Transcript: The Economics of Energy in Agriculture

 
 
 
 
 
 
THE CNA CORPORATION
 
ENERGY:  A CONVERSATION 
ABOUT OUR NATIONAL ADDICTION 
 
THE ECONOMICS OF ENERGY IN AGRICULTURE
 
 
SPEAKER:
 
NEILSON CONKLIN,
DIRECTOR, MARKET AND TRADE ECONOMICS DIVISION,
U.S. DEPARTMENT OF AGRICULTURE RESEARCH SERVICE
 
 
WELCOME AND MODERATOR:
 
STEVE WEHRENBERG,
COAST GUARD DIRECTOR OF EXECUTIVE DEVELOPMENT
 
 
 
 
 
TUESDAY, MAY 22, 2007 
6:00 – 8:00 P.M.
 
 
 
Transcript by:
Federal News Service,
Washington, D.C.
 
 
 
 
 
 STEVE WEHRENBERG:  Good evening, ladies and gentlemen, if you’ll take
your seats we’ll get started.  We do so hate to break up the networking.  Well, good
evening to all of you and welcome to the 14th in this ongoing session of conversations
about energy – 14th.  Somebody asked me this evening, what have there been, what two
or three of these now?  So, it seems like a hundred.
 
 My name is Steve Wehrenberg: by day Coast Guard director of executive
development, by night I’m a masked energy crime fighter.  I left my mask in the car. 
Before I introduce our speaker and tonight’s activities, I wanted to share something with
you.  One of the people in my office, knowing of my interest in energy in the evenings,
brought me a copy of a comic book – and I know you can’t quite see it from here, but it’s
Mickey Mouse and Goofy Explore Energy.  It was a joint effort between Disney and
Exxon in 1976 and everybody who’s looked at this evening said, my God, it’s as relevant
today as it was then.  (Laughter.)  I don’t know what to make of that, but I was very
happy to find it.  I wish I could find the stuff that’s in it now, you know, the little things
that they advertise in comic books.  Wouldn’t that be great?
 
 I want to start, as I usually do, by thanking our hosts.  I used to thank our hosts
individually, but the list is growing.  We now include State, Defense, Energy,
Agriculture, EPA, the director of National Intelligence, go figure, and other agencies
whose initials escape me at the moment.  We’re certainly continuing to try to grow that
list and will do so until everybody who’s involved in energy in one way or another in our
federal system is involved along with us.  
 
You see flashing by here, besides the cartoon, are the first pages of our website at
energyconsensus.org.  On that website, you will not only be able to register for these
events as you probably have, but you’ll find audio and transcripts and presentations given
by most of our speakers from tonight’s event and from all the previous events where we
had materials and were able to do that.  So it’s a rich source of information to all of you
and a growing source of information and we appreciate the fact that you are part of the
community that makes it all possible.  
 
We’re trying very hard to grow this website into something that better enables the
growth and nurturing of this community and practice, people who are concerned about
energy.  And we thank all of you for being part of that and we will certainly let you know
as soon as that website begins to grow into its potential.
 
Since nobody ever listens to me at the end of these sessions, I’ll say now that our
next session will be June 4th, that’s a Monday, right; Monday, June 4th.  And we’re going
to do it in a little different format: it’s going to be a panel discussion.  The topic will be
energy on military installations, which is really kind of ironic because that’s really the
thing that got this started to begin with.  We recognized that there were pockets all over
the government, certainly all over DOD – and I’ll just limit it to that for a moment – of
people doing extremely innovative things with regard to energy and the environment. 
And the problem was, of course, that everybody was doing it in their own little pocket
and their own little stovepipe and nobody knew what anybody else was doing and this
began as an effort to try to bring people together and perhaps find some synergies.  And
we believe we are beginning to see some successes in that area.  So I thank all of you for
that.
 
On the 4th of June, we’ll have representatives from the Air Force, Army, Navy,
Coast Guard, OSD, and I believe somebody from the Defense Science Board, if my
memory serves me.  So it will certainly prove to be a good exposition of some of the
more interesting things that are going on, at least with facility energy management in
those areas.
 
I am very pleased to welcome our guest this evening, Dr. Neil Conklin.  Neil is –
and he’s going to speak on a topic that is certainly relevant and timely and it has to do
with the connections between agriculture and energy.  Neil is currently the director of the
market and trade economics division of the U.S. Department of Agriculture’s Economic
Research Service.  I guess it’s fair to say that you are an applied economist in agriculture;
would that be a fair thing to say?
 
NEILSON CONKLIN:  That would be fair.
 
MR. WEHRENBERG:  And has produced a thing such as a fruit and vegetable
outlook.  So for those of you who are worried about those kinds of things, I say that with
a smile because I think we all know that we can’t afford fruit and vegetables, so our
subsidies may not be right.  We may have to rethink some of our agricultural subsidies. 
We’ve posted a little bit of a biographical sketch on the website, so I won’t burden you
with that; you can look.  What I’d rather do is welcome Neil to the podium and there will
be plenty of time for questions at the end of our session.  So thank you so far.  Thank
you, Neil.  (Applause.)
 
MR. CONKLIN:  All right.  Thank you very much, Steve.  I really appreciate that
kind introduction.  Thinking about topics involving national security and the military and
energy, really my only credentials in that area date back about 38 years ago tonight when
I found myself as a diesel mechanic pumping diesel fuel for patrol boats in the Mekong
Delta.  Since then, I’ve gone on to other things, but within the last year to year-and-a-
half, I’ve really begun to think about energy again and in a very different way in
connection with agriculture.  
 
I’m maybe more than a little bit awed to be – what, 14th? – in this series of
addresses with some really very influential and key people, including James Woolsey and
Amory Lovins who have preceded me.  So if I trip over my tongue, it’s probably because
I’m awed up here.  
 
I am an economist, but I guess at heart I am a historian.  If you look at my bio,
you’ll see that my undergraduate degree is in History.  And so while I’m going to talk
about some analyses of the current situation tonight – and I’ll hope you’ll find some of
that interesting – and I want to talk a little bit about how at USDA we see future
prospects especially in terms of corn-based ethanol, but also a little bit in terms of at least
the uncertainties about further developments in technology involving cellulosic ethanol.  
 
There’s one big idea I’d like to leave with you tonight beyond that analysis of the
present and future.  And that is that we’re at a major turning point, at least from a
perspective, I think, of looking at history.  Beginning in about 1850, over a course of 100
years, we made a transition from an economy that was based almost entirely on
renewable fuels to an economy that’s based almost entirely on fossil fuels.  And today, as
we look at the rising cost of fossil fuels, both in terms of the direct economic cost at the
gasoline pump or at the fuel tank and at the perceived environmental costs, the indirect
environmental costs, as we look at those costs and talk about a transition back to
renewable fuels, we’re talking about really some major challenges.  
 
And from the point of view of an economist, we’re talking about major challenges
that will not come certainly without economic, social, and political costs.  And so I think
that’s something that’s very important to think about.  Because in terms of my economics
training, I’ve been thoroughly indoctrinated into the idea that there really is no free lunch. 
Now, if I can – ah, very good.  
 
Well, I want to talk tonight about some of the choices that we’re going to be
facing, but I want to start by understanding the context here for thinking about bioenergy. 
I think agriculture is key to the context because agriculture and forestry are really the
basis for most of the inputs and the feedstocks for renewable energy.  We still have things
like wind and water and solar, but at least looking at certainly much of what we’re hoping
to find in the area of renewable energy, it comes directly or indirectly from the resource
base that we use for agriculture and forestry currently.  
 
Once I’ve gone through some of that historical context and the big picture
context, I want to talk about the situation today, spend a little time looking primarily at
the economics of corn-based ethanol, what it means for agriculture and our economy over
the next 10 years, which is the horizon that we use in USDA for what we call our long-
term projections.  
 
And then finally, I’d like to close with a little section looking at beyond first
generation technology, what about cellulosic technology, what does that imply, what are
some of the things that we need to be thinking about as we look to the future, and what
are some of those challenges if we are indeed to go through another major energy
transition?  
 
Well, here are a few definitions.  I’ve been reading a lot of energy things lately
and when I read them I see all these terms thrown around and I’m sure you see them, too,
and sometimes people use them almost synonymously and so I thought I’d throw these up
as a little review.  And if I start throwing them around and not being precise tonight, at
least you’ll have this to refer back to.  
 
Alternative energy: usually what we’re talking about is alternatives to petroleum,
including both renewable and fossil sources and also things like nuclear and other sources
of energy that we wouldn’t call renewable energy.  That’s non-fossil sources and non-
nuclear sources, including solar, wind, hydropower, and bioenergy – which is energy
derived from biomass, wood, plant, animal waste – and finally biofuels, which is a subset
of bioenergy, liquid fuels derived from biomass.  So if I’m sloppy especially between
bioenergy and biofuels, maybe someone will hold me to account.  
 
We once lived in an economy powered by wind, water, wood, and muscle power. 
And what’s missing from this chart is – it’s there in the background – is the muscle
power.  I grew up in northern New England and I learned very early on in the 1950s that
wood heats you twice: once when you split it and once when you burn it.  This shows the
percentage of our consumption of these different sources of energy by source from 1850
up through 2000, roughly.  This data came from the Energy Information Agency website;
if you dig around there long enough, you can find the data series and put it together.  One
thing is missing from this chart: that’s the muscle power.  
 
I have seen some places some people who have constructed time series of the
energy value of the feed that went into feeding draft animals because feed grains and hay
were the motor fuel of the 1800s.  I have yet, in attempting to correspond with any of the
authors who have used unreferenced series, found out what their – I have been unable to
find out their methodology and we’re working to see if we can try to construct that kind
of series.  
 
The data I’ve seen elsewhere would suggest that that actually is comparable to the
percentage of our energy consumption through the 1800s and the first part of the 1900s
that wood occupied.  So that’s the missing part of this.  We were even more dependent on
renewable sources and primarily on bioenergy sources for our economy throughout the
last half of the 1800s and into the first half of the 1900s.  That’s what I’m talking about
when I’m talking about this tremendous transition that we underwent in our economy. 
And you can see that we went from, oh, probably close to 90 percent of our economy
powered by biomass, most of which was wood.  Add to that the amount that we had in
animal feed, down to one where that’s really become a very small percentage.  And first
coal and then natural gas and oil overtook biomass as a source of power for our economy.
 
