[Senate Hearing 110-529]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 110-529
 
                     BIOFUELS IMPACT ON FOOD PRICES

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   TO

   RECEIVE TESTIMONY ON THE RELATIONSHIP BETWEEN THE UNITED STATES' 
                 RENEWABLE FUELS POLICY AND FOOD PRICES

                               __________

                             JUNE 12, 2008


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               Committee on Energy and Natural Resources


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           BOB CORKER, Tennessee
KEN SALAZAR, Colorado                JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Glauber, Joseph, Chief Economist, Department of Agriculture......    11
Huttner, Jack, Vice President, Biorefinery Business Development, 
  Genencor, Rochester, NY........................................    37
Karsner, Alexander, Assistant Secretary, Energy Efficiency and 
  Renewable Energy, Department of Energy.........................     5
Outlaw, Joe L., Agricultural and Food Policy Center, Texas A&M 
  University, College Station, TX................................    20
Pyle, Jason, Chief Executive Officer, Sapphire Energy, Inc., San 
  Diego, CA......................................................    25
von Braun, Joachim, Director General, International Food Policy 
  Research Institute.............................................    33

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    69

                              Appendix II

Additional material submitted for the record.....................    91


                     BIOFUELS IMPACT ON FOOD PRICES

                              ----------                              


                        THURSDAY, JUNE 12, 2008

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:15 p.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. The hearing will come to order.
    Thank you all for coming here today to discuss our Nation's 
biofuels policy and how that policy is affecting domestic and 
global food prices. The recent increase in commodity prices, 
with food and fuel prices at historic highs, highlights the 
importance of trying to be sure we get our policies right. We 
called today's hearing in an effort to do just that, to make 
sure that those policies make sense.
    Last month, I asked the Secretaries of Agriculture and 
Energy a series of questions about the impact of the Renewable 
Fuels Standard on domestic and international food and fuel 
prices. Those questions were intended to establish some of the 
facts on this issue so that we could base today's discussion on 
facts rather than on agenda-driven calculations that we see 
more often than not.
    The answers that I received from the Departments of 
Agriculture and Energy indicate that U.S. biofuels policy 
explains between 4 and 5 percent of the 45 percent global 
increase in food prices this last year. At least that is my 
interpretation of what they have said. If that is wrong, we can 
clarify that. At the same time, biofuels have increased the 
U.S. fuel supply and are reducing the price that Americans pay 
at the gas pump by somewhere between 20 and 35 cents per 
gallon.
    As we continue on this path toward expanding our 
alternatives to gasoline and reducing its cost, we obviously 
need to find a way to eliminate any impact on global food 
prices. The intent of the Renewable Fuels Standard that was 
enacted in December of last year, December 2007, is to move 
beyond our current technologies and to technologies that have 
no implications for our food supply.
    I think the critics of our current biofuels policy do not 
question the validity of our end goal of a healthy second-
generation biofuels industry, but rather question our path for 
arriving at that end goal. Our current path does require 
increased use of existing biofuels, including corn ethanol and 
soy-based biodiesel.
    We need to consider what altering that path now would do to 
industry that is attempting to respond to the Government 
policies we have already put in place and if there would be 
negative implications for second-generation fuels. It is a fact 
that many of the companies that are expected to be next-
generation biofuel industry leaders, especially for cellulosic 
ethanol, are current industry leaders in corn ethanol 
production.
    At the same time, we need to be mindful of any unintended 
consequences of our biofuels policy. No one wants our biofuels 
policy to increase the prices that Americans are paying at the 
grocery store. We also, of course, need to ensure that our 
policies, including but not limited to our biofuel policies, 
are not negatively impacting the world's poor who are most 
vulnerable to food price increases. I take seriously the United 
Nations call for further study on the topic of biofuels and 
look forward to constructive thoughts on how we can create a 
more sustainable global biofuels industry.
    Let me just defer to Senator Domenici for his statement at 
this time.
    [The prepared statements of Senators Bingaman and Salazar 
follow:]

 Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico

    Thank you all for coming today to discuss our nation's 
biofuels policy, and how that policy is affecting domestic and 
global food prices. The recent increase in commodity prices, 
with food and fuel prices at historic highs, highlights the 
importance of getting our policies right. I called today's 
hearing in an effort to help us do just that: to make sure we 
are getting our biofuels policy right.
    Last month, I asked the Secretaries of Agriculture and 
Energy a series of questions about the impact of the Renewable 
Fuel Standard on domestic and international food and fuel 
prices. Those questions were intended to establish some of the 
facts on this issue, so that we could base today's discussion 
on facts, rather than the agenda-driven calculations that we 
see more often than not.
    The answers that I have received from the Departments of 
Agriculture and Energy indicate that U.S. biofuels policy 
explains between 4 and 5 percent of the 45 percent global 
increase in food prices in the last year. At the same time, 
biofuels have increased the U.S. fuel supply and are reducing 
the prices that Americans pay at the gas pump by between 20 and 
35 cents per gallon.
    As we continue on this path toward expanding our 
alternatives to gasoline and reducing its cost, we obviously 
need to find a way to eliminate any impact on the global food 
prices. The intent of the Renewable Fuel Standard that was 
enacted in December 2007 is to move beyond our current 
technologies, to technologies that have no implications for our 
food supply.
    I think the critics of our current biofuels policy do not 
question the validity of our end goal of a healthy second-
generation biofuels industry, but rather question our path for 
arriving at that end goal. Our current path does require 
increased use of existing biofuels, including corn ethanol and 
soy-based biodiesel.
    I am concerned that altering that path now would not only 
be unfair to the industry that is responding to the government 
policies that have already been put in place, but also would 
have negative implications for second-generation fuels. It is a 
fact that many of the companies that are expected to be next-
generation biofuel industry leaders, especially for cellulosic 
ethanol, are current industry leaders in corn ethanol 
production. To hurt those companies' bottom lines now would 
endanger their investments in expanding their business to 
include next-generation production.
    I also suspect that investment in other kinds of next-
generation technology would suffer, as investors would feel 
less confident of Congress's commitment to its biofuels 
policies. I believe that many next-generation fuels hold great 
promise for further diversifying our fuel supply. As we 
diversify away from biofuel feedstocks that compete with our 
grain supply, we also diversify the geographic production areas 
beyond the current base in the Midwest.
    In my home state of New Mexico, which has no corn ethanol 
production, limited sorghum-ethanol production, and very small 
amounts of biodiesel production, is an example of how the 
geography of biofuels production can change. We are hopeful 
that we will be home to the country's first biobutanol plant, 
which could be located near Portales, New Mexico, and could use 
sweet sorghum as a feedstock. We also understand that New 
Mexico is one of the most promising states in the U.S. for 
large-scale algae production, which we will hear more about in 
today's hearing. We need the market certainty that comes with 
the existing renewable fuels mandate in order to realize the 
benefits of this next-generation industry.
    At the same time, I do think we need to be mindful of any 
unintended consequences of our biofuels policy. No one wants 
our biofuels policy to increase the prices that Americans are 
paying at the grocery store--although I think we can agree that 
this domestic price increase is to some degree offset by the 
savings we're seeing at the fuel pump. But we must also ensure 
that our policies, including but not limited to our biofuels 
policies, are not negatively impacting the world's poor, who 
are most vulnerable to food price increases. I take seriously 
the United Nations call for further study on the topic of 
biofuels, and look forward to constructive thoughts on how we 
can create a more sustainable global biofuels industry.
                                ------                                


   Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado

    Mr. Chairman and Ranking Member Domenici, thank you for 
holding this critical hearing on the relationship between our 
nation's renewable fuels policy and food prices. Obviously fuel 
and gasoline prices are front and center in our minds today as 
families across the country are struggling to cope with 
spiraling fuel costs. Globally, however, there is an emerging 
food crisis that threatens to affect the lives of millions of 
the world's poorest citizens. It is our responsibility to 
evaluate whether our biofuels policies are impacting food 
prices.
    As I have said repeatedly over the last four years there is 
no quick fix to this enormous problem, but there are a number 
of things we can do to stem the tide of rising fuel costs in 
the long-run. We need to be improving our energy efficiency, 
investing in technologies, and developing our clean energy 
economy. And I am proud that under your and Sen. Domenici's 
leadership this committee has produced two landmark energy 
bills that are huge steps in the right direction in terms of 
righting our nation's energy policy and breaking our addiction 
to foreign oil.
    At the end of 2007, Congress passed legislation to increase 
fuel efficiency standards in cars and light trucks by over 40 
percent by 2020. This will save over 1.1 million barrels of oil 
a day. The bill we passed last December, the Energy 
Independence and Security Act, is spurring rapid development 
and deployment of the next generation of biofuels, such as 
cellulosic ethanol. The bill quintupled the existing renewable 
fuels standard to 36 billion gallons by 2022, 21 billion of 
which must be from advanced biofuels, such as cellulosic 
ethanol. That is more than enough to offset our oil imports 
from Saudi Arabia, Iraq, and Libya combined.
    I was also proud of the work we did in the Farm Bill to 
spur cellulosic biofuels production. Cellulosic biofuels have 
the potential to displace 3 billion barrels of oil annually, 
equivalent to 60 percent of our country's yearly consumption of 
oil in the transportation sector, without affecting our need 
for food, feed or fiber, and DOE scientists believe have the 
potential to dramatically reduce carbon pollution. The Farm 
Bill includes a provision I sponsored that provides a $1.01/
gallon tax credit for the production of cellulosic biofuels. It 
is the first incentive for cellulosic biofuels of its kind.
    Biofuels are an essential and critical part of our strategy 
to reduce our dependence on foreign oil. Recently many have 
attributed the rising cost of food worldwide to the increased 
use of biofuels, and corn ethanol in particular. Some are even 
calling for a repeal of the expansion of our renewable fuels 
standard that was a cornerstone of last year's Energy 
Independence and Security Act. I believe firmly that we must 
not lose our resolve.
    The so-called ``food vs. fuel'' issue has been a part of 
the discussion of biofuels from day one, and today's full-
throated debate is an important opportunity to engage in a 
healthy discussion of the future of biofuels. But as I'll 
explain, ethanol production is not driving food prices up. In 
the long run, pushing forward with the RFS and the development 
of cellulosic biofuels--biofuels that are made from various 
waste feedstocks--is one of the most responsible things we can 
do to reduce our dependence on foreign oil.
    Three principal factors have driven rising food prices, and 
ethanol production isn't one of them. First, global demand for 
grains, particularly from China and India, is rising. Second, 
global supply has slumped badly due to serious drought 
conditions in several areas of critical agricultural 
production. U.S. producers are doing everything they can to 
boost supplies. Not counting corn used for ethanol production, 
we produced 17% more corn food product and exported 23% more 
food product overall in 2007 than in 2006. Furthermore, Ed 
Lazear, Chairman of the President's Council of Economic 
Advisors, stated recently that ethanol accounts for less than 3 
percent of the increase in global food prices.
    The third major factor driving increased food prices is the 
rising cost of oil. Petroleum costs are embedded in every part 
of the global food supply chain. Recent studies by USDA reveal 
that for every dollar we spend on food, only twenty cents is 
the cost of the food product itself. The other 80 cents or so 
are the costs of labor, energy, transportation, etc. Simply put 
there is a broad consensus that in the global marketplace, U.S. 
corn production alone does not set the price for corn and that 
biofuels production has a negligible impact on the prices of 
wheat, rice, and other food commodities.
    With the price of oil spiraling higher, it is easy to lose 
sight of the fact that gas prices would be even higher today if 
not for biofuels. Merrill Lynch estimates that we would be 
paying 15 percent higher prices at the pump without current 
domestic biofuels on the market. In addition, studies are 
showing that, as a result of our renewable fuels standard 
enacted in 2005, U.S. oil imports recently declined for the 
first time in a quarter century.
    In my view, biofuels are a centerpiece of our quest for 
energy independence and we must stay the course with the RFS. I 
am eager to engage in this discussion and to hear the 
perspectives from our distinguished panel on these critical 
issues. Thank you, Mr. Chairman.

    Senator Domenici. Mr. Chairman, in order to expedite the 
hearing, since we have a number of places to go and still want 
to do this committee justice, I would ask that my statement be 
put in the record, provided we can just proceed after this to 
the witnesses. Is that what would happen?
    The Chairman. That is correct since I do not anticipate any 
other opening statements. So we will put your statement in the 
record.
    [The prepared statement of Senator Domenici follows:]

    Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From 
                               New Mexico

    Thank you, Mr. Chairman, for calling this hearing on a topic that 
you and I have worked closely on in recent years. I am very proud of 
the work that this committee has done to promote the production of 
domestic biofuels. Increasing their availability and usage could help 
resolve some of our most serious energy challenges.
    Late last year we passed the Energy Independence and Security Act, 
a bill that will significantly strengthen our nation's energy security. 
One of its most important provisions was an expansion of the Renewable 
Fuel Standard, which we first established in the Energy Policy Act of 
2005.
    Much has changed since the 2005 standard was put into place. In 
2005, we thought of renewable fuels as fuel additives. But last year, 
in his State of the Union Address, the President laid out his ``Twenty 
in Ten'' initiative, which inspired people to think of renewable fuels 
as full-fledged transportation fuels. Our re-evaluation and enhancement 
of the renewable fuels standard in 2007 reflects our strong desire to 
promote development of fuels that will reduce the nation's reliance on 
foreign oil.
    We have been on the Senate floor for the past week talking about 
our energy crisis. I have stressed that we need to produce all the 
domestic oil and gas that we can, and as soon as we can, not only to 
dampen prices, but as a bridge to the future where we envision our 
nation's freedom from foreign sources of energy. While some biofuels 
technology, like corn ethanol, is available now to help build that 
bridge, we must also move forward with advanced biofuels, including 
cellulosic ethanol, if we're going to get to the other side of the 
bridge where biofuels, nuclear energy, wind, solar, and other 
renewables will secure our energy future, free of foreign sources. In 
the near term, wholesale ethanol is currently about one dollar cheaper 
than wholesale gasoline. As more biofuels are produced, as more service 
stations offer them for purchase, and as more cars are able to run on 
them, we should expect even more progress in decreasing fuel prices and 
emissions. But the purpose of this hearing is not to look at the 
benefits that biofuels have for our energy supply and security. We have 
already concluded that the benefits are legion. Instead, we're here 
today to examine what role, if any, biofuels are playing in recent 
price increases for agricultural commodities. Many in the media, along 
with other critics of biofuels, have been quick to blame increases in 
the price of corn on greater demand for ethanol. America's biofuels 
policy has been called into question, and the ``food versus fuel'' 
debate has now led to a number of formal requests to suspend or repeal 
the Renewable Fuel Standard.
    Most experts point out that there are multiple factors contributing 
to food price increases. Those include higher energy prices, soaring 
global demand for commodities, droughts, the weakening of the dollar, 
and poor agricultural policies around the world.
    A number of studies have examined the relationship between domestic 
biofuels production and global access to food. I hope that our 
witnesses today will help in our assessment of these studies and our 
search for answers as to whether increased production of biofuels will 
exacerbate world hunger.
    We want to ensure that the expanded RFS promotes a robust biofuels 
industry here in the United States. We want to make sure that we take 
the right approach to facilitate the implementation of that program, 
and provide a smooth transition to greater integration of biofuels into 
our energy supply mix. But as we do those things, we also want to be 
sure that we do not create other problems that will in turn need to be 
dealt with.
    I look forward to the testimony from today's witnesses, and hope to 
learn more about what we can do to ensure that we meet these 
objectives.

    The Chairman. Let me just alert all the witnesses that we 
do have a vote scheduled here at 3 o'clock. So we hope by then 
we can have everyone's testimony in, and then we will probably 
have a short recess and return for some of the questions that I 
am sure people will have.
    Let me just introduce our witnesses. First is Alexander 
Karsner who is the Assistant Secretary in the Office of Energy 
Efficiency and Renewable Energy in the Department of Energy. 
He's a regular witness here, and we appreciate him being here 
again today. Joseph Glauber, who is the Chief Economist with 
the Department of Agriculture. We appreciate you being here 
very much. Joe Outlaw, who is the Co-Director of the 
Agricultural and Food Policy Center in the Department of 
Agricultural Economics in College Station, Texas. Thank you for 
being here. Joachim von Braun. I am getting you a little out of 
order here. I guess the next in order of the way you are seated 
is Jason Pyle. Jason is the Chief Executive Officer with 
Sapphire Energy out of San Diego, California. Thank you for 
coming. Joachim von Braun is the Director General of 
International Food Policy with the Research Institute here in 
Washington, DC. Thank you very much for being here. Jack 
Huttner, who is the Vice President of Biorefinery Business 
Development in Genencor out of Rochester, New York.
    Thank you all for being here, and if each of you could take 
5 or 6 minutes and summarize the main points you think our 
committee needs to understand and we will put your full 
statements in the record as if read. Let us start with you, 
Andy. If you will just go ahead. Thank you.

