HOW CLEAN AIR LEGISLATION COULD AFFECT US AGRICULTURE

HOW CLEAN AIR LEGISLATION COULD AFFECT US AGRICULTURE

While Congress struggles to complete work on a 5-year farm bill before the August recess, a separate piece of legislation on track for earlier passage could prove to have just as significant an impact on U.S. agriculture.

New U.S. clean air legislation, which would require the use of better oxygenated fuels in at least 44 U.S. cities, could open up a new market for ethanol, an oxygen-rich alcohol made primarily from corn.Increased demand for ethanol, and thus for corn, could drive up the cost of feed for cattle and hogs and depress soybean and oilseed prices, because of increased production of corn meal, a by-product of ethanol production.

But exactly how much of the oxygenated fuel market ethanol will capture is a matter of debate.

Calling the legislation a virtual mandate for ethanol, the American Petroleum Institute released a Sparks Commodities Inc., study that estimated an additional 1.3 billion bushels of grain would be needed annually to meet demand.

However, the National Corn Growers Association and the Renewable Fuel Association say, at best, ethanol will fill 30 percent to 40 percent of the oxygenated-fuel market, or only about 300 million additional bushels. In USDA's energy division, officials said it was still too early to make an estimate.

Much will depend on which clean air package House and Senate conferees agree on, with the legislation scheduled to go into effect by November 1991 under the Senate bill and a year later under the House.

In the U.S. cities that have failed to meet the Environmental Protection Agency's standards for carbon monoxide emissions, the Senate bill would require the sale of motor fuel containing at least 3.1 percent oxygen, while the House calls initially for only 2.7 percent to bring the areas into compliance.

The difference is significant because the higher the oxygen content requirement, the more likely ethanol would be used as the oxygenator. Under current EPA regulations, ethanol can be blended with gasoline at rate that produces a 3.7 percent oxygen content.

By comparison, 2 prime competitors in the oxygenator market - methyl tertiary butyl ether and ethyl tertiary butyl ether - can be blended at rates that produce just 2.7 percent and 2.0 percent oxygen content, respectively.

Both the House and the Senate bill also would require 2.7 percent oxygen-content fuel by 1994 for 9 major U.S. cities that have failed to meet standards for ozone-forming emissions. Together, the cities consume about one- fourth of the gasoline sold in the United States.

The estimate by Sparks Commodities of the extra grain that might be needed under the Clean Air bill is based on API's assertion that government subsidies give ethanol a cost advantage over other alternatives.

The federal government waives 6 cents of the 9-cent federal excise tax on gasoline if it is blended with at least 10 percent ethanol produced from renewable resources, such as corn. The effective subsidy totals 60 cents per gallon of ethanol, since one gallon of ethanol can be blended with 10 gallons of gasoline.

Based on expected fuel demand, the Sparks study estimated that annual ethanol production could quadruple to about 4 billion gallons from about 800 million to 900 million currently. Assuming no ethanol is imported, an additional 1.29 billion bushels of grain would be needed for the extra 3.23 billion gallons of ethanol production, Sparks said. One bushel of corn makes about 2.5 gallons of ethanol.

''Short-term acreage and production adjustments would be unlikely to offset fully the corn consumption increases . . . The result would be sharp reductions in U.S. feedgrain stocks and increases in price by as much as 35 percent," the Sparks study said.

In addition, the high-quality, protein-rich meals that are the by- products of ethanol production would flood the market, reducing demand and prices for soybeans. It also could further reduce U.S. soybean production - already in a decade-long decline - as farmers switch into corn instead.

The higher corn prices would mean an "enormous cost-price squeeze for producers of meat, milk and eggs, and would have complex impacts," the Sparks study said.

Although prices eventually would return to more normal levels once the agricultural sector adjusted to the higher ethanol demand, "prices and food costs would continue to be higher even after the adjustment," the study said. Congressional sources also put ethanol's potential market share lower than Sparks, although an aide to Sen. Tom Daschle, D-Iowa, said it could lead to a doubling of the industry. Ethanol could capture 40 percent of the market in carbon monoxide non-attainment cities, but probably no more than a third in the 9 ozone non-attainment cities, he said.

Many of those major cities - New York, Baltimore, Los Angeles, San Diego - are on the coast, far away from Midwest ethanol refiners. Because of its physical characteristics, ethanol can not be transported through a pipeline, leaving those cities for MTBE or perhaps ETBE, which can be more easily transported.