Not only that, our total energy consumption has increased dramatically.  So that
small amount of biomass that fueled the economy in 1850 was almost 90 percent of our
energy consumption is really only a tiny fraction, a tiny fraction, of the total amount of
energy that we need today.  And I think that says something about the challenge as we try
to look – what is it going to take to return to an economy that’s powered more by
renewables and less by fossil fuels and what does that challenge mean?  Now, our
technology today is considerably different than it was in 1850; we have possibilities and
prospects that we didn’t have then.  But it’s still, to my way of thinking, a tremendous
challenge and it shows you how dependent we really are on fossil fuels, relative to what
we were only 150 to 100 years ago.
 
The availability of low-cost petroleum was one thing that really transformed the
U.S. economy.  There is a lot of debate going on – or there’s debate going on among
economists about the degree of linkage between economic growth and energy.  Most
conventional economists believe that the relationship between economic growth and
energy has become progressively de-linked, that we’re less dependent in economic terms
on energy than we once were, that what happens in energy doesn’t determine where we
go in terms of economic growth.  
 
There are economists on the other side in a school of what’s usually called
ecological economics, some of whom believe in an energy theory of value that’s almost
an energy parallel to Marx’s labor theory of value, that all value in the economy derives
from energy and therefore the linkages is 100 percent between economic growth and
energy.  So there’s this – and there’s opinions everywhere in between.  What is safe to
say is that the availability of high-powered fossil fuels – because wood, wind, sunshine,
all of those things are relatively diffuse; they’re relatively low power; it takes a lot to
bring them together to create power.  
 
The possibility of powering motor vehicles with wood or the lower powered
alternatives that we had in the 1800s just wasn’t possible; today we can convert biomass
to high power equivalents, that is where you have a lot of energy packed into a small and
easily used and manipulated packet.  Liquid is usually the fuel – has sort of been the fuel
of choice; maybe if we get battery technology, even better than electricity and it is
already becoming increasingly important.  But it changed our mobility.  We went away
from feed grain and horses and those came with environmental problems of their own to
automobiles and to a whole set of economic possibilities and possibilities of consumer
choice that we didn’t have before that.
 
So low-cost petroleum transformed the U.S. economy.  It also transformed U.S.
agriculture.  This is my grandfather in 1940.  It transformed U.S. agriculture in the same
way: it provided the possibility of high-powered alternatives, the ability to farm larger
areas for an individual farmer to produce more; it helped to free up labor that went into
driving economic growth in the rest of the economy.  This was toward the period of the
end of the transition, really, when we went from animal power to tractor power and by
1960 the Department of Agriculture stopped collecting data on draft horses on farms. 
And that sort of marks, in some sense, the end of this transition period.  But it really
happened very rapidly.  Really in only about – between the end of World War I – World
War I is when tractors really began coming in on farms – to the end of World War II, in
agriculture we made this transition and the rest of the economy was undergoing this same
transition.  
 
And once we made the transition, we reached this point where we had a pretty
high level of energy intensity, in terms of our use of energy in agriculture, we’ve actually
begun to see in agriculture the intensity of use that is the amount of energy that is used
for a dollar’s worth of output begin to decline in agriculture.  And this has happened in
other sectors of the economy, too; much more rapidly in some than in others.  And you
can see that some of that was fueled by the energy price spike in the ’70s – Donald and
Goofy certainly understood that.  But there’s some debate, once again, among economists
about what does this really mean in terms of our total energy dependence?  Because this
doesn’t mean that our total consumption of energy is going down either.  In fact, as you
increase the efficiency of energy use, it creates an incentive to produce more; you’ve got
productivity growth, prices are being driven lower, and you’re producing more and more. 
And so actual total energy use may go up.  
 
So it creates a little bit of a dilemma in terms of thinking about that, but we are
becoming more and more efficient over time as our technologies improve and higher oil
prices or higher energy prices in general stimulate the research that leads to increased
efficiency over time.  And certainly this is one of the things that we’re looking at in
agricultural policy today, is not only looking at biofuels, but looking at the use of energy
within the sector and other sectors obviously are thinking about that very seriously as we
have sustained oil prices at increasingly high levels.
 
Well, understanding the economic interactions, there’s certainly a lot of debate
and ferment among economists about the overall relationships between energy and
economic growth, but understanding what all of this means in terms of agriculture is
really a complex system.  You’ve got linkages between fossil fuels and bioenergy, in
terms of the price of fossil fuels: can bioenergy compete with it?  You’ve got chemical
inputs that are important to the production of bioenergy and also field crops that feed
bioenergy, competition between energy and field crops for the product of – competition
between energy and livestock for the production that comes out of the crop sector.  All of
this is influenced by unpredictable elements: geopolitics, weather, changes in markets,
and by policy.  
 
And that’s one thing that today if you look around the world, we’re seeing this
huge policy response to our view of the difficulties associated with consuming fossil
fuels, whether that’s oil prices at $60 plus a barrel, whether it’s concerns about energy
security, whether it’s concerns about greenhouse gasses and global warming, and you go
on and on around the world and different countries look at different problems associated
with our dependence on fossil fuels.  And they’re – from China to the EU to the U.S.,
across the world, governments are starting to try to address those issues through the use
of energy policy, science and technology research policies, agricultural and trade policies,
environmental policies.  And all of those make for a very complex mix in terms of
understanding what happens as we try to push changes through this system, thinking
about where we’re going in terms of a transition back in the direction of renewable fuels.  
 
Looking at it from today’s point of view, this is another lens on that long-term
historic picture about our transition from biomass to fossil fuels.  We’re now in a position
today where we have an asymmetric relationship between agriculture and energy. 
Ethanol use is small relative to overall motor fuel, overall gasoline use: about three-and-
a-half percent in 2006.  The comparable, roughly, period for corn – since almost 90+
percent of our ethanol in the U.S. is corn-based ethanol now – in 2005-2006, crop year –
that was the last crop year, we’re in 2006-2007 and about to be entering 2007-2008 –
you’ll see that we used roughly 14 percent of our corn for ethanol.  So if you want to
have a big impact on the energy side, you know that you’ve got to have, at least with
current technology and current economics, a huge impact on the agriculture side.  It’s
three-and-a-half percent versus 14 percent for corn.  It’s illustrative; it’s not
comprehensive, but it holds even across things like biodiesel and others.
 
This share has been of corn use for ethanol has been growing rapidly.  If you go
back only a few years, you’ll find we used about anywhere from four to six percent of our
total corn crop for ethanol.  Last year, you saw the number was about 14.  This crop year,
we’re expecting about 20 percent and we’ll look 10 years down the road here in a few
minutes.  That means we’re rapidly approaching the point where the amount of corn that
we use for ethanol is equal to our exports and the U.S. exports make up about 60 percent
of the total world trade in corn.  Sixty percent of the total world trade in corn.  So you can
see that there are profound implications as you start to squeeze corn use.  There are
profound implications, not just for the U.S. but for global corn markets, because these are
very much global corn markets.  
 
Well, where did this boom in ethanol come from?  Ethanol’s been around for a
good many years and our agency spent relatively little time looking at ethanol, in part
because it was a fairly small percent of corn consumption and it was driven almost
entirely by government policy and there wasn’t really any market action and it wasn’t
very dynamic.  There were people that had big hopes for it at various periods of time, but
it wasn’t going anywhere.  
 
Well, if you look back in the summer of 2006, this will give you a picture of what
the profitability of ethanol – now, I’m going to see if I can use my laser pointer, yeah,
there, did I get it? – what the profitability of ethanol was.  The price of corn in July of
2006 was bout $2.20 a bushel.  It’s going to be, I don’t know, $3.50, $3.70, who knows? 
But we’re expecting for this next crop year corn prices somewhere between $3.20 and
$3.70 a bushel.  So say, $3.50 a bushel now.  
 
And oil prices have come back down.  What are they today?  Sixty, sixty plus or
minus?  So that profitability triangle has now been significantly squeezed.  But we hit a
point at which the relationship between oil prices and corn prices was such that producing
ethanol became extraordinarily profitable.  It’s what one of my analyst calls a perfect
storm and you can see the perfect storm sort of outlined in yellow here.  
 
We hit a period of time where the price of ethanol – this is ethanol, not gasoline,
and there are – ethanol has often been a premium to gasoline because the oil companies
have needed it, especially as (MTB ?) went out as an oxygenate, then the demand for
ethanol to blend with gasoline made it worth more than its energy value.  It was as an
additive.  So it really drove the premium on ethanol to very high levels when (MTB ?)
went out.  And you can see corn prices stayed pretty low.  We had a lot of corn at that
point; we had big stocks.  
 
And along came the Energy Policy Act of 2005.  And the Energy Policy Act of
2005 included something called the renewable fuels standard, which set target – 7.5
billion gallons by 2010 – did I get that right, Joe?  I think that’s right.  Anyway, set a
target.  So that came right in the middle of perfect storm.  And there was an assurance to
investors that hey, you know, we may have been concerned about some risk, yeah, this
very profitable market opportunity can be here, but it might go away if oil prices come
back down.  But if there’s a mandate that you have to use this much of renewable fuels,
then that gives investors some assurance that they’re going to get a return on their
investment.  
 
And so, taken together, this stimulated a huge growth in ethanol capacity.  Very
rapidly, we went up to where we had – today we have a bit over six billion gallons, I
think.  It’s around six billion gallons; that’s a good rough number.  But the ethanol sector
is planning to add six billion more gallons to its capacity over the next two years,
roughly.  Now, plans come and plans go, but at this point, we had a period of time this
winter where ethanol profitability went down and people were saying maybe some of
these plants will be back, people will back off.  Oil prices have since gone back up.  Corn
prices have come down a bit from their peak because of news about farmers’ response by
planting more corn.  And so this development is going to continue.  
 
Before I leave this map, the point isn’t just the planned additions to – the light
pink is – the light colors are plans and the dark red is existing plants.  You can see where
it relates to the intensity of corn acres on that map, so the economics of these plants are
dictating that they’re being located close to where the feedstock is.  There are some that
are going into other locations, but they’re close to the feedstock.  And this is raising some
really interesting infrastructure issues and another set of policy issues that I’m not –
(chuckles) – prepared to talk about tonight.
 