  STATEMENT OF ALEXANDER KARSNER, ASSISTANT SECRETARY, ENERGY 
     EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY

    Mr. Karsner. Mr. Chairman, Ranking Member Domenici, members 
of the committee, thanks for the opportunity to appear before 
you today to discuss the sustainable contribution that biofuels 
make to the Nation's fuel supply in the context of the food 
versus fuel debate. All of us recognize that rising food and 
fuel prices are an important pocketbook issue for American 
consumers. We also recognize the national and economic security 
importance of addressing our dangerous addiction to oil, as 
well as the urgency of developing clean alternative fuels that 
reduce greenhouse gas emissions and enhance our environmental 
well-being. Our biofuels policy and national program make 
important contributions with consideration and inclusion of all 
of these goals.
    Unfortunately, recent media coverage of ethanol and food 
prices has created a number of misconceptions about biofuels 
and fed inaccuracies into the global and national dialog. The 
most prominent recurring myths are that ethanol does not 
improve the energy balance, that it has a net negative impact 
on the environment, and that it is a primary contributor to 
rising food prices. We appreciate the opportunity to address 
these views and continue to invite all serious and interested 
parties to engage with the depth of experience that our 
national laboratories and scientists can provide on the 
subject.
    Data would suggest that domestic biofuels are not in and of 
themselves creating a food security issue and in fact are only 
a small fraction of the increase in food prices. Importantly, 
biofuels offer a number of significant energy security and 
environmental benefits that will continue to grow, assuming a 
predictable policy environment as the technology for next-
generation biofuels evolves. Of course, next-generation 
biofuels are exclusively what the Department of Energy invests 
in.
    In the U.S. today, conventional ethanol has a positive 
energy balance and this balance is measurably and constantly 
improving with new technologies and efficiencies. According to 
Argonne National Laboratory, each gallon of ethanol produced 
from corn today is estimated to deliver on average 25 percent 
more energy than the energy that is used to produce it.
    DOE's current estimates find that ethanol also results in 
approximately 20 percent fewer greenhouse gas emissions 
compared with gasoline. According to Argonne National 
Laboratory, with improved efficiency and the use of renewable 
energy in production, this reduction could potentially reach up 
to 52 percent, which has recently been demonstrated. The 
positive energy balance and the potential GHG reduction from 
cellulosic ethanol is, of course, far greater still.
    With regard to food price impacts, most preliminary 
analyses suggest that present feedstock demand for domestic 
biofuels plays only a small role in global food supply and 
pricing. Moreover, the food price impact of domestic biofuels 
on U.S. consumers is even smaller since the farm price of 
commodities accounts for less than 20 percent of U.S. 
consumers' food costs.
    Of course, there is significant offset and compensation for 
some of this through the constraint on retail fuel prices at 
the gasoline pump which we conservatively estimate to be 20 to 
35 cents per gallon savings for the use of ethanol every time 
we fill up. Independently verified and peer-reviewed studies 
suggest the number is far higher.
    To help meet our long-term energy needs, this committee has 
ensured that the Department of Energy's biomass-related 
activities are 100 percent designed and dedicated to move 
toward non-food, nonedible feedstocks in a renewable and 
sustainable way. Primarily, this is from waste streams and 
fast-growing sustainable energy crops that have the potential 
to have an even greater positive environmental and energy 
security impact.
    Cellulosic biofuels are expected to deliver four to six 
times as much energy as what is required to produce them. 
Additionally, DOE research has shown that cellulosic feedstocks 
can reduce life-cycle greenhouse gas emissions by up to 86 
percent when compared with gasoline.
    DOE's research, development, deployment, and 
commercialization activities exclusively support the 
development of cellulosic and advanced biofuels. This is 
consistent with EPACT section 932. So the Department is 
investing up to $385 million over the next 4 years in cost-
shared, integrated, commercial-scale biorefineries that are 
projected to produce up to 130 million gallons of ethanol from 
cellulosic biomass.
    In addition, DOE is investing up to $200 million over the 
next 5 years in smaller 10 percent scale cost-shared 
biorefineries that will demonstrate a range of advanced 
biochemical and thermochemical conversion platforms and 
technologies and use a wide range of sustainable cellulosic 
feedstocks.
    With continued technological advances, cellulosic ethanol 
and other advanced biofuels will, in fact, help our Nation reap 
greater benefits in the future, complementing the bipartisan, 
bold energy initiatives that the President and Congress have 
put in place to enhance our Nation's energy security and 
economy.
    The food and fuel pricing issues, including aspects of 
sustainability, need increased clarity and further dialog as 
they are, of course, important and complex as we grow 
alternatives to a carbon-based fossil fuel economy. We would 
again caution, therefore, against hasty judgments based on 
insufficient assumptions, limited information, or the interest 
of particular parties or groups. Many analysts both within and 
outside of the Government are currently working to analyze 
these issues on a scientific and economic basis, and one 
certainty is that our data, as well as the technologies and the 
performance, will continue to improve substantially in the 
months and the years ahead.
    Mr. Chairman, thank you for holding this important hearing 
and your continued leadership offering us perspective and 
proportionality on these issues. I appreciate the leadership of 
the committee in this and the opportunity to address the 
current debate of the role of biofuels as part of our Nation's 
energy portfolio.
    This concludes my prepared statement and I am happy to 
answer any questions that you may have.
    [The prepared statement of Mr. Karsner follows:]

 Prepared Statement of Alexander Karsner, Assistant Secretary, Energy 
         Efficiency and Renewable Energy, Department of Energy

    Mr. Chairman, Ranking Member Domenici, Members of the Committee, 
thank you for the opportunity to appear before you today to discuss the 
sustainable contribution that biofuels can make to the Nation's fuel 
supply in the context of the U.S. Renewable Fuel Standard (RFS) and the 
food versus fuel debate. All of us recognize that high food prices and 
high gasoline prices are important ``pocketbook'' issues for American 
consumers. We also recognize the national and economic security 
importance of reducing our dependence on oil as well as the urgency of 
developing new fuels that will reduce greenhouse gas emissions. Our 
biofuels policy makes important contributions to each of these goals.

         FEDERAL COMMITMENT TO SUSTAINABLE BIOFUELS DEVELOPMENT

    As part of the 2007 State of the Union Address, President Bush 
called on Congress to significantly increase the use of advanced 
biofuels as part of the Twenty in Ten Initiative. Congress passed and 
the President signed into law the Energy Independence and Security Act 
of 2007 (EISA), requiring that U.S. transportation fuels contain at 
least nine billion gallons of renewable fuels in 2008, growing to 36 
billion gallons in 2022. Of the quantity required in 2022, at least 21 
billion gallons must be advanced biofuels (non-corn), and of that 21 
billion, 16 billion gallons must be cellulosic biofuels; ethanol from 
corn is capped at 15 billion gallons. The Department of Energy is 
committed to the goal of developing cost-competitive cellulosic ethanol 
by 2012. Our efforts will help spur the resources, technologies, and 
systems at the rate and scale needed to enable this mandate to be met, 
and impact climate change. To that end, DOE and other federal agencies 
are working to develop diverse, non-food feedstocks that require little 
water or fertilizer, and to foster sustainable agricultural and 
forestry practices. The Administration is also committed to developing 
a methodology, as required by EISA, to assess the life-cycle impacts of 
biofuels production, from feedstocks to vehicles, and analyze the 
impacts to land use and soil health, water use, air quality, and 
greenhouse gas emissions. Many of these issues are also being addressed 
through the senior-level Biomass R&D Board Sustainability Working 
Group, which the Departments of Energy (DOE) and Agriculture (USDA) and 
the Environmental Protection Agency (EPA) jointly chair.
    Together, DOE, USDA, and EPA continue to be committed to collecting 
and presenting accurate data, projecting potential impacts, and 
initiating the necessary and appropriate actions to ensure the 
sustainable growth of biofuels. To that end, DOE, USDA, and EPA have 
significantly ramped up our analytical efforts to ensure that we 
proceed with caution but also determination. The agencies will continue 
to work together as we undertake our respective responsibilities under 
Title II of EISA.
    DOE is also leveraging other partnerships to support the RFS goals. 
The Department is investing up to $385 million total over four years 
(FY 2007-FY 2010, subject to appropriation) in cost-shared, integrated 
commercial-scale biorefineries that are projected to produce up to 130 
million gallons of ethanol from cellulosic biomass in four years when 
they are fully operational. In addition, DOE is investing up to $200 
million over five years (FY 2007-FY 2011, subject to appropriation) in 
smaller (10% of commercial scale) cost-shared biorefineries that will 
demonstrate a wider range of advanced biochemical and thermochemical 
conversion technologies and use a wide array of cellulosic feedstocks.
    In addition, the Department's Office of Science has recently 
established three major new DOE Bioenergy Research Centers--led by the 
University of Wisconsin-Madison, Oak Ridge National Laboratory, and 
Lawrence Berkeley National Laboratory, respectively--which are bringing 
together top scientists and researchers in an effort to accelerate the 
transformational breakthroughs in basic science needed to make next-
generation cellulosic biofuels cost-effective. The Department plans to 
invest over $400 million in total in this effort through FY 2012.

