethanol production is coming from absentee-owned plants.

Congress should give locally owned bio-refineries a boost. If the national biofuels mandate were increased, as many expect it will be, there would be less justification for financial incentives that simply encourage consumption. Congress could then turn its attention to fashioning incentives to encourage the most beneficial kind of production.

You can get there from here

How might that occur?

One step is to transform the federal biofuels incentive from a pump credit — that is, an incentive that goes to the blender of ethanol and gasoline — to a direct payment to the ethanol producer, with higher rewards accruing to locally owned plants. Minnesota did something similar to this with its state ethanol incentive in the mid-1980s, to good effect.

Taking a page from Minnesota’s playbook, Congress could redesign the federal incentive this way. An absentee-owned plant could be paid 15 cents per gallon for the first 20 million gallons produced each year for 10 years. A majority locally owned plant might receive 25 cents per gallon.

Such incentives might be expected to encourage communities to raise money internally to build biofuel plants. To produce enough biofuels to satisfy 30 percent of our transportation fuels and 75 percent of our chemical needs would require about 2,500 bio-refineries. Assuming 500 investors per plant with an average investment of about $25,000, we would have about 1.2 million local investors, each with a direct stake in a biologically fueled future.

These local investors need not be farmers. But if the majority were, the number would exceed the total number of commodity farmers in the nation — which is why an aggressive and community-oriented rural energy policy could serve as the foundation for a dramatically redesigned agricultural policy.

We may be able to displace only 25 to 35 percent of our ground transportation fuels with plants, but to achieve that objective would require harvesting more plant matter than is used today for all purposes, including food, feed, textiles, paper, structural materials, and energy. That is, sufficient plant matter to supply over 2,500 bio-refineries. And as the transition to cellulosic production progresses, there’s no need to focus on any single dominant feedstock such as corn. Feedstocks can become region-appropriate, and bio-refineries can be widely dispersed, with at least one in virtually every state.

With an energy policy in place to encourage local ownership of bio-refineries, Congress should make locally owned rural energy production an integral component of farm policy when the Farm Bill comes up for reauthorization in 2007.

Consider the numbers. In 2005, the nation’s commodity farmers (cotton, rice, soybeans, cotton, wheat) had sales of about $50 billion. Commodity farmers received about $15 billion in government payments. Over the years, this level of support has fluctuated, depending on the market price of the commodities, from $5 billion to $25 billion.

Wholesale revenues from biofuels in 2006 will be about $8 billion, and could reach $14 billion by 2009, with a net income of more than $3 billion. Wind energy sales will be a little less than $1 billion in 2006 and could reach $2 billion by 2010.

If the farm program were redesigned to help farmers become owners of value-added processing and manufacturing facilities, it could change the very structure and dynamics of American agriculture. For farmers, a share in a bio-refinery acts as a hedge against a possible fall in the price of their crop. If the price of corn falls, so does the input costs of producing ethanol and, all other things being equal, the profits from that plant will increase, generating a higher dividend check to the farmer. The same dynamic would occur when cellulosic ethanol is introduced.

Just $5 billion — or a third of last year’s commodity-support outlay — could enable farmers to become owners in some 500 additional bio-refineries producing an additional 20 billion gallons of ethanol.

When Congress reconvenes in January, it will have the opportunity to fashion a far-reaching Farm Bill that marries agricultural and energy goals, and aligns rural prosperity with energy security. But it will only take advantage of that historic opportunity if it accepts a basic proposition: ownership matters. The ownership structure of agriculture, not the demand for agricultural products, will decide the future of rural America, and perhaps the future of world agriculture. And bioenergy can be the lever that stabilizes our farms, even as it helps wean us from fossil fuels.