But another thing to file away, thinking about all those complex economic
interactions in the plate of spaghetti chart: where do we need ethanol?  Well, we don’t
need that much of it in the Midwest; we need it all over the country.  And, in fact, the big
consumption centers are not primarily in the Midwest.  Ethanol has a problem: you can’t
move it in pipelines; you can’t move it in a common carrier pipeline.  It’s very corrosive. 
I don’t know all the chemistry or technology details, but we can’t move it in common
carrier pipelines yet, if ever.  And we don’t have any dedicated ethanol pipelines in place,
so it’s all got to move by rail or truck, which is creating pressures on the transportation
system.  
 
You’ve got to aggregate the corn and move it into the ethanol facilities, which is
creating other pressures because our system for moving grain up until now has primarily
been oriented either toward moving it to where livestock are, cattle or – most of the cattle
are fed in the Great Plains area: Kansas, Oklahoma, Colorado and so on – or into export
markets, down the Mississippi River; some corn out of the Great Lakes and some out of
the Pacific Northwest, but mostly down the Mississippi River.  So the infrastructure that
we have developed for this is not aligned with the new realities of where that grain is
being demanded.  It’s also having significant regional effects on the price of grain and
different effects, therefore, on livestock producers in different areas as their feed costs are
bid up, which is creating some political stresses right now as well as economic ones.  
 
Well, what does the future hold in terms of corn-based ethanol?  At least as we
see it objectively, as of right now at USDA, every year we undertake what we call either
our long-term projections or our baseline exercise.  This is a part of the process of
developing the president’s budget.  We use it for other purposes, but that’s one of the
primary purposes for doing this.  What we do is we make an assessment of the long-term
prospects for all the major agricultural commodities that we produce in the U.S., with a
lot of focus on the ones that receive support; so it’s corn and wheat and soybeans and
cotton and so on.  So we do a 10-year projection to provide that input for the president’s
budget so we can make an estimate of what all those programs will cost.  It also plays
some role in looking at the costs of feeding programs, at the cost of – in the case of
ethanol, since ethanol receives a tax credit, it has implications for tax receipts and
Energy, DOE, prepares that, puts that stuff in.  But it all comes together in looking at
agriculture in our baseline process.  
 
This chart shows you our projections for corn-based ethanol that we made in
2005, the next set that we made in 2006, and then the 2007 projections which we just
released in February.  All of these are available on the USDA website and you can find
excruciating detail about the supply demand and use of all these commodities, about all
the underlying assumptions.  And we’ve just put out on Friday, last Friday, a publication
that goes into the details of the analysis of ethanol for 2007 that wasn’t in the basic
publication; it’s further details on ethanol.
 
So I’m going to go through these next two – I spent a little time on this because
I’m going through this next series of slides and I’m going to be talking about these 10-
year ahead projections that we made in three consecutive years because it’s almost like a
natural experiment.  The only thing that’s really had a dramatic impact on agricultural
markets over these three years has been changes in ethanol.  Yeah, there have been some
other changes around the margin and if some of my baseline analysts were here, they
would pitch a fit hearing me say this, but it’s almost like a natural experiment because it
shows you how our thinking has changed over the course of three years.
 
Well, in 2005, we basically used – or in 2006, we basically used the renewable
fuels standard from the Energy Policy Act of 2005.  We took those projections that went
up to seven-and-a-half billion gallons and we assumed that that’s where we would end
up.  There was a lot of debate in 2006 about whether we might exceed that.  There is a
tremendous debate among the analysts in the process of doing this.  For those of you that
come from the intelligence community, the sort of commodity analysis is, I think, in
many ways the same kind of thing as analysis in the intelligence business.  You want a lot
of debate.  You want individuals who disagree to come to the table and have discussions
and look at the numbers and argue about the assumptions and try to come up with the
best possible projections.  Well, by 2007, our perspective on this had changed almost
completely.  And you can see what we were assuming as a result – that was going to
happen as a result of that perfect storm that came to a head in the summer of 2006.
 
So that’s the ethanol production dimension.  This is the corn use that goes along
with it.  And I think in most of the succeeding slides, you’ll see the shorthand, Pre RFS,
which means the projections we made in 2005, before the Energy Policy Act was passed,
right before that; in 2006, after the Energy Policy Act was passed mandating the
renewable fuel standard; and then finally in 2007 where we had high oil – I put plus oil
prices because oil prices were the big thing that changed the market dynamic for ethanol
right there.  And you can see what happened.  Our projections for corn use in 2010-2011
for ethanol went up from 1.5 to roughly 2.5 to somewhere around four billion bushels:
just explosive growth in terms of the use we expected of corn in producing ethanol.  
 
Well, how have we been meeting that demand so far?  How do we expect it’s
going to be met?  One way it’s been met, certainly currently, has been in terms of stock
reductions.  And you can see what our 2007 projections show us pushing stocks down to
below a billion bushels which is a very, I think, probably about a month to two months’
worth of corn, if my guesstimation is remembering correctly.  World stock levels are also
coming down quite low.  And that’s much lower levels of stocks than we had thought
earlier we would be pushing to.
 
Well, here this is the relationship between stocks and use, which is our – sort of
our standard measure and commodity analysis of how tight stocks are.  It isn’t just the
absolute amount of stocks that are in the pipeline; it’s how big they are relative to the use
that you need.  And you can see our projections are putting those at what is nearly a
record low level.  The high levels of stocks that you see back in the ’80s are primarily the
result of government policies: government policies where we encouraged, we had
programs that compensated farmers for holding stocks.  All of those policies were done
away with basically with a 1990 legislation in the early 1990s and since then the market –
it’s been markets and not government policies that dictate what level of stocks are being
held.  There’s no government policy that provides incentives or particular targets for the
levels of stocks that are being held.  
 
So we’re entering new territory and we’re entering new territory at a time where
the nature of demand for corn is changing.  Because if you have an ethanol plant, as long
as it’s profitable to produce ethanol, as long as you can get more back than the cost of the
corn and the enzymes and the other variable inputs that you put into it, you’re going to
continue to run that plant.  So up to a fairly high level of corn prices, if you believe
analysts at Iowa State University, maybe that’s somewhere between four and five dollars
a bushel, depending on the price of gasoline, because the higher the price of gasoline
goes, the higher the break-even price of corn goes.  So as long as you’re below that
break-even price, these plants want to run full tilt.  And so the demand for corn is very –
going into those plants is very unresponsive to price.  That means they’ll be bidding it
away from other users that are willing to cut back, including livestock feeders and
including buyers on global markets, in terms of exports.
 
Projected corn prices are rising.  Now, it’s interesting, you’ll see headlines when
prices – you start to get prices spiking in a particular day or month, you’ll see headlines –
and you will have seen corn prices this winter that were up in the four dollars plus range;
they’re back down now.  But these are – the projections we make are for season average
prices because you tend to have lower prices at harvest time and then they rise through
the year.  And these are farm-level prices, not the prices that you’d see quoted at a
delivery point.  So don’t be surprised if you see we’re projecting prices that are below
prices you’ve already heard people talking about.  
 
But we’re really in very, very uncertain territory because all our projections
assume normal weather.  And with those low levels of stocks, in some senses, markets
adjust and we’ve looked at what higher grain prices mean for livestock producers.  It
means somewhat less production, not much; somewhat higher prices ultimately for beef
and pork and chicken that offset the added costs of the feed.  You move to a new
equilibrium situation.  Things adjust; markets adjust; people adjust.  But the problem is
that an equilibrium when you get to very low levels of stocks is balanced on an knife
edge.  And so if you hit an extremely poor crop, then you get a big shock and great deal
of difficulty in meeting all of the demands that the different uses put on feed grains.
 
And that could mean significant price spikes in the event you get a short crop.  So
we’re really looking at the potential for higher price volatility than we have experienced
in corn and other agricultural commodities over the last couple of decades.  Well,
certainly, it means higher prices for agricultural products, ultimately mean higher retail
prices.  And these are the estimates that we’ve prepared as a part of the president’s
budget this last year.  And I’m showing this is just our ’06 projections compared to our
’07; the ’05 ones just sort of distracted from it.  This is the percent change – it’s food
price inflation, so it’s the percent change in food prices.  It’s not the level of food prices;
it’s the level at which they’re going up.  So it’s the food component of the CPI.  
 
And so you notice that the effect is corn prices run up, you get a jump up in the
rate of food price inflation – and I think most people are probably sensing that there’s
some of that starting to go on now – primarily, as you begin to push up meat prices. 
Well, ultimately, markets begin to adjust and then that rate of change begins to drop back
off again.  It doesn’t mean that prices have gone back down to a lower level; it just means
they’re not going up as fast as they were, so you’ve got a bulge, if you will, in the
prospects for food price inflation.  
 
This one doesn’t look terribly scary, but it shows you that there’s certainly
something there.  One thing to remember is that even small percentage changes in prices
can have big implications, have different implications for different people.  Overall,
about 10 percent of our income goes into food.  Ten percent.  But I guarantee you there
are people in Arlington and Alexandria and Washington, D.C. who spend way more than
10 percent of their income on food.  If you’ve been reading about the food stamp diet that
some of the members of Congress have been going on over the last week or two, that
brings it home to you that even these fairly, what appear to fairly modest effects in
inflation, will have disproportionate effects on some people in our population.  
 
And that’s not just domestically, either, because if you look at what’s happening
in the rest of the world – I had another chart that was too late to put in tonight that I want
to talk about for a minute that makes this point: if you look at parts of the world including
sub-Saharan Africa and certainly at parts of Latin America, people’s diets are much more
dependent on staple products.  They’re much more dependent on things like grains, fats;
they’re dependent on sugar, especially in some Latin American countries, for their
calories.  And those are all the products that are the potential feedstocks, given our
current generation of biofuel technology: sugar in Brazil, corn in the United States.  All
of these things work together and the rising tide lifts all boats in commodity markets. 
Things spill over on the supply side as corn bids land away from soybeans and sugar bids
land away from something else and so you see rising prices for these products that
people, in many poor parts of the world, depend on critically for a very large share of
their diets.
 
And in addition to that, this chart shows you what happens with food aid
allocations when you have a relatively fixed budget.  What happens to the quantity that
you can buy as prices rise?  It goes down.  So we’re going to be – we’re certainly in –
both State and AID and USDA are all aware of the implications of higher grain prices for
what happens in terms of our planning for food aid.  But this isn’t just going to affect the
U.S. as a donor country; there are going to be much larger effects throughout the world
and so we can’t forget once again that the distributional effects of rising grain prices are
certainly not uniform.  
 