   MISCONCEPTIONS ABOUT BIOFUELS: ENVIRONMENT, GASOLINE PRICES, AND 
                              FOOD SUPPLY

    Recent press coverage of ethanol and food prices has created a 
number of misconceptions about biofuels. The most prominent of these 
misconceptions are that ethanol does not improve the energy balance, 
that it has a negative impact on the environment, and that it 
contributes to rising food prices. We appreciate the opportunity to 
address these views. We believe biofuels are not creating a food 
security issue and are only a small part of increased food prices. In 
addition, biofuels offer a number of important energy and environmental 
benefits that will grow as the technology for next generation biofuels 
comes online.
    Today's corn-based ethanol has a positive energy balance--that is, 
the energy content of ethanol is greater than the fossil energy used to 
produce it--and this balance is constantly improving with new 
technologies. According to Argonne National Laboratory, each gallon of 
ethanol produced from corn today is estimated to deliver on average 25 
percent more energy than would the fossil energy that is used to 
produce it.\1\ Over the last 20 years, the amount of energy needed to 
produce ethanol from corn has significantly decreased because of 
improved farming techniques, more efficient use of fertilizers and 
pesticides, higher-yielding crops, and more energy-efficient conversion 
technology.\2\ A few scholars have conducted studies that allege a 
negative energy balance for ethanol; however, these fail to take into 
account the energy use avoided because of the production of co-products 
such as Distiller's Grain, a high-protein animal feed.\3\
---------------------------------------------------------------------------
    \1\ Source: Wang et al, ``Life-cycle energy and greenhouse gas 
emission impacts of different corn ethanol plant types,'' Environmental 
Research Letters, May 2007.
    \2\ Source: May Wu, Center for Transportation Research, Argonne 
National Laboratory, ``Analysis of the Efficiency of the U.S. Ethanol 
Industry 2007.'' http://www.ethanolrfa.org/objects/documents/1656/
argonne_efficiency_analysis.pdf.
    \3\ See metaanalysis supportive of this statement: Farrell et al, 
``Ethanol Can Contribute to Energy and Environmental Goals,'' Science 
Magazine, January 2006.
---------------------------------------------------------------------------
    DOE's current estimates find that ethanol also results in fewer 
greenhouse gas (GHG) emissions than gasoline, and is fully 
biodegradable, unlike some fuel additives. DOE's analysis shows that 
today, on a life-cycle basis, corn ethanol produces approximately 20 
percent fewer GHG emissions than gasoline. According to Argonne 
National Laboratory, with improved efficiency and use of renewable 
energy, this reduction could reach 52 percent.\4\ The positive energy 
balance and the potential GHG reduction from cellulosic ethanol is far 
greater, as I will discuss later in this testimony. It is important to 
note that the lifecycle greenhouse gas emissions estimates discussed 
here do not reflect indirect land use impacts requirements as specified 
in EISA. Life-cycle analyses involve a number of complicating factors, 
such as direct and indirect land use effects, and DOE is working with 
EPA as they develop a lifecycle methodology that meets the EISA 
definition.
---------------------------------------------------------------------------
    \4\ Source: Wang et al, ``Life-cycle energy and greenhouse gas 
emission impacts of different corn ethanol plant types,'' Environmental 
Research Letters, May 2007.
---------------------------------------------------------------------------
    Further evidence of ethanol's environmentally sound contribution to 
the fuel supply is that vehicles fueled with the ethanol-blended fuels 
currently in the market--whether E10 or E85--must meet EPA's stringent 
tailpipe emission standards. Ethanol has proven to be a safe, high-
performance replacement for fuel additives such as MTBE.
    Blending ethanol and gasoline has led to questions on its potential 
impact on gasoline prices. However, evidence from an Iowa State study 
suggests that without ethanol, gasoline prices would be higher.\5\ 
According to this analysis, even during the period in which MTBE was 
being phased out (2006) and ethanol prices were very high, had ethanol 
not been available, gasoline prices would have been even higher.\6\
---------------------------------------------------------------------------
    \5\ Source: http://www.card.iastate.edu/publications/DBS/PDFFiles/
08wp467.pdf.
    \6\ Historical spot conventional regular gasoline data from EIA 
2003-2007, Spot ethanol prices at Chicago Board of Trade 2003-2007, Oil 
Price Information Services (OPIS).
---------------------------------------------------------------------------
    Ethanol is currently less costly than the refiner's average mix of 
gasoline components. The cost of ethanol to refiners has been lower 
than the wholesale cost of conventional gasoline.\7\ In fact, as of the 
week of May 26, 2008, the gap was close to a $1.00/gallon difference; 
even adjusting for energy content, ethanol is cost-competitive. 
According to EIA, if we had not been blending ethanol into gasoline, 
gasoline prices would be between 20 cents per gallon to 35 cents per 
gallon higher.\8\
---------------------------------------------------------------------------
    \7\ Based on Oil Price Information Service data for spot prices of 
ethanol (after rebate) and conventional gasoline.
    \8\ This estimate relies on data on the current price difference 
between ethanol and gasoline and the elasticity of supply for 
petroleum. Consequently, a range is presented.
---------------------------------------------------------------------------
    With regard to food price impacts, our preliminary analysis 
suggests that current biofuels-related feedstock demand plays only a 
small role in global food supply and pricing.\9\ Moreover, the impact 
of biofuels on U.S. consumers is even smaller since the farm price of 
commodities accounts for less than 20 percent of U.S. consumers' food 
costs.\10\
---------------------------------------------------------------------------
    \9\ Source: http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/
7_0_1OB?contentidonly=true&contentid=2008/05/0130.xml, http://
www.afpc.tamu.edu/pubs/2/515/RR-08-01.pdf.
    \10\ Source: USDA's Economic Research Service.
---------------------------------------------------------------------------
    Numerous studies have found that world food prices have increased 
due to many factors, including high oil prices (used both in 
transportation and production of food); droughts in some key exporting 
countries, including Australia; increased demand as emerging economies 
grow and their populations consume better diets and eat more meat; a 
reduction of global agricultural R&D; and other factors.
    In 2007, about a quarter of the U.S. corn crop went to biofuels 
production, but this fact can be misleading in isolation. Only the 
starch from the corn kernel is used to produce the fuel, leaving the 
co-product Distiller's Grain. These Distiller's Grains are used as 
animal feed which is valued by its protein content, which is 
significantly higher by weight than the protein content of corn. As a 
result, almost one-third of each ton of corn used for ethanol 
production is recovered as a livestock feed. Thus, in actuality, only 
about one-sixth of the U.S. corn crop by mass is used in fuel 
production. Moreover, it is important to note that U.S. corn exports 
have been stable throughout the past decade, and have, in fact, 
increased recently.\11\
---------------------------------------------------------------------------
    \11\ Source: USDA National Agricultural Statistics Service.
---------------------------------------------------------------------------
    Furthermore, our Nation's enhanced farming techniques and continued 
improvement in plants and seeds will likely enable our supply to grow. 
Yield increases could enable us to double our corn based ethanol 
production over the next ten years while maintaining corn availability 
for other uses.\12\
---------------------------------------------------------------------------
    \12\ Source: Historical Trend data from USDA.
---------------------------------------------------------------------------
    Finally, increased global food demand as living standards and diets 
improve is an important factor in explaining increases in commodity 
prices, and is unrelated to biofuels. According to the UN, global 
economic growth has driven up prices for all commodities.\13\
---------------------------------------------------------------------------
    \13\ Source: UNCTAD database: http://www.unctad.org/Templates/
Page.asp?intItemID=1584&lang=1.
---------------------------------------------------------------------------
    THE POTENTIAL FOR CELLULOSIC ETHANOL AND OTHER ADVANCED BIOFUELS

    Evidence suggests that corn ethanol is not the primary driver 
affecting worldwide food prices. To help meet our long-term energy 
needs, the Department's biomass research and development activities are 
designed to move toward non-food feedstocks that have the potential to 
have an even greater positive environmental impact.
    The biomass feedstocks of today include grains (corn, sorghum, 
wheat), as well as oilseeds and plants (such as soybeans). The 
feedstocks of tomorrow will come from a variety of sources such as 
wastes and residues and fast-growing energy crops. These future 
feedstocks will consist of agricultural residues like stalks, stems, 
and other crop wastes, as well as forest resources such as wood waste, 
forest thinnings, and small-diameter trees. Examples of energy crops 
include switchgrass, miscanthus, and hybrid poplar trees, in addition 
to oilseeds and oil crops like algae and jatropha. Some of these 
promising energy crops can grow on marginal soils, and they can 
actually sequester carbon. Forest resources, green wastes, and sorted 
municipal solid waste will also play a role.
    As I noted earlier, research to date suggests that today's ethanol 
has a positive energy balance--that is, the energy content of corn 
ethanol is greater than in the fossil energy used to produce it. In the 
future, cellulosic ethanol is expected to improve upon this by 
delivering four to six times as much energy as needed to produce 
it.\14\ Additionally, DOE research has shown that cellulosic feedstocks 
can reduce life-cycle greenhouse gas emissions by 86 percent compared 
to gasoline.\15\
---------------------------------------------------------------------------
    \14\ Source: Wang et al, ``Life-cycle energy and greenhouse gas 
emission impacts of different corn ethanol plant types,'' Environmental 
Research Letters, May 2007.
    \15\ Ibid.
---------------------------------------------------------------------------
    A number of market and technical barriers to advanced biofuel 
production exist. Fortunately, Congress and the Administration have 
taken steps to diminish these obstacles, and we are poised to make even 
more progress. Market barriers include a lack of cellulosic feedstock 
market and high capital costs. The main technical barriers are a lack 
of cost-competitive conversion technologies, a lack of feedstock 
collection equipment, the absence of standard cellulosic biofuels 
production blueprints, and the lack of fully integrated large-scale 
systems. As part of the effort to overcome these hurdles, EISA helps 
establish a market demand for cellulosic biofuels. EISA also provides 
grants for research and development projects; and demonstration and 
commercial application of biofuel production technologies, including 
important research on plants, enzymes, and microbes. These efforts are 
working toward cost reductions in conversion technologies, and cost-
shared biorefinery projects will help validate approaches.
    We have made significant advances, but there is more that would be 
helpful to support the development of biofuels--for example, expansion 
of the use of woody biomass and increased penetration of flex-fuel 
vehicles into the market. Additionally, when developed in parallel to 
E85 infrastructure, intermediate ethanol-gasoline blends (those between 
E10 and E85) could also help enable continuous uninterrupted growth in 
production. The research we are supporting today to produce advanced 
biofuels beyond ethanol and biodiesel may also eventually help the 
industry. With continued technological advances at all levels, ethanol 
can help our Nation reap greater benefits in the future, complementing 
the President's bold energy initiatives, which seek to increase our 
Nation's energy and economic security.

                               CONCLUSION

    The food and fuel pricing issues about which you have raised 
questions are important and complex. We would again caution, therefore, 
against hasty judgments. Many analysts both within and outside of 
Government are currently working to analyze these issues and the one 
certainty is that our data will improve substantially in the months 
ahead.
    Mr. Chairman, thank you again for holding this important hearing. I 
appreciate your leadership in this matter as well as this opportunity 
to address the current debate over the role of biofuels in our Nation's 
energy portfolio. This concludes my prepared statement, and I would be 
happy to answer any questions the Committee Members may have.

    The Chairman. Thank you very much.
    Dr. Glauber, go right ahead.

  STATEMENT OF JOSEPH GLAUBER, CHIEF ECONOMIST, DEPARTMENT OF 
                          AGRICULTURE

    Mr. Glauber. Thanks very much. Mr. Chairman, Senator 
Domenici, and members of the committee, thank you for the 
opportunity to discuss the effects of the expansion in biofuel 
production in the U.S. on commodity markets and food prices 
both here and abroad.
    In the U.S., two commodities, corn and soybean oil, account 
for over 90 percent of biofuels production. From April 2007 
through April 2008, corn and soybean prices rose by over 50 
percent in response to a variety of factors, including domestic 
and global economic growth, global weather, rising input costs 
for energy, international export restrictions, and new product 
markets, particularly biofuels. Over the same period, global 
food commodity prices, as measured by the IMF, rose by over 45 
percent and retail food prices in the U.S. increased by more 
than 5 percent.
    There has been much confusion in the media over the price 
effects of biofuels. Some studies have attributed most and, in 
some instances, all of the increase in global food prices and 
retail food prices in the U.S. to biofuel production, while 
other studies have reported considerably smaller effects. I 
believe it is important to distinguish between, one, the 
effects of biofuels on feedstock prices such as corn or soybean 
oil, which tend to be quit large; two, the more general effects 
on a bundle of world commodity prices, such as measured by the 
IMF's Global Food Commodity Price Index, which tend to be 
somewhat smaller; and three, the effects of U.S. food prices as 
measured by the CPI, the Consumer Price Index, which tend to be 
smaller still due to the relatively small value accounted for 
commodities in the total consumer food bill.
    In my written testimony, I have described the factors 
affecting the farm commodity prices and the effects of biofuel 
production on commodity prices, global food prices, and retail 
food prices in the United States.
    While increased biofuels production in the United States is 
partially responsible for the increase in corn and soybean farm 
prices, other factors have also contributed to the sharp 
increase in prices for these commodities. We use various 
analytical approaches to estimate the effects of increased 
ethanol and biodiesel production on corn and soybean markets 
for the 2006 and 2007 marketing years. We estimate that about 
30 percent of the increase in the price of corn between 
marketing years 2005 and 2007 can be attributed to the growth 
in biofuels production in the U.S.
    The growth in biofuels production in the United States has 
also pushed up soybean, soybean meal, and soybean oil prices. 
We estimate the percentage increase in the prices of soybeans, 
soybean meal, and soybean oil between marketing years 2005 and 
2007 would have been 25 to 40 percent lower in the absence of 
any growth in biofuels production in the U.S. Again, those were 
the price effects on the feedstock prices themselves.
    Turning to the International Monetary Funds's Global Food 
Commodity Price Index, it is often quoted as an indicator of a 
change in global food prices. The IMF index includes a bundle 
of agricultural commodities, including cereals, such as wheat, 
corn, rice, and barley, as well as vegetable oils and protein 
meals, meat, sugar, seafood, bananas, and oranges. The effects 
of biofuels production in the U.S. on global prices for 
agricultural goods is estimated by combining the individual 
commodity price impacts with their relative weights in the IMF 
price index. Assuming no growth in biofuels production in the 
U.S., we estimate that the IMF Global Food Commodity Price 
Index would have been increased by over 40 percent compared 
with the actual increase of 45 percent from April 2007 to April 
2008.
    Let me turn briefly to the effects of higher feed prices on 
dairy, livestock, and poultry markets. In my testimony, I 
present a chart that looks at the ratio of livestock prices 
relative to feed costs. These livestock feed cost ratios are a 
measure of the pressure on livestock producers to adjust future 
production in response to higher feed costs.
    In April, the steer and heifer corn price ratio was the 
lowest since August 1996. The hog corn price ratio was the 
lowest since December 1998, and the milk feed price ratio and 
the broiler feed price ratio were the lowest since at least 
1995.
    To estimate the effects of growth in ethanol on biofuels 
production on U.S. retail food prices, we have assumed that all 
of the increase in prices for corn, other feed grains, soybean 
oil, soybeans, and soybean meal are passed on to consumers 
through higher retail food prices. In 2007, the expansion in 
ethanol and biodiesel production is estimated to have increased 
the CPI for all food by 0.1 to 0.15 percentage points, or the 
expansion in ethanol and biodiesel production accounted for 
about 3 to 4 percent of the increase in retail food prices. 
During the first 4 months of 2008, the food CPI increased by 
4.8 percent, with increased ethanol and biodiesel production 
accounting for about 4 to 5 percent of the increase in retail 
food prices.
    Over time, livestock and dairy producers will adjust to 
higher feed costs by reducing production, leading to higher 
retail prices for animal products. In future years, production 
adjustment by livestock and dairy producers in response to 
higher feed costs resulting from the expansion in ethanol and 
biodiesel production could add a total of 0.6 to 0.7 percentage 
points to the CPI for all food.
    Last, much attention is focused on the size of this year's 
corn crop. In March, producers indicated they would plant an 
estimated 86 million acres of corn, down from the 93.6 million 
acres planted in 2007. However, a wet spring in the Midwest has 
slowed plantings and crop emergence and, in some cases, washed 
out fields planted to corn.
    USDA will report acreage in its acreage report on June 30 
and its first objective yields survey for 2008 will be reported 
on August 12. Both of these reports will be watched very 
closely.
    A shorter crop than expected could send corn prices sharply 
higher. Indeed, over the last week, we have seen quite a large 
rise in corn prices with the December 2008 corn futures 
contract closing at $7.33 per bushel yesterday. An increase of 
over $1 over the past few weeks--and this, indeed, puts 
pressure as we watch--looking forward, will put pressure on 
ethanol production margins.
    Mr. Chairman, that completes my statement.
    [The prepared statement of Mr. Glauber follows:]

   Prepared Statement of Joseph Glauber, Chief Economist, Department 
                             of Agriculture

    Mr. Chairman, members of the Committee, thank you for the 
opportunity to discuss the effects of the expansion in biofuels 
production in the U.S. on commodity markets and food prices here and 
abroad. In the United States, two commodities, corn and soybean oil 
account for over 90 percent of biofuels production. From April 2007 
through April 2008, corn and soybean prices rose by over 50 percent in 
response to a variety of factors, including domestic and global 
economic growth; global weather; rising input costs for energy; 
international export restrictions; and new product markets, 
particularly biofuels. Over the same period, global food commodity 
prices as measured by the International Monetary Fund (IMF) rose by 
over 45 percent and retail food prices in the U.S. increased by more 
than 5 percent. I will describe the factors affecting farm commodity 
prices and the effects of biofuels production on commodity prices, 
global food prices, and retail food prices in the United States.