Well, what happens – where is all this corn going to come from?  Corn acreage:
more corn acreage is the first source.  And interestingly enough, our projections – and
you can see the little red tip at the end and I’ve put it on a long series so you could see
where this is coming from, where we’re coming from.  If you noticed the headlines about
a month ago when USDA announced their survey of farmers on their intended corn
plantings, I think it was 90.5 million acres.  That put us ahead of what our projections
were by about three million acres for this year – which we had made before the survey –
and at higher levels of corn acreage than we’ve seen since the late 1940s, since 1994, I
think.  
 
So we’re entering an era of much higher levels of corn production, corn acreage
and production.  But where does that corn acreage come from, because we had been
running historically for quite a while at somewhere around 80 million acres?  Part of it is
coming from soybeans.  Farmers in the Midwest, especially, tend to double crop corn or
rotate corn and soybeans: corn one year, soybeans the next.  That actually reduces energy
consumption because soybeans are nitrogen-fixing and so when you plant soybeans one
year, you get the soil fertilized and it cuts down on your need for nitrogen fertilizer which
comes from natural gas, for the most part.  So that – so we’re starting to – some farmers
are going to corn, corn, corn and some are maybe going to corn, corn and back to
soybeans.  But that will probably have some effect on energy use in the sector.  
 
We’re also brining in acreage from other crops like cotton and so on, but this
marginal acreage that comes in – if you cut back on soybeans, you’re going to reduce
yields because of disease problems and fertilizer issues; if you bring in land that was in
cotton or some other crops that’s less well suited to corn, the yields are going to be lower
and that’s also true of land that was out of production that you’re bringing back in to
production into corn.  
 
And as you’ve seen this year, corn prices seem to be holding and we project them
to hold at a range that’s well below four dollars a bushel.  But that’s after we brought in a
tremendous amount of land into corn this year.  And the question is with an additional six
billion gallons of capacity coming online over the next two years, where does the next
seven million acres of corn come from to feed those plants?  So we’re going to end up
seeing more that’s going to have to come out of other uses, primarily either livestock
production or out of exports of U.S. grain.  
 
And at the end of the 10-year period, where does that leave us in terms of our
underlying asymmetry?  It leaves us with ethanol at – and that’s with – let’s see if I can
remember how many billions of gallons we got – I think that was about 12 billion gallons
in our last year of our projection.  So by the time we’ve gone to 12 billion gallons of
ethanol, corn-based ethanol, seven-and-a-half percent of gasoline use roughly, 31 percent
of our corn use.  So that asymmetry, that underlying asymmetry, is still there.  We’re not
going to change that.  
 
Well, where do we go from here?  Corn is the first – corn and sugar – the sugar in
starch-based ethanols are first generation technology.  Where do we go as we look at the
future of bioenergy?  And one of our analysts found a very interesting quote from Otto
Doering who’s currently the president of the American Agricultural Economics
Association.  Unfortunately, I didn’t find a good picture of Otto to paste in here.  And this
quote from Otto came in the 1980 USDA yearbook of agriculture.  We don’t do
yearbooks anymore, but for hundreds – I don’t know, hundred plus, hundreds of years,
over a hundred years anyway, we did yearbooks.  And this was one – they always had a
theme, at least, in their later years and it was cutting energy costs in 1980.  And Otto’s
projection was in three to five years, technology advances should occur that will allow
the conversion of cellulosic materials, tree trimmings, old newspapers, crop residues to
alcohol on an economic basis.  Well, I sent this slide to Otto, who I’ve known for a long
time, a couple of days ago to ask him if his forecasting skills had improved any –
(laughter) – since he made this projection in 1980.  
 
And then a quote, a current quote, from Winard Kosler (ph), who’s a well known
venture capitalist who’s been heavily engaged in bioenergy: remember last year
cellulosic ethanol was six to 10 years away, now people talk about four to six years, and
my bet is that by the end of the year, they’ll talk about two to three years.  Well, maybe
he’s a better forecaster than Otto.  I don’t know.  I’m not a chemist; I’m not a biochemist;
I’m not a scientific research guy.  But I do know that we aren’t there yet.  And so there is
certainly some uncertainty about what is the future of second and third generation
technologies, how fast they’re going to come along and how fast they can come on
stream to help potentially alleviate some of the pressure that’s associated with the first
generation technologies in our push toward renewable energy.  
 
Well, this will give you some sense – this is a slide I borrowed from Dr. Keith
Collins who’s the chief economist at USDA.  Keith probably ought to be here tonight
addressing you; he certainly knows more about this subject than I do.  Keith allowed me
to borrow this slide that he used at the Energy Information Agency’s outlook conference
earlier this year and it shows roughly what the costs of corn-based ethanol are today: a
total of about $1.65 a gallon.  And that’s based on $3.22 a bushel of corn, which is more
or less pretty good right now, a conversion rate of 2.75 gallons per bushel – my
understanding is the most efficient plants can do about three gallons per bushel – and
then you can see the byproducts, the distillers’ grains that you can sell, are – you get a
credit for that and then the costs of all the other costs of producing this stock.  
 
Cellulosic today, Keith put illustrative, I don’t know how good these costs are, but
that’s an estimate based on where we’re at today with the technology: $2.65.  The
Department of Energy’s target for 2010-2012 is $1.10.  That’s a pretty ambitious target to
me.  We’ve got to – if we’re going to – and even to be able to compete with corn-based
ethanol at the price of corn today, you’re talking about having to bring those costs down
by a dollar, by a dollar a gallon for cellulosic.  So there’s a ways to go yet.  I’m not – as I
said, I’m not a biochemist or an engineer, but it’s something that we still have to wait and
see how this will play out.  
 
But we’re presuming that we are, at some point, going to have cellulosic ethanol
at the point where it becomes competitive for some feedstocks.  The question is what will
those feedstocks be?  Another chart that I borrowed from Dr. Collins: this is taken from
what’s called the Billion Ton Study.  Has anybody heard of the Billion Ton Study?  Oh, I
see a couple of hands, wow.  This was funded by the Department of Energy and USDA. 
And it was – it’s basically an inventory of biomass potential and it went on – I don’t
remember how far in the future it went, but Keith picked 2017 because it’s the end of our
projection period to pull out sort of what their estimate was as of 2017.  Now, we’ve
excluded corn-based ethanol from this, so we’re not talking about any biomass from
crops like corn or wheat or anything else that might go into ethanol, so we’re not double
counting that.  
 
And you can see what these different sources look like for different regions and
there are two dominant sources: the numbers in parentheses in the legend there are the
total tons, total millions of tons, of biomass that would be available for each of those
things – forest residues, crop residues, and perennial crops.  And you can see the two big
ones are crop residues and forest residues, much bigger than perennial crops like
switchgrass, which has received, of course, a huge amount of publicity.  But if you start
to look at the assessment, at least, of the potential availability, a big chunk of it is really
in what we’re calling residue.  
 
But that doesn’t tell you about the economics of these, even if you know that the
technology has brought the costs of the process down; the question is what is it going to
cost acquire these feedstocks for a plant?  Partly you’ve got, once again, infrastructure
and transportation problems.  Can you assemble enough of this stuff in an area that makes
a plant economic viable?  Not all of these things, in spite of the fact we call them
residues, have economic value: corn stover, for example – that’s the corn stocks and
leftovers once you’ve gone through the field with a combine – has value to be
incorporated back into the soil as organic matter and as fertilizer and it also helps to
reduce erosion by leaving that on the ground in today’s modern zero tillage systems. 
They don’t plow the way my grandfather used to.  
 
So those – there are certainly costs associated with brining in those things.  I
think, comparably if you start talking about forest residues and waste, some of that has
productive uses as of now.  I know that certainly in the Northeast, some of that is already
being burned, is being chipped up and palletized and burned and it’s already a source of
bioenergy, primarily in power plants.  
 
So there are still a lot of real economic questions and this is one area right now
that we’re starting to focus some research attention on as economists is understanding the
potential demand and supply for these feedstocks so that then we can go beyond that and
start to ask questions about what does it mean in terms of the rest of agriculture and our
environment.  Because if you get to the point where you start to compete for land to
produce perennial crops, much of that land is already doing something.  
 
Harvested cropland area fluctuates.  This shows you a time series in millions of
acres from 1910 on to the present – I think it goes roughly through 2003, 2002 or ’03 –
the amount of harvested cropland in the United States.  And you can see that we had very
high levels of harvested cropland back in the 1940s and through the first half of the 20th
century.  Remember, we had to feed a lot of animals; we had to feed a lot of draft animals
and also yields, especially for corn, were much, much lower then than they are today.
 
So by the end of World War II, with improved technology, tractors taking the
place of animals, you had fertilizer, you had hybrid corn varieties, yields were going up,
you had new pesticides, herbicides, the need for land began to drop, and that was further
accelerated by the fact that we took a lot of land out of production to try to boost prices,
both long term in something that was called the soil bank and short terms in terms of just
year-to-year set-aside requirements, farmers had to put land out of production in
exchange for receiving subsidies.
 
Fence-row to fence-row, does anybody remember that.  I remember that was at
the dawn of my professional career as an agricultural economist. That was Earl Butts,
secretary of agriculture.  The former Soviet Union came into global grain markets.  We
had this huge boom in demand that actually in many ways is comparable to the boom in
demand we are experiencing now as a result of ethanol.  And it created these tremendous
expectations, and so we freed up a lot of acreage, went back into production.
 
By the mid-1980s, we are into the farm financial crisis, and we can see one big
dip where we did a temporary set-aside.  And then you can see what happened as we took
about 36 million acres out of production into the conservation reserve program – long-
term reserve program.  We have basically stopped doing any year-to-year set-asides, and
so all of the land under government program that is being put into conserving uses today
is on long-term contracts, 10-year contracts in what we call the conservation reserve. 
There are some other programs, but CRP Is the primary one.
 
Well, what does the rest of that land base look like because this is really, if you
think about it, the critical base that we’re going to have to think about, this plus forestry. 
And I didn’t – the one thing we don’t do in terms of what USDA does at the Economic
Research Service is forest economics.  The forest service handles that.  So my knowledge
of the forest side of this biomass potential is pretty limited.
 