          KEY FACTORS BEHIND THE INCREASE IN COMMODITY PRICES

    Many factors have converged to increase commodity prices. Global 
economic growth, weather problems in some major grain producing 
countries, and depreciation in the value of the dollar have increased 
the demand for U.S. agricultural commodities, leading to higher 
commodity prices. In FY 2008, the value of U.S. agricultural exports is 
projected to reach a record $108.5 billion, up from last year's record 
of $81.9 billion.
    Global economic growth is boosting the demand and prices for 
agricultural commodities. Real foreign economic growth was a healthy 
4.0 percent in 2007, only slightly below 2006's robust rate of 4.2 
percent. Foreign economic growth is expected to be 3.9 percent in 2008, 
down slightly from 2007, but well above trend, as has been the case 
beginning in 2004 (Economic Research Service). Asia, excluding Japan, 
will likely grow at over 7 percent in 2008, above trend for the fifth 
consecutive year. Higher incomes are increasing the demand for 
processed foods and meat in rapidly growing developing countries, such 
as India and China. These shifts in diets are leading to major changes 
in international trade. For example, China's corn exports are projected 
to fall from 5.3 million metric tons in 2006/07 to 0.5 million metric 
tons in 2007/08, as more corn is used for domestic livestock feeding.
    Adverse weather events in a number of countries have reduced 
production leading to higher commodity prices. The multi-year drought 
in Australia reduced wheat and milk production and that country's 
exportable supplies of those commodities. Drought and dry weather have 
also adversely affected grain production in Canada, Ukraine, the 
European Union, and the United States. These weather events have helped 
to deplete world grain stocks. With world stocks for wheat at a 30-year 
low, grain importers are increasingly turning to the U.S. for supplies. 
Furthermore, the tight stocks situation is leading to increasing 
concerns that prices could move sharply higher if this year's harvest 
falls below expectations. These concerns are causing some importers to 
purchase for future needs, pushing prices higher.
    Many exporting countries have put in place export restrictions in 
an effort to reduce domestic food price inflation. The United Nations 
Food and Agriculture Organization recently noted the cereal import bill 
of the world's poorest countries is forecast to rise by 56 percent in 
2007/2008, which comes after a significant increase of 37 percent in 
2006/2007. Exporting countries as diverse as Argentina, China, India, 
Russia, Ukraine, Kazakhstan, and Vietnam have placed additional taxes 
or restrictions on exports of grains, rice, oilseeds, and other 
products. By reducing supplies available for world commerce, these 
actions exacerbate the surge in global commodity prices. Export 
restrictions are ultimately self-defeating, reducing the incentives for 
producers to increase production.
    Higher food marketing, transportation, and processing costs are 
also contributing to the increase in retail food prices. Record prices 
for diesel fuel, gasoline, natural gas, and other forms of energy 
affect costs throughout the food production and marketing chain. Higher 
energy prices increase producers' expenditures for fertilizer and fuel, 
driving up farm production costs. Higher energy prices also increase 
food processing, marketing, and retailing costs. These higher costs, 
especially if maintained over a long period, tend to be passed on to 
consumers in the form of higher retail prices. ERS estimates direct 
energy and transportation costs account for 7.5 percent of the overall 
average retail food dollar. This suggests that for every 10 percent 
increase in energy costs, the retail food prices could increase by as 
much as 0.75 percent if fully passed on to consumers.

                RECENT DEVELOPMENTS IN COMMODITY MARKETS

    Higher commodity prices are contributing to the increase in food 
price inflation, even though in the United States the farm value 
accounts for only about 20 cents of each dollar spent on food. For 
highly processed foods, such as cereal and bakery products, the farm 
component of the retail value is less as processing costs account for a 
higher portion of the retail value. In contrast, for food products that 
undergo little processing prior to being consumed, such as eggs and 
fresh fruits and vegetables, the farm value accounts for a much larger 
share of the retail value.
    The index of prices received by farmers for all products increased 
by 18 percent in 2007, as farm prices for several major crops, beef, 
milk, broilers, and eggs either reached new record highs or posted 
large annual gains. Compared to one year ago, the index of prices 
received by farmers for all products was up 13 percent during the first 
4 months of 2008. Over the same period, the prices received for all 
crops were up 19 percent, reflecting continued strong prices for major 
crops. Meanwhile, the prices received for livestock and livestock 
products, while up 7 percent during the first 4 months of 2008 compared 
to one year ago, have moderated in recent months as record large 
supplies of red meat and poultry have lowered farm prices for cattle 
and hogs.
    Wheat & Coarse Grains: The 2007/08 wheat marketing year reflects a 
third straight year in which global production has fallen short of 
consumption, driving expected world stocks to their lowest level in 30 
years. Back-to-back years of lower production in the major exporting 
countries, including Australia, Canada, and the European Union, have 
combined with below-trend yields in the United States to reduce the 
availability of exportable supplies. Tight supplies in competitor 
countries and restrictions on exports in major producing countries such 
as Argentina, Ukraine, and Russia have boosted export demand for U.S. 
wheat. U.S. ending stocks are projected at their lowest level in 60 
years. As a consequence, wheat prices have increased to record levels. 
Farm prices for 2007/08 are estimated at a record $6.50 per bushel, 
sharply higher than last year's $4.26 and the previous record of $4.55 
per bushel.
    Wheat producers indicated in March they intend to plant 63.8 
million acres in 2008, up 6 percent from 2007. Yield prospects for the 
2008 crop remain mostly favorable, but persistent dryness remains a 
concern in the southwestern portions of the hard red winter wheat belt 
in western Kansas and the panhandle areas of Texas and Oklahoma. In 
addition to higher production in the U.S., wheat production in other 
major wheat producing countries is expected to rise sharply as planted 
area is up around the world, spurred by record prices and encouraged by 
favorable fall sowing weather. If trend yields are achieved, world 
production could set a new record, rising as much as 50 million tons 
from 2007/08. Global production is expected to exceed global 
consumption for the first time in four years leading to some recovery 
in global wheat stocks. Nonetheless, the average farm price is 
projected to increase in 2008/09 to $6.75-$8.25 per bushel, supported 
by forward sales made at prices well above last year's level. Cash 
wheat prices during the first quarter of the marketing year are also 
expected to be supported by strong competition between domestic mills 
and foreign buyers.
    The U.S. corn market in 2007/08 is characterized by record 
production and farm prices driven by strong domestic and export demand, 
which is boosting use to record levels. U.S. producers planted 93.6 
million acres to corn in 2007, the largest plantings since 1944. 
Domestic use for 2007/08 is estimated at a record 10.5 billion bushels, 
up 1.4 billion or 16 percent from last year. Ethanol use, projected at 
3.0 billion bushels, is expected to surpass exports for the first time 
ever, accounting for 23 percent of total corn use. Despite high prices, 
export demand remains strong with growing world demand for animal 
protein and tight supplies of feed quality wheat, particularly in the 
European Union. Exports are projected at a record 2.45 billion bushels, 
up 15 percent from last year. The farm-level price of corn for 2007/08 
is expected to average a record $4.25-$4.45 per bushel, up 
substantially from $3.04 per bushel in 2006/07.
    Corn prices are expected to rise again in 2008/09. Demand is 
expected to remain strong, supported by expanding use for ethanol, 
which is forecast to reach 4 billion bushels in 2008/09. Corn area and 
production are expected to be lower in 2008/09 as record soybean prices 
and high input costs for corn encourage a rebound in soybean plantings. 
Producers indicated in March they intend to plant 86.0 million acres of 
corn in 2008, down 8 percent from last year. In addition, cool, wet 
weather slowed planting progress, which could also lead to lower corn 
plantings and lower yields in 2008. With higher use and lower 
production, ending stocks are expected to decline, keeping upward 
pressure on prices. The farm price of corn is forecast to average 
$5.30-$6.30 per bushel in 2008/09.
    Rice: Tighter domestic rice supplies, higher global rice prices, 
and export bans imposed by some major rice exporters have helped to 
boost U.S. rice prices in 2007/08. Producers cut back on rice area in 
2007 by 3 percent, because they could earn higher returns by planting 
alternative crops such as wheat, corn, sorghum and soybeans. U.S. 
exports in 2007/08 are projected to increase 23 percent to 112 million 
hundredweight (cwt). Tight global supplies and self-imposed export bans 
in Egypt, Vietnam, and India are helping to support U.S. exports. Rice 
ending stocks are forecast at 21.6 million cwt, down from carry-in 
stocks of 39 million cwt. The season-average farm price is forecast at 
$12.85-$13.15 per cwt, up from $9.96 in 2006/07 and the highest since 
1973/74. Domestic rice prices in 2008/09 are expected to be higher than 
in 2007/08 due to tighter domestic and global supplies and higher world 
prices.
    Soybeans: U.S. soybean prices are record high this year, reflecting 
lower production and strong demand. The farm price received for 
soybeans is estimated to average $10.00 per bushel during 2007/08, 
compared with $6.43 last marketing year and the previous record of 
$8.73 per bushel set in 1983/84. Lower production was brought about by 
sharply lower planted area as producers shifted some soybean acres to 
corn in 2007. Lower stocks are projected in part due to strong export 
demand for U.S. soybeans resulting from record imports by China and 
limited growth in South American supplies despite high prices.
    U.S. soybean crush is also a contributing factor to declining 
stocks as foreign demand for U.S. soybean meal remains exceptionally 
strong. Wheat shortages in many parts of the world are leading to 
strong export demand for soybean meal protein which can be used to 
replace wheat in feed rations. Soybean crush is also supported by 
growing demand for biodiesel, production of which is expected to 
account for 14 percent of total soybean oil use for 2007/08. Strong 
domestic and export demand have pushed prices for both soybean meal and 
soybean oil higher. The prices of both soybean meal and soybean oil are 
up by over 50 percent in 2007/08, compared with one year ago.
    U.S. producers indicated in March they intend to plant 74.8 million 
acres to soybeans in 2008, up 18 percent from last year. If these 
intentions are realized, soybean supplies for 2008/09 could increase as 
larger production more than offsets sharply lower beginning stocks. 
Reflecting the increase in projected soybean production, soybean ending 
stocks are expected to rebound in 2008/09 from this year's very low 
level. Forward sales at prices above last year's average and high corn 
prices are likely to push soybean prices higher in 2008/09. The farm 
price of soybeans is currently forecast to average $11.00-$12.50 per 
bushel in 2008/09.
    Fruits and Vegetables: Retail prices for fruits and vegetables 
increased 3.8 percent in 2007, as fresh fruit and vegetable prices rose 
by 3.9 percent and processed fruit and vegetable prices rose by 3.6 
percent. Price spikes in these commodities are often linked to drought 
or freeze damage. In 2008, the CPI for fruits and vegetables is 
projected to increase by 3.5-4.5 percent.
    Livestock and Poultry: Beef production is currently forecast to 
increase by 1.5 percent in 2008 due to continued strong cow slaughter. 
Drought conditions in the Southeast led to strong increases in cow 
slaughter last year and, even with a return to normal weather in 2008, 
cow slaughter is expected to remain relatively high in 2008. The 
January Cattle report indicated the cow herd continued to contract 
during 2007. Beef cow numbers were estimated about 0.6 percent lower 
than a year ago, and the number of beef cows expected to calve was down 
1 percent. In addition, the number of beef heifers to be retained for 
the breeding herd was down 3.5 percent. Higher feed costs are lowering 
returns to cattle feeders. Nebraska Direct steer prices averaged a 
record $91.82 per cwt in 2007 and are expected to average $89-$93 per 
cwt. in 2008.
    Pork production in 2008 is expected to increase 6.6 percent due to 
expansion triggered by positive returns to producers in 2006 and 2007 
and strong productivity gains. However, the growth in production is 
expected to slow later in the year as producers respond to much higher 
feed costs. The most recent Quarterly Hogs and Pigs report indicated 
that producers farrowed 5 percent more sows during December 2007-
February 2008, but intend to farrow 2 percent fewer sows during June 
2008-August 2008. In 2008, hog prices are expected to decline from 
2007's $47.09 per cwt to $46-$48 per cwt.
    Broiler producers reacted to low returns in 2006 and pulled back 
broiler production during the last two quarters of 2006 and the first 
two quarters of 2007. As broiler prices hit record levels in mid-2007, 
broiler producers responded by expanding production. Since last fall, 
weekly estimates of chicks placed for growout were consistently 3 to 5 
percent above a year earlier, but the increase in placements has 
dropped below 3 percent recently. However, little to no expansion in 
broiler production is expected during the second half of 2008, as 
producers respond to higher corn and soybean meal prices. Broiler 
prices for 2008 are forecast to average 80 to 83 cents per pound in 
2008, compared with a record 76.4 cents in 2007.
    Eggs: In 2007, the wholesale price for a dozen grade A large eggs 
in the New York market averaged $1.14 per dozen, 43 cents higher than 
the previous year. The strong increase in egg prices reflected lower 
production and strong domestic demand. In 2007, table-egg production 
was down 1 percent, as producers lowered production in order to 
increase the hatching-egg flock.
    Given the current size of the table-egg flock and the number of 
birds available to add to the flock, no significant expansion in 
production is expected in 2008. Wholesale table-egg prices (New York 
area) averaged $1.59 per dozen in the first-quarter, up 51 percent from 
the previous year. Prices are expected to decline seasonally in the 
second quarter and average $1.21-$1.25 per dozen in 2008.
    Milk: Very strong international dairy product prices, robust 
domestic demand and modest expansion in domestic production in response 
to very low milk prices in 2006 were the primary factors pushing up 
dairy product prices in 2007. The recent increase in feed costs 
probably had only a minimal effect on milk production in 2007.
    Although higher feed costs are expected to temper later-year 
expansion plans, milk producers are expanding herds in response to 
generally favorable returns during much of 2007. Production in 2007 
increased about 2 percent as the herd increased fractionally. Milk per 
cow increased but lagged its historical growth. Driven by strong 
domestic demand and sharply higher international prices in response to 
declining milk production in Australia due to drought and limited 
surpluses of dairy products in the European Union, the all-milk price 
averaged a record $19.13 per cwt, over $6.00 above 2006. Cow numbers 
are expected to increase further in 2008 but high feed costs may slow 
the growth in milk per cow. Milk production in 2008 is expected to 
increase about 2 percent and about equal the growth in demand for dairy 
products domestically and for export. The all-milk price is forecast to 
average $18.90-$19.30 per cwt in 2008.

           EFFECTS OF BIOFUELS PRODUCTION ON COMMODITY PRICES

    In recent years, the conversion of corn and soybean oil into 
biofuels in the United States has been an important factor shaping 
major crop markets. The amount of corn converted into ethanol and 
soybean oil converted into biodiesel nearly doubled from 2005/06 to 
2007/08. The growth in biofuels production has coincided with rising 
prices for corn, soybeans, soybean meal, and soybean oil.
    While increased biofuels production in the United States is 
partially responsible for the increase in domestic corn and soybean 
farm prices, other factors have also contributed to the sharp increase 
in prices for these commodities. The strength in exports resulting from 
global economic growth and drought and dry weather in some major grain 
producing countries has boosted prices for corn and soybeans. For 
example, corn exports are projected to reach 2.45 billion bushels in 
2007/08, up from 2.1 billion bushels in 2005/06, and soybean exports 
are projected to increase by 18 percent over the same period.
    Estimating the effects of increased ethanol and biodiesel 
production on domestic agriculture and domestic food prices 
necessitates segmenting the portion of the increase in corn and soybean 
prices due to the expansion in ethanol and biodiesel production and the 
increase in corn and soybean prices due to other factors. Various 
analytical approaches were used to estimate the effects of increased 
ethanol and biodiesel production on corn and soybean prices. Table 1 
compares actual and estimated corn and soybean prices over the period 
2005/06-2007/08, assuming corn used for ethanol and soybean oil used 
for biodiesel production in the United States remained unchanged from 
the amount used in the 2005/06 marketing year. 


      
    Under the alternative scenario, lower corn and soybean oil use 
lowers the prices of corn and soybeans. In addition, changes in 
relative returns for corn and soybeans cause producers to switch from 
planting corn to planting soybeans. Lower corn and soybean prices could 
also result in increased plantings and lower prices for other crops and 
lower feed costs to livestock producers.
    The recent increase in corn and soybean prices appears to have 
little to do with the run-up in prices of wheat and rice. Corn and 
soybean prices began increasing during the fourth quarter of 2006. By 
this time, producers had already planted the 2007 winter wheat crop. 
Rice and spring wheat plantings could have been affected by increasing 
corn and soybean prices, but weather problems, low stocks, and strong 
global demand likely had a much greater impact on wheat and rice prices 
than increasing corn and soybean prices in 2007/08. In 2008, U.S. wheat 
producers indicate they intend to plant more acreage to wheat, while 
rice acreage is projected to remain flat, suggesting that higher corn 
and soybean prices have not greatly altered wheat and rice producers' 
planting decisions.

     EFFECTS OF BIOFUELS PRODUCTION ON GLOBAL FOOD COMMODITY PRICES

    The International Monetary Fund's (IMF) global food commodity price 
index is often quoted as an indicator of the change in global food 
prices. The IMF global food commodity price index includes a bundle of 
agricultural commodities including cereals such as wheat, corn (maize), 
rice, and barley as well as vegetable oils and protein meals, meat, 
seafood, sugar, bananas, and oranges. A complete list of the 
commodities included in the index, the percentage change in each 
commodity price, and the estimated contribution of each commodity to 
the overall percentage change in the food price index from April 2007 
to April 2008 are presented in Table 2. It is unclear how the list of 
commodities and the prices used in the IMF index relate to the foods 
purchased and the prices paid for food items by consumers in less 
developed countries.
    The IMF global food price commodity price index increased by an 
estimated 45.0 percent from April 2007 to April 2008. Sunflower oil and 
rice exhibited the largest price changes, with prices for both 
commodities increasing by over 200 percent. Prices for corn, wheat, 
soybeans, soybean oil, soybean meal, palm oil, sunflower oil, and 
rapeseed oil also exhibited relatively large price increases,while the 
prices for beef and swine meat actually fell.
    Combining the change in corn prices with the corn weight of 8.1 
percent, the change in corn prices contributed 5.0 percentage points to 
the estimated 45.6 percent increase in the global food commodity price 
index. Soybeans, soybean oil, and soybean meal exhibited larger price 
increases and play a much larger role in the global food commodity 
price index, a combined weight of over 15 percent. The combined effects 
of the increase in soybean, soybean meal, and soybean oil prices 
contributed 11.7 percentage points to the estimated 45.0 percent 
increase in the IMF global food commodity price index from April 2007 
to April 2008.