This is a more detailed look at our crop acreage base.  And you’ll notice – if you
look carefully at that early chart, the cropland showed at about 340 million acres.  This
shows cropland has 441.  The difference is the previous chart was harvested.  This
cropland include cropland that is in government retirement programs, about 36 million. 
It also includes land that is fallow that in wheat areas farmers crop every other year to let
the land recuperate and the water levels build up.  It includes land that is out of
production – consider it cropland but out of production for other temporary reasons, and
it would also include failed acreage or abandoned acreage.  So you see there is a
difference of about 100 million acres between those two series.
 
But this shows you what our U.S. land base is.  And out of that total base of about
2.2 million acres, we have 441, less than a – less – only 441 million that is really
cropland.  Then we have got another 586 that is pasture and range.  Beyond that, we have
got 651 that is forest.  And the other uses, special, I think includes wetlands and other
things like that.  I don’t even know what other is.  Urban is obviously urban, which is
pretty small.
 
But the acreage we are looking at to derive biomass from comes primarily from
forest, pasture and range, cropland and cropland.  So that is where we can get acreage
from.  We don’t sort of have acreage that we can call into being to produce switch grass. 
So if we’re going to – even if we start moving away from corn and towards cellulosic, we
have got find out where we are going to get those sources.  Some of them will come from
waste.
 
There is no doubt that there is some of that out there.  Some of that will be bid
away from other uses; there may be tradeoffs.  Land may be bid away from other uses. 
For example, pasture and range – historically we have brought pasture and range
periodically into production of row crops.  That has had environmental costs.  The costs –
environmental costs of moving to perennial crops like grasses to provide biomass is
obviously not going to – you’re not talking about dust-bowl kinds of situations, but you
are probably talking about some tradeoffs potentially in terms of wildlife and other kinds
of issues.
 
So there is a lot to be done in terms of looking at what are the potential feed
stocks that come on line, and where are they going to have to compete in this land
resource base for the land to produce to produce those biomass feed stocks.  So as I said,
economists never believe in a free lunch.  We like technological progress and technology
can help us but it doesn’t eliminate the fact that in order to produce things, we need the
underlying resources, and so this is the reality of our – of the resource base that we have
to think about.
 
Well, to summarize, and then we have, oh, gee, lots of time – lots of time Mitzi
(ph) to have some discussion and some good discussion and questions.
 
MR. WEHRENBERG:  You can stay all night, Neil; it’s fine.
 
MR. CONKLIN:  I don’t know if anybody wants to stay all night.  Agriculture
and energy policy are increasingly intertwined, and if you’re following the farm bill
debate, you’ll see where there is going to be pretty, I’m sure, very active debate over the
energy title of the farm bill.  And I think maybe the last farm bill was the first one that
had an energy title.  This one undoubtedly will and it will be a much bigger deal than the
last one was.  And certainly, the energy policy act has had profound implications, as you
can see, for agriculture.  So, you know, we’re dealing in a political system that has been
geared up to debate policies for energy and policies for agriculture in sort of separate
arenas and separate environments to evaluate those trade offs politically, which is what
democracies do.  There is nothing wrong with that.  And our – so we have got to start to
get in a new mode where we understand how intertwined these policies are.
 
Increased demand for agricultural products, as bio-energy feed stocks is
increasing farm income.  There is no doubt about it.  In general, farmers are pretty happy. 
Livestock producers, somewhat less so, depending on which kind of animal you grow
and whether or not they can use the byproducts from corn-based ethanol effectively
depends on sort of their degree of concern or uncertainty right now.  But in general as
livestock producers adjust, meat prices are going to rise, and profitability of livestock
production is going to come back up.  And the primary issue that we’re going to have to
focus on as we do that is, what happens as long as we are at very low stock levels, and we
have these – we’re very vulnerable to potential yield shocks.
 
Greater use of land for bio-energy production means less land for other uses,
whether that is food, or whether that is the environment.  That is sort of the outcome of
that discussion of our land base.
 
And once again, back to the fundamental asymmetry, and it goes back to the – not
only to those little pie charts on gasoline and ethanol, but also to thinking in the bigger
picture.  If we’re thinking about this as a turning point, if we’re thinking about this as a
period of transition where we have realized that, gee, we’re mining fossil fuels, which
took millions of years of sunshine and chlorophyll to place, okay, that enabled us to take
advantage of relatively low-cost energy in a very concentrated, convenient to use form.
 
Now how do we go back to thinking about sunshine and chlorophyll, which are
distributed all over the planet, and which it costs money and it competes with other
resources, with other uses to produce fuel, to power an economy that is trying to shift
back in the direction of renewables because fossil fuels are becoming so expensive both
in terms of their cost and in terms of their environmental consequences.  But that doesn’t
mean that renwables come without cost or without environmental consequences either.  
 
And so sensible policy from the point of view – from my limited point of view is
going to require a lot of thinking and a lot of discussion and a lot of careful analysis
trying to look at some very, very complex economic engineering biological and physical
systems.
 
And I guess that is the end.  Gee, usually I have a slide on the end that has our
website address because I have to make the plug.
 
MS. :  Where is it?
 
MR. CONKLIN:  It’s missing.  (Laughter.)  If you have your pen out, our Internet
address – and if you just go to USDA.gov, you can find the economic research service. 
But it’s www.ers.usda.gov.  And we have one part of our website that is devoted to bio-
energy.  We have what are called briefing rooms, and if you look for those, you’ll find
bio-energy.  If you don’t like to look for buttons, just, there is a little search box, type in
bio-energy and hit go, and you’ll find it.  And we’re – we keep that updated, and we have
some links to other government websites as well as all of the research publications that
provide more details on – especially that analysis of the current corn-based situation that
was in here.
 
Anyway, thank you very much, and I’m ready to take questions.
 
(Applause.)
 
MR. WEHRENBERG:  Thank you very much.  We’ll put the link to that on our
website as well, so everybody will have no problem at all finding it.  And eventually on
our new site, we will probably link in altogether to your site because it will be a source of
input to what we’re hoping is a larger – (off mike).
 
First of all, you see we have some mikes out back here.  These are what we call
self-queuing question systems.  This way I don’t have to point at people who are going to
ooh, ooh, ooh, or anything like that.  So if you would queue up, that would be great.  I
would just like to thank Neil very much.  I have got to admit that this is almost as
frightening a proposition as our very first conversation which was about – (inaudible). 
So when you think about the relationship between these two things, it’s kind of
frightening.  Let me ask you – this is certainly evidence of course that everything is
connected to everything else.
 
I will take the moderator’s advantage here, and if I may just ask one quick
question.  This may be out of your lane, Neil, but do you have any idea for the sort of
energy budget of corn, energy in, energy out?
 
MR. CONKLIN:  Yeah, corn-based ethanol, the net-energy budget – and I’m not
– boy, I’m not a thermodynamics expert and I’m not an chemist, but I looked up some
numbers, and corn-based ethanol.
 
MR. WEHRENBERG:  And you stayed at a Holiday Inn last night.
 
MR. CONKLIN:  Corn-based ethanol is about – the net-energy balance is about
1.34, which means that you get about 1/3 more energy out of corn-based ethanol than you
put into producing it.  And I see Joe who is a – you’re a biochemist, right Joe – who does
know about this stuff is nodding his head yes.  So, yeah, there has been some substantial
debate about that over the years, but the consensus now is that, yes, corn-based ethanol is
not a net-energy loser and it gives us about one-third more.
 
MR. WEHRENBERG:  Yeah, I guess that depends on where you draw your
boundaries.
 
MR. CONKLIN:  Right.  And you can find – you know, if you look at the most
efficient plants and the lowest-cost corn-producing regions, you get a balance that is even
higher.  If you look at marginal stuff, it’s lower.
 
MR. WEHRENBERG:  Yeah, if you add the trucks and the – (off mike).
 
MR. CONKLIN:  Right. 
 
Q:  I have got a question.  I’m Bob Hershey.  I’m a consultant.  What kind of
payback periods have these ethanol plants been running lately?
 
MR. CONKLIN:  The data on that – I don’t know that there is any really
systematic data.  Some of them are reported to pay off in very, very short period of time –
I mean, in a matter of a year or even – Joe is going three months – three years on the
average.  But there have been some that if they went in at the right time and hit those very
high prices, have been paid off very, very quickly.  So it’s been a very profitable
business.
 
Q:  At least in the short run.  I’m Jed Shilling with the Millennium Institute.  I
have two questions.  The first, in your definition of the energy input for a unit of
agricultural output, and also used in calculating the energy return on ethanol, what is
included in that?  Does that include the energy required to build the machines on the
farm, to transport the goods around, to run the ethanol factories and things like that, not
just the diesel put into the tractors in – 
 
MR. CONKLIN:  Oh, it does include the energy running the plants.  Now, in
terms of producing the original machines, I don’t think it goes back that far.  I would
have to go and dig in – that balance is published in a number of places.  The particular
source I took – that is from DOE’s – from DOE’s website.
 
Q:  Because that would change a little bit the energy balance.
 
MR. CONKLIN:  Depending on how you define it, you can get – this whole area
of energy balance is a big area of debate.  It’s not my area of expertise.  I focus on the
economic balance.
 
Q:  The second question is, in all of this discussion of agriculture, you did not
mention water availability or water use, which is critical to maintain and expanding,
particularly with the draughts that we have had.  
 
MR. CONKLIN:  Water use, no question.  And certainly it takes a lot of water to
produce ethanol as well.  So there will undoubtedly be – undoubtedly be water issues. 
Yeah, that is one of – probably one of many things I didn’t get to –
 
Q:  (Off mike.)
 
MR. CONKLIN:  We don’t – no, we don’t really – we assume basically normal
everything based on historical trends going forward.  We do have some people, though,
who are working on resource – assessments of resources basis. We have some research
projects looking at the long-term – looking at longer-term global analysis where we are
looking at both land and water resources.  Those will be coming out somewhere over the
next year or two.
 
Q:  Yes, I am Scott Chubb (ph) from the Naval Research Laboratory.  And I had a
related question, which is, you know, there is this whole question about potable water,
and even maybe not using potable water for farming in the future because of the potential
problems associated with global warming.  Have you considered this a serious problem? 
I mean, I know that there have been analyses at NASA where they said that in 70 years,
or 30 years, we will have to be using seawater, for example.
 
MR. CONKLIN:  You know, water is certainly one of the critical issues globally
for agriculture.  There are some parts of the world where it is much more critical than it is
for the U.S.  And certainly, as you look at increased pressure being put on the agricultural
resource base, that pressure will be felt on water as well.  
 
Q:  Yes.
 
MR. CONKLIN:  And I don’t have any very good answers about – especially
about the longer term.  That is not an issue that I personally have really looked at in
detail.
 
Q:  Yea, you’re more short-term.  The second question and final question, you
show the rise in energy consumption from 1850 to today, but that was total consumption. 
An important number I think is consumption per human being.  And I would suggest that
would be an interesting thing to compare.  
 
MR. CONKLIN:  That would.  That is something that – it is interesting because
another interesting thing to compare that to would be looking at energy consumption
relative to economic output.
 
Q:  Right, yes, absolutely.
 
MR. CONKLIN:  And I have been – as I have been plowing through the
literature, there are – there is quite a bit of literature on that.  We’re in the process of
starting to put together a publication that will try to look at some of this historical
perspective and we hope to include some of those kind of – some of that kind of analysis.
 
Q:  Well, I think it’s very worthwhile what you’re doing.
 
MR. CONKLIN:  Thank you.
 
Q:  Margaret Hayes.  I am a Latin America specialist.  So my question is going to
go to comparison o f the costs of corn-based vice Brazilian sugarcane-based ethanol. 
And what – your analysis has treated the U.S. as if it were a close system –
 
MR. CONKLIN:  Yeah, that is –
 
Q:  – as if we have no imports.  But have you done projections as to what the
impact on prices would be if we eliminated tariffs on ethanol imports from Brazil and
other cane-producing countries.  And also, is there anything that we can learn from the
Brazilians in terms of our own adoption of an ethanol program?
 
MR. CONKLIN:  Wonderful questions.  Yeah, this is kind of a closed – this was
kind of a closed-economy discussion.  One reason for that is that, at least up till now,
bioenergy, really, if you look around the world, has kind of been compartmentalized
country by country.  Brazil has been relatively closed system in terms of bioenergy.  We
do know quite a bit about that.  And we factored where Brazil is going into in our global
projections, especially for sugar markets, which is primarily where it has an impact.
 
We do import a fair amount of ethanol primarily from Brazil.  Most of it comes
through the Caribbean basin.  Our ethanol policy today – we have – there is a 50-
something-cent tax credit that you get for using ethanol – 50-something cents per gallon. 
There is a tariff that is basically designed to offset that – offset that credit so that if you
import ethanol, you have to pay the tariff.  You still get the credit, but you have to pay the
tariff so it offsets – it’s offsetting. 
 
Some ethanol – and I have forgotten the exact amount – can come in through the
Caribbean basin.  It is part of the Caribbean basin initiative.  So if it makes a stop in one
of the Caribbean countries on the way from Brazil or distilled form the European (wine
lake ?), which is where some of this trade started.  It gets dehydrated, turned into
anhydrous ethanol in the Caribbean and then imported into the U.S. and it comes in duty-
free.  But there is a limit on that.  I think it’s 7 percent of total U.S. ethanol.  Don’t hold
me to the exact number, but if you Google it, you will find it.
 
We have not published any analysis on what would happen if we eliminated – if
we eliminated the tariff and the credit.  You can find some analyses around.  They
generally suggest that we would have somewhat lower corn prices, somewhat – it would
have somewhat – it would dilute a bit the impact on U.S. agriculture if you begin to
import more ethanol from elsewhere, if you eliminate that.
 
In general, though, ethanol prices have been so high that actually some ethanol
has been coming in and paying the tariff anyway over the last year.  And so in that
situation, where the economics have said that tariff really doesn’t – prices are so high that
tariff doesn’t matter anymore, the impact, at least at this point, would be probably not
huge.  That is at least my reading of the best analyses I have seen published on that.  So –
but we are looking – you know, we are – we have got a number of people looking at
Brazil, looking at other parts of the world.  The EU is having a huge effect on world
vegetable oil markets with their biodiesel policy, something we didn’t even touch on
tonight.  So, yeah, trade is going to be increasingly a reality.
 
Q:  My name is Caius Egbufoama.  And –
 
MS. MITZI:  Speak louder.
 
Q:  Okay, my name is Caius Egbufoama.  I work with Whaste Technology.  I
might ask question, and it’s a normal question is, how renewable energy – because –
would have firmed – (inaudible) – gas.  And also greenhouse gas to distilled (?) water. 
And since – as they – (inaudible) – of this application – since – I brought it back to the
state because I went to school here in the state but I’m originally from Nigeria, I have
been – (inaudible) – war every time I try to get agencies to verify – to validate my test
results.  And what can your firm (?) do for me in terms of trying to bring that to the
market because I have – (inaudible) – investment firms, but it has always been – they
need a second party to validate my test.
 
And then if you go back to looking at the energy consumption, if you implement
the application, since, like, waste-water treatment plants that consume more energy –
could reduce their energy cost by 20 to 25 percent.  So that is really why I’m here
because I have been frustrated so far since I return back in the states, and I have had firms
from India, China, and other part of the world trying to do business with us, but we need
a second-party verification.
 
MR. CONKLIN:  I wish I could help you, but focus, as I said, is on the economics
and not on the technology.  And I don’t –
 
MR. WEHRENBERG:  You’re not a venture capitalist, are you?
 
MR. CONKLIN:  No, I’m not a venture capitalist.
 
Q:  The question is, what can your firm – because I was told that I could go
through EPA, Department of Energy, and Department of Agriculture to get the test
validated.  And I have tried every single one of those agencies, and I have not been very
successful.
 
MR. CONKLIN:  Well, I wish I could help you out.  I don’t know if any – if you
were to let me know who you talked with at agriculture, I might be able to tell you if you
are asking in the right places anyway.
 
Q:  Okay, thank you.
 
MR. CONKLIN:  Got another one?
 
Q:  Yes.  I’m Peter Balash with the Department of Energy.  What – in your view,
what level of oil prices would you need to make ethanol competitive without the blending
subsidy?
 
MR. CONKLIN:  Without the blender credit?
 
Q:  (Off mike.)
 
MR. CONKLIN:  I would hate to try to pull numbers off the top of my head, but
we have certainly been in the range.  The fact that we imported ethanol over the tariff law
is alone evidence of that.  So certainly when we’re at oil prices – when we are at oil
prices at $60 a barrel, I’m sure we are in ranges where there are many – many, if not most
of the ethanol – today’s ethanol plants that are profitable without the credit.  I think that
there is another issue involving the credit that is important not to – that is important not to
overlook.
 
The credit not only has an effect on sort of the direct economic incentives in terms
of do I produce or not produce now.  And we have seen, even with the credit, periods of
time when corn prices went high enough or gasoline prices low, and ethanol prices low
enough that we had plants shutting down back in the ’90s.  So, you know, people respond
to those incentives.
 
But in addition to that, it has an effect on a perception of risk, because if people
are concerned, not just about what the level of prices is today, but the risk that price
might drop below the threshold, that the credit raises that threshold.  So it has a risk effect
and an effect on investment, people’s willingness to invest in facilities, not just in their
decisions to produce on an ongoing basis.  So there is – it’s an interesting issue to think
about.  That perhaps is something we should be looking at more, and I suspect we will be
over the course – I mean, that is an important policy issue because at some point – what
is it, 2010, that that credit that that credit – huh?  Is that right – 2010 it sunsets?  So that is
going to be an important policy issue to discuss.  Is that something that we still need? 
What role does it play?  It depends on where we are going forward.
 
There is going to be obviously a lot of people, whether you need it or not, are
going to be attached – very attached to that.  It’s like subsidies for farmers.  People get
attached to subsidies; they like rent strings.
 
Q:  My name is Martin Ogle.  And I’m just here as an individual, but I have been
very involved with energy issues over the years, including – I actually gave a talk with
the USDA at the future trends and animal agriculture conference in 2004 on energy and
agriculture.  And so I really appreciated a lot of the specific – I would like to get maybe
some of your slides or data.  
 
However, my question is around more of the macro scale, and as it relates to a lot
of the talks that I have been here – I have been to about eight or nine of them.  In those
eight or nine that I have been to, it always seems like, no matter what the subject is, we’re
coming to a kind of inescapable conclusion that I find that only one of the speakers so far
has actually addressed in any real way.  In fact, I would go so far as to say it’s pretty
much been dismissed.
 
And that is, if all of these technological fixes are possibly out there, but they are
only going to do so much, and if efficiency is out there, but it’s only going to do so much,
and if we have to put land into corn where now it’s not, and it may not be the best land, et
cetera, et cetera, multiply those by all of the others that are in these talks, it seems to me,
even if I didn’t have any energy expertise, that we’re at the inescapable conclusion that
we have to start putting actual reduction of demand – that is, conversation – into our
policy and into our discussions.  And so far as I can tell so far, Roscoe Bartlett is the only
one of our speakers that has addressed that.  
 
And so I don’t want to put you on the spot – (chuckles) – but I would really –
 
MR. WEHRENBERG:  (Off mike.)
 
Q:  What is that?
 
MR. WEHRENBERG:  Scott Sklar brought in how we can up that.
 
Q:  Well, that is true.  I wasn’t here for Scott Sklar, but I know that he does talk
about that.  So I would like for you to discuss that and say how can we up that in our
discussions?
 
MR. CONKLIN:  Oh, I think you ought to have a – you need a speaker who can
really address that because I hinted at it a little bit in this presentation, that the effects of
conservation policies are controversial within the economics profession.  There are some
people in the economics profession who believe that conservation policies do not
necessarily lead you to less energy use, that if you improve efficiency and lower prices,
then you get more –
 
Q:  Just to clarify, not efficiency as conservation; conservation as –
 
MR. CONKLIN:  Conversation as conversation.
 
Q:  (Off mike) – reduce.
 
MR. CONKLIN:  So I think a lot of this – a lot depends on what policy
approaches you’re using, what the outcome – I think that is a very interesting area to be
looked at and debate.  How would conservation policies work?  Are there some kinds that
would – that work better than others?  Are there other approaches to increased energy
efficiency, the increased energy efficiency approaches that may not necessarily reduce
total, total energy use, even though they increase our productivity?  There is tradeoffs
there too.  I’m not an expert in that area, but I think, boy, get a panel of dueling energy
economists up here; that would be a fascinating evening.  I would come – (laughter) – in
a heartbeat.
 
Q:  I’m going to give you my card and hopefully you find some names – (off
mike).
 
MR. CONKLIN:  We can certainly – I would be happy to help somebody try to
identify some people who would like to do that.  I think that would be a marvelous
evening.  That is a great suggestion.
 
MR. WEHRENBERG:  Go ahead.
 
Q:  I’m Les Taylor.  I own about a half a square mile of farmland in central
Illinois.  And my question is, what do you think the EU’s biodiesel efforts are going to
have on U.S. soybean prices?
 
MR. CONKLIN:  Whew.  (Chuckles.)  Boy, it’s –
 
Q:  Or soybean demand I should say.
 
MR. CONKLIN:  Soybean demand.  Boy, the – a we could put – this is a question
we could probably – because we have got corn pulling – we have got corn pulling acres
out of soybeans in the United States.  We have got Brazil starting to look at more and
more biodiesel domestically in addition to their corn-based ethanol.  We have got the EU
which is stimulating their – the EU basically mandates certain amounts of biodiesel to be
used, and they have targets like we have for ethanol.  And they are dragging in more
acreage to palm oil production in Indonesia and Malaysia.
 
There is huge – there is rapid run-up in rapeseed acreage, canola acreage in
Russia.  And where all of that washes out in world veg oil markets, we see – well, se see
veg oil prices rising, but that we have got so many pulls on both supply and demand that
we could have a very interesting conversation for many hours, and I probably ought to
have two or three of our top analysts sit down and talk with you.  If you send me an e-
mail or give me your card – are you in town most of the time?
 
Q:  Yes, I live here.
 
MR. CONKLIN:  Well, then you can – you can come over to 1800 M. Street any
day and we’ll have a great conversation.
 
Q:  Thank you.
 
MR. WEHRENBERG:  You should be back watching that half-acre.  (Laughter.)
 
Q:   Don Erbach, U.S. Department of Agriculture, retired.  It seems to me that
policy is going to play a heck of a role in how effective any of these projections are.
 
MR. CONKLIN:  Yeah.
 
Q:  Could you speculate on policies you would like to see enacted –
 
MR. CONKLIN:  (Laughter.)  Ooh!
 
Q:  That would lead us to a desired outcome in terms of both energy and
agriculture.
 
MR. CONKLIN:  I have been around too – I have been around too long as a
bureaucrat to get trapped –
 
MR. WEHRENBERG:  Well, this is Las Vegas, Neil.  (Laughter.)  What ever you
say here –
 
MR. CONKLIN:  But I can tell you as an economist, as an economist, I have a
predilection to like policies that are market-oriented better than I like policies that are not
market-oriented.  It’s very clear this is a complex situation, and it’s one that we’re not
going to come to a policy mix – I mean, we don’t live in a – you know, I have – I used to
go to OECD meetings a lot, and my European colleagues always used to be, you know –
you know, you Americans, you know, you don’t have clear policy goals, you kind of
want to punt.  Well, we live in a democracy where we need to have a debate about that.
 
I do think there are some elements that need – there are some elements that need
to be in the mix, certainly.  One element that is obviously key to any good outcome of all
of this is research.  That is, I think a pretty non-controversial conclusion.  I think that as
you look at the future, as you look at the future of policies, you need to think – people
need to be thinking very carefully about if we’re going to try to – that we don’t want to
get into a situation I think where the government is trying to pick winner and losers.  That
is sort of the way the former Soviet Union did it, and I think we all agree – we can agree
on some of these general principles.
 
In terms of specific policy proposals, there is so much all over the map right now
that it’s very hard to –
 
MR. WEHRENBERG:  Well, if I can make another follow-up comment on that, it
seems to me that a couple of big factors are externalities.  And it seems to me that we
don’t pay the cost in the price at the point of sail.  And so we have got security, we have
got the environment, we have got the economy, and those – you know, if we just allow
the market forces to proceed under our current policy, a lot of those externalities don’t
show up.
 
MR. CONKLIN:  Well, that is what a democracy is about; it’s about trying to sort
out how are we going to account for those externalities.  You are absolutely right.  There
were externalities – don’t forget, there were externalities – don’t forget, there were
externalities associated with bio-energy production in the 1800s.  You had to deal with
horse manure and you had to deal with wood smoke, and you could go on and on.  So
there is something we need to sort out.
 
Q:  Good evening.  Dr. – (inaudible) – 2020 institute.  And Dr. Urbeck (ph) is a
really sharp guy and he sort of stole my thunder with exactly the question I had. 
(Laughter.)  I’ll morph it into something a little bit different.
 
First of all, I hold in my hand the Armed Forces Journal, Magazine, that I just got
this morning.  And the main topic is a failure in generalship in they are sort of beginning
to reanalyze some of the decisions we have been making recently.  And I believe
introspection and critiquing is healthy, so I’m going to try to engage in that tonight with
ethanol. 
 
I take most of my numbers from Dr. Hussein Shapiri’s (ph) calculations, 2002
current (?) energy balance.
 
MR. CONKLIN:  Yup.
 
Q:  He is a colleague of yours.  His spread (?) is about 1.8 percent return – I’m
sorry, 1.08 return for the energy balance of corn ethanol.
 
MR. CONKLIN:  Yes.
 
Q:  And I know there is – everyone has their own studies and I know we are never
going to nail it down precisely.  But –
 
MR. CONKLIN:  Yeah, I have got to – there is a summary here I found on one of
the websites that sort of summarizes a whole bunch of these.  They are all over the map.
 
Q:  Right. And my problem in all of this – and you mentioned Dr. Collins (ph),
who was recently at the EIA’s energy mid-term conferences, and it was brought up to
him also that we’re really supplanting a lot of the energy found in oil with other energy
sources such as coal and natural gas to fuel the ethanol production.  And his analysis of
that was more or less so what?  Energy is energy.  And my question is, as we know that
when you take a gallon of gasoline, you have got about 125,000 BTUs to the 80,000 BTU
content of ethanol.  And you have got the delta in what it takes to produce ethanol and
what ethanol yields.  And you burn that in a 25-percent efficiency international
combustion engine.  My analysis is you’re almost going backwards, if not breaking even. 
And so what I’m getting at is that you’re already talking about we’re on a knife’s balance
in terms of the energy costs of ethanol, and it could go either way.  Is there now, or do
you foresee that there will be a reanalysis of the bet we are making in corn ethanol within
the USDA?
 
MR. CONKLIN:  Well, I think we are having.  I think the discussion about where
we are going with ethanol in general, including corn ethanol, certainly you have seen a
pretty active debate going on in the paper.  I think there is going to be active discussion
going on between everybody in the government.  But the reality is that we have a corn
ethanol industry in place, and that industry is expanding, and the economics of that
industry are driving it.  And until there is some change in policy or change in market
conditions that pushes us in the opposite direction, I don’t – I don’t think that we’re likely
to see any major change in where ethanol is going.  I’m not in a position to speak on the
department’s policy in terms of ethanol. 
 
Q:  And I’m not trying to speak negatively of you personally –
 
MR. CONKLIN:  No, but 
 
Q:  Just that, if you can convey –
 
MR. CONKLIN:  I think there is going to be a very active debate.  You have seen
–
 
Q:  (Off mike) – extremely cautious about where we head with this.
 
MR. CONKLIN:  I think you’re going to see a very active debate.  I appreciate
those comments.
 
MR. WEHRENBERG:  I suggest that if you’re not standing up, you’re probably
ought not to stand up.
 
Q: My name is John Clark.  I’m a retired mechanical engineer with a career
behind in engines of all kinds.  I want to make a point that seems to be missing a lot and
could dramatically change the way we look at the use of biofuels.  We all recognize that
the engines we use at the moment in our motorcars are internal-combustion engines.  It’s
because they are internal-combustion engines that they need a refined fuel.  So we have
this very pure, very expensive ethanol, say, to use in our engines, which is convenient for
the engines.
 
By way of contrast, most of our electric light comes from external combustion
engines, which burn, of all things, coals, and that is a horrible fuel to – (inaudible).  In
between there, there is the option that we can relatively cheaply and easily turn our
biomass into something that can be used in external combustion engines. That process
I’m sure would be less energy intensive than making ethanol.  And there is no reason
why external combustion engines can’t have the same efficiency as our current internal
combustion engines.  Thank you.
 
MR. CONKLIN:  Well, all of the thermodynamics I learned were from the
“Principles of Naval Engineering,” which is a big, thick manual that we were forced to
read in engine school when I was in the Navy.  But what you’re saying about – because
marine engines, you use a lot of external combustion – steam-propulsion is all external
combustion, and it makes sense.
 
I do think that as you start to talk about bioenergy as opposed to just biofuels, I
think you’re going to see more and more – more and more focus over the next few years
where we are not just going to be talking about biomass in terms of biofuels, for –
whether it’s ethanol or biodiesel or some of the other things that are being talked about,
but more about – more about bioenergy in general, which includes fuels for power plants
and more external combustion kinds of applications.
 
Q:  Hi, Neil.  My name is Triston (ph).  I’m a government consultant.  And I
found it very interesting to listen to an economist’s point of view on ethanol because
coming into this, I knew that corn-base ethanol was about 30-percent efficient.  I also
knew that there is a big other issue that comes with it, which is energy security.  So by
producing all of this corn and alternative fuel here, we can then attack the petroleum issue
in case of emergencies and any sort of breech in our supply.
 
You brought up some other interesting points about the transportation issues. 
Exporting to the Third World, I didn’t know that that was such a big deal with their food
supplies, and I didn’t know we made nearly that much of a difference with 60 percent of
global corn exports.  And also the feedstock issue – if you look at The Wall Street Journal
this morning, the front page, one of the articles is about how feedstock is becoming so
expensive that companies like Hershey’s and other chocolate and sugar-base companies
are starting to send their waste products to farmers all over the country to just give to
their pigs and stuff to feed, which is definitely different than the traditional-based corn
supply.  I’m wondering – I wanted to kind of get your opinion into the issue – just about
maybe like the opportunity costs of going in this direction versus spending money in
other directions, if corn-based ethanol only will make up 7.5 percent of the petroleum
output, like one of your pie charts showed.
 
MR. CONKLIN:  Well, I think that is one reason – certainly one reason –
everybody – there is a general recognition that corn-based ethanol cannot be the basis for
a comprehensive solution to renewable energy or even bioenergy, biofuel issues.  it’s one
of the reasons why, if you look at – if you look, for example, at the plan that the president
laid out in his State of the Union address, that the focus there is how do you get a path to
35 billion gallons, where you’re only talking about maybe 12 or 15 billion gallons that
involve corn-based ethanol, but then you begin to move on to other technologies and
other feedstocks.
 
That is one of the things that makes research and progress in that area so critical. 
It’s one of the things I think that we get – you talked about opportunity costs.  It’s one of
the things that we need to focus on as we discuss about what direction are we going as we
look at wrestling with the energy issues that we have got in front of us today.
 
Q:  Okay.  And as far as cellulose is concerned, what is your opinion on that? 
How much of a footprint can that make, assuming prices will come down shortly?
 
MR. CONKLIN:  There is certainly – if you look at the potential, you have got
such a broad range – so much broader range of feedstocks that could potentially go into
cellulosic. One of the things – that it’s no doubt it can have a much bigger impact than
you can have with corn-based ethanol alone. The question is how big, what feedstocks,
and what are the consequences because there are obviously going to be tradeoffs no
matter what direction we go.
 
The other thing we haven’t talked about, and something I don’t know anything
about, things like wind, solar, and other sources of energy, nuclear, other sources that we
can look at in the future. So there is – it’s a whole big picture and I’m looking at one
small – one small slice here.
 
Q: Okay, thank you.
 
Q:  Adam Siegel, Energy Consensus.  I want to thank you for a good presentation,
and an hour-and-a-half can’t cover the entire spectrum.
 
A couple points on things that were not covered – a short question, then perhaps a
longer.  Peak soil is also talked about – some people – and so, for example, the
implication of corn and the energy return of what is happening with the soils.  Secondly,
generally, the Department of Agriculture looks big.  When you talk to some of the people
doing synthetic fuels, their vision, looking downstream a decade or so, or almost yard-
waste – the neighborhood fuel machine that you can cut your grass, take and get fuel out
of to I guess power the big power lawnmower.  (Laughter.)  Absolutely – as opposed to
the push mower, which I’m about to buy. 
 
The one – the quick question would be is, in your statistics on agriculture, does
that include the rise and use of packaging, the energy inputs to food transportation and
the whole food system, or is it in only the pure – 
 
MR. CONKLIN:  No, that energy intensity I reported there was production
agriculture.
 
Q:  So it’s production agriculture.
 
MR. CONKLIN:  So that is farm gate.
 
Q:  So rather than our food system.
 
MR. CONKLIN:  It goes from farm gate and back.  And I’ll have to – I’m not
sure – I’ll have to look around and see if – it’s a good question about whether we have
got – I can find someone who has done a good accounting for the whole food system.
 
Q:  One of the things – there is a – you know, if you take a look around at the
people looking at peak oil and otherwise, the hundred-mile diet is every year, the average
calorie travels more miles into the stomachs than in the past.
 
The one that Governor Schweitzer talks about when he talks about biofuels, one
of the things he argues is, in terms of the – the disruption that the United States has
created with our subsidies, the problems that we create in trade negotiations, because of
our subsidies to agriculture, as well as a lot of the disruption that we have created in
Third World economies from our aggressive pushing of agriculture, that we have
probably served our economy much better by cutting our oil inputs through in essence
eliminating our agricultural exports and turning that over to fuels, improving economies
around the world and lowering our tensions with other nations.  Something to think about
in an economic –
 
And I believe – I can’t remember if he is an agricultural economist as his Ph.D. –
it’s something along those lines.  So you have a governor who is in this field.
 
MR. CONKLIN:  Yeah, I may – that last one is an interesting observation because
of course, you have had a lot of complaints, especially from developing countries and the
– as we have gone through the Doha negotiations about the effect of U.S. agricultural
policy.  And some of that – some of that I think is based on a lack of understanding about
how potent our policy really is, about how big of an effect it really has, but if you look at
what has happened with grain prices over the last two years and the effect as a result of
ethanol, we have had kind of an experiment because we have done – and you can find on
our website a number of analyses of global trade liberalization.
 
In 2001, we did a study that looked at what would happen if we completely
liberalized agricultural policy globally if we had to eliminate all tariffs, all subsidies,
everything, something – nobody ever expects to go there.  This was globally, not just the
U.S.  We estimated that there was – what the impact on overall – on prices for different
agricultural commodities would be, and it was something like an average of 12-percent
increase globally in commodity prices across a whole range of them.  You can find the
study on there.
 
The effect of ethanol on corn prices has been an order of magnitude bigger than
anything we projected would ever come from negotiating – from negotiating a
completely successful liberalization.  And I think there is sort of a natural experiment
here that says, well, how – what is that going to – what effect is that going to have on
farmers in the rest of the world, not just farmers but on poor people and economies and
economic growth.
 
And I think as you look around, you’re already starting to see food importing
developing countries that are quite concerned about the rise in prices and the effect on
poor people.  I don’t think we have seen a really – we have seen farmers in some parts of
the world really doing better, but it doesn’t solve the income-distribution problems in
Brazil, which has probably one of the least-equitable income distributions in the world,
and it’s not – higher commodity prices aren’t resolving their problem.
 
So at one level, it sounds like, gee, this might be a very nice solution as to sort of
move back and look at more closed economic solutions – more close system – economic
solutions, but I think the reality is that we are linked today globally.  We are linked in
energy markets.  We are linked in agricultural markets, and we have got to find ways to
deal – it doesn’t mean that we don’t want to move forward in terms of policy reform, in
terms of better policies and more efficient policies, but I think once again, it means that
there isn’t any sort of magic solution.  It would be nice if there really was.  
 
Q:  Hans Herren with the Millennium Institute.  You sort of just sort of touched
on what I wanted to bring up a little bit, is that I think we are setting ourself up again with
short-term thinking and not looking at the longer, at the bigger picture.  In particular, I
think we really need to – when you look at ethanol in the U.S. and maybe even in Brazil,
what is happening at what cost, at the real cost this is coming.
 
Rising food prices – we still have in the world today, what, 1800 million people
who don’t have enough to eat.  In 2050, we’re going to have probably another 3 billion
people more around.  Now, I really wonder how these equations are going to pan out. 
We have climate change coming.  We know that, for example, in Africa, a lot of areas
will dry out totally.  So what is – how are we going to deal with this because some areas
in the world will have to produce more food to make available for other people, or maybe
they will just migrate.  They will come here, come to Iraq, wherever.
 
And I think that we need now to really think bigger scale and longer term.  And
the ethanol, as you mentioned earlier – yeah, what is the time frame?  Maybe 10 years.  
Some of these factories may be paid off in three years.  At what damage, what kind of
permanent damage to the soil, to the water table lowering.  I think – we cannot continue
the same as usual.  This is business as usual which brought us into all of this trouble with
agriculture today.
 
I’m co-chairing the major assessment of agriculture, which is looking 50 years
back in agriculture and 50 years forward in agriculture, sort of the agricultural equivalent
of the millennium assessment.  And this bioenergy thing is now sort of – maybe with that
technology coming to the top, as a big discussion point in this assessment.  But I think it
looks to me like we have other issues to deal with.  And agriculture is here mostly to feed
people and to feed them well with nutritious and quality food, not junk food.
 
And so I just want to – I mean, to me this equation doesn’t pan out.  It just doesn’t
add up because you are using resources, land, water, even oil for more fertilizer, for more
herbicide, which I wonder how much they are calculating into this things there.  And I
think that one has to reassess this whole issue with I think – take a new piece of paper
and start from scratch.  Thank you.
 
MR. CONKLIN:  I don’t disagree with your final conclusion at all, that we need
to think through where we are at this point in a really very – in a really very careful way. 
I think if you think about – you can no longer think about agriculture and energy in a
separate world.  We have been used to thinking about agriculture and sort of being over
here in kind of a declining part of our – relatively a declining part of our economy, and
we’re used to thinking about energy in a different context.
 
We have got to think about them together because if you think about it, if you
abstract from mining fossil fuels, if you abstract from thinking about using fossil fuels,
where does energy come from; it comes from the sun.  We have got a little bit of
geothermal energy I suppose from within the planet, and that energy gets translated into
wind, and it gets translated into potential for water power and chlorophyll transform it
into plant matter and plant matter can feed animals or it can produce ethanol or it can go
to food for humans.
 
And all of these things involve – ultimately involve tradeoffs in terms of thinking
about where we are going.  We have driven tremendous economic growth in part as – no
doubt in part as a result of relatively cheap energy for a relatively short period in the
evolution of mankind.  And so I certainly agree that we are at a point where we need to
think very carefully about where we are going and have a really – a really productive
discussion about what is the most appropriate direction for policies.  These interactions
are all complex.  There are no simple solutions and there are no free lunches, so.
 
Q:  Sarah Minczeski, Center for Naval Analysis.  I’m curious to know what the
role of fertilizer plays into this discussion about the economics of investing more in
ethanol, and where is that fertilizer coming from?  How much is it costing us?  How
much is coming from unstable regions of the world?
 
MR. CONKLIN:  Well, I can’t give you all of the facts and figures connected
with fertilizer, but most nitrogen fertilizer at least is derived from natural gas.  We import
substantial amounts of fertilizer, and I think – I’m trying to think where some of the big –
I know that Russia is a substantial exporter of fertilizer into world markets.  And it’s not
just the U.S. that we need to be thinking about – that we need to be thinking about, but
fertilizer.  And somebody asked the question about do we account for the energy use in
fertilizer when we’re doing the energy balance – those energy balance calculations, and
the answer is yes on the corn-based ethanol.
 
I’m not a real expert on fertilizer.  We have got some.  So send me an e-mail, sir. 
You have got my address and I’ll put you in touch with the fertilizer man.  (Laughter.)
 
Q:  Thank you.
 
MR. WEHRENBERG:  Thank you very much, Neil.
 
MR. CONKLIN:  You’re welcome.
 
MR. WEHRENBERG:  Please thank our –
 
(Applause.)
 
MR. CONKLIN:  Thank you.  Thank you, a terrific audience.  (Chuckles.)
 
MR. WEHRENBERG:  Stimulated a fair amount of discussion.  We hope to see
you all on the fourth of June.
 
(END)

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