    In order to estimate the impact of the increased production of U.S. 
biofuels on global food prices, one needs to estimate the direct and 
indirect effects of the increased use of corn and soybeans on 
individual commodity prices. Last month, CEA testified before the 
Senate Foreign Relations Committee about corn-based ethanol's impact on 
global food prices using this strategy. The analysis below continues in 
this spirit, but it considers a broader category of factors and costs 
and a slightly different time period. Here the analysis is updated to 
the 12 months ending in April, and the analysis considers a broader mix 
of biofuels--focusing on corn-based and soybean oil-based biofuels.
    Table 3 presents the estimated effects of increased ethanol and 
biodiesel production in the United States on global prices for corn, 
soybeans, soybean oil, and soybean meal as well as the impact on the 
IMF global food commodity price index. We estimate that the percentage 
increase in the price of corn from April 2007 to April 2008 would have 
been 23 percent lower in the absence of any growth in biofuel 
production in the United States. Based on this analysis, we estimate 
that the price of corn would have increased by 47.5 percent assuming no 
growth in biofuel production in the United States, down from the actual 
increase of 61.7 percent, from April 2007 to April 2008. Assuming no 
growth in biofuel production, the price of soybeans, soybean meal, and 
soybean oil in the global food commodity price index would have 
increased by 54.2, 51.2, and 61.5 percent, respectively, down from 
actual increases of 78.6, 69.3, and 80.9 percent, respectively, from 
April 2007 to April 2008.



    Assuming no growth in biofuel production in the United States, the 
IMF global food commodity price index would have increased by 40.6 
percent compared to the actual increase of 45 percent, from April 2007 
to April 2008. Lower corn prices contributed 1.2 percentage points, 
lower soybean, soybean meal, and soybean oil prices contributed 3.2 
percentage points to the total reduction in the global food commodity 
price index.
    However, combining soybeans, soybean meal, and soybean oil in the 
same index overstates the impact of biofuels on global prices. Soybeans 
are processed into soybean meal and oil and by including the effects of 
biofuels on the prices of all three commodities we magnify the impacts 
of biofuels on the global food prices. If we exclude the impacts of 
biofuels on soybean meal and oil prices, the IMF global food price 
index would have increased by 42.0 percent assuming no growth in 
biofuels production in the United States, compared to the actual 
increase of 45.0 percent from April 2007 to April 2008.

       EFFECTS OF BIOFUELS PRODUCTION ON U.S. RETAIL FOOD PRICES

    In 2007, the Consumer Price Index (CPI) for all food increased by 
4.0 percent, up from 2.4 percent in both 2004 and 2005. In 2007, the 
retail price of eggs increased by 29.2 percent, retail dairy product 
prices rose by 7.4 percent, retail poultry prices posted a 5.2 percent 
gain, and retail beef prices increased by 4.4 percent. In 2008, the CPI 
for all food is projected to increase by 4.5 to 5.5 percent, with the 
retail prices of eggs, dairy products, fats and oils, and cereals and 
bakery products all increasing by more than 5 percent.
    It is very unlikely that the retail prices for dairy products, 
beef, poultry, and eggs were greatly affected by higher corn and 
soybean prices in 2007. Higher corn and soybean prices increase 
livestock and dairy producers' feed costs. The increase in feed costs, 
with no offsetting increase in livestock prices, reduces livestock 
producers' margins. Livestock producers react to these lower margins 
over time by reducing the breeding herd. In the short term, higher feed 
costs lead to an increase in livestock slaughter and lower livestock 
prices. For milk and eggs, higher feed costs may have lowered 
production somewhat 2007, partially contributing to the increase in 
retail prices for these food products. However, other factors, such as 
low returns in 2006, strong demand, abnormally high international 
prices, especially for dairy products, and increasing use of eggs for 
hatching to expand broiler production likely contributed to the bulk of 
the increase in retail food prices for these commodities in 2007.
    The ratio of livestock prices relative to feed costs is a measure 
of the pressure on livestock producers to adjust future production in 
response to higher feed costs. In April, the steer and heifer corn 
price ratio (bushels of corn equal in value to 100 pounds of steers and 
heifers, live weight) was the lowest since August 1996, the hog-corn 
price ratio (bushels of corn equal in value to 100 pounds of hog, live 
weight) was the lowest since December 1998, and the milk-feed price 
ratio (pounds of 16 percent mixed dairy feed equal in value to 1 pound 
of milk) and the broiler-feed price ratio (pounds of broiler grower 
feed equal in value to 1 pound of broiler, live weight) was the lowest 
since at least 1995.
    In 2008, higher feed costs are likely to lead to lower prices for 
beef and pork as producers react to higher feed costs by reducing the 
number of breeding animals. In contrast, dairy producers react to 
higher feed costs by cutting back on the number of dairy cows and 
adjusting rations. In 2008, higher feed costs are expected to dampen 
the growth in milk production per cow but the dairy herd is expected to 
continue to expand in response to strong milk returns in 2007.
    To estimate the effects of growth in ethanol and biodiesel 
production on U.S. retail food prices, we assume that all of the 
increase in prices for corn, other feed grains, soybeans, soybean oil 
and soybean meal presented in Table 1 are passed on to consumers 
through higher retail food prices. In 2007, the expansion in ethanol 
and biodiesel production is estimated to have increased the CPI for all 
food by 0.10-0.15 percentage point. During the first four months of 
2008, the all food CPI increased by 4.8 percent, with increased ethanol 
and biodiesel production in the U.S. accounting for about 0.20-0.25 
percentage point of the increase in retail food prices. Over time, 
livestock and dairy producers will adjust to higher feed costs by 
reducing production leading to higher retail prices for animal 
products. In future years, production adjustments by livestock and 
dairy producers in response to higher feed costs resulting from the 
expansion in ethanol and biodiesel production could add a total of 0.6-
0.7 percentage point to the CPI for all food.

                               CONCLUSION

    Many factors have converged to increase corn and soybean prices. 
Some of these factors include domestic and global economic growth; 
global weather; rising input costs for energy; international export 
restrictions; and new product markets, particularly biofuels. At this 
time, the expansion in biofuel production in the United States would 
appear to be a relatively modest contributor to food price inflation 
globally and in the United States. Assuming no expansion in biofuel 
production in the U.S., we estimate the IMF global food commodity price 
index would have increased by over 40 percent from April 2007 to April 
2008, compared with the actual increase of 45 percent. In the U.S., the 
CPI for all food would have increased by 4.55- 4.60 percent during the 
first four months of 2008, compared with the actual increase of 4.8 
percent, assuming no expansion in U.S. biofuel production. In future 
years, production adjustments by livestock and dairy producers in 
response to higher feed costs resulting from the expansion in ethanol 
and biodiesel production could add a total of 0.6-0.7 percentage point 
to the CPI for all food.
    Mr. Chairman, that completes my statement.

    The Chairman. Thank you very much.
    Dr. Outlaw.

   STATEMENT OF JOE L. OUTLAW, AGRICULTURAL AND FOOD POLICY 
       CENTER, TEXAS A&M UNIVERSITY, COLLEGE STATION, TX

    Mr. Outlaw. Mr. Chairman and members of the committee, 
thank you for the opportunity to testify on behalf of the 
Agricultural and Food Policy Center at Texas A&M University. 
For more than 25 years, we have worked with the agricultural 
committees in the U.S. Senate and House of Representatives 
providing members and committee staff objective research 
regarding the potential effects of agricultural policy changes.
    My testimony today summarizes the results of a number of 
our reports and analyses that evaluate the potential impacts of 
changes to U.S. renewable fuels policies. The most recent 
study, which I have provided for the record, analyzed the 
impacts of farm level corn prices on the retail prices of 
selected food products at the national level and also included 
analysis of alternative RFS levels.
    In the short run, it can be argued that economic 
encouragement is needed to develop a new industry through 
Government policies. However, in the long run, the cost of 
production will determine whether biofuels are a viable energy 
alternative. The answer as to whether the corn-based ethanol 
industry will be viable over the long run is: it depends.
    Table 1 illustrates that the net returns for a typical 
ethanol plant varies substantially depending on the feedstock 
costs and the ethanol price. Currently the corn price in the 
U.S. is around $6 per bushel and the ethanol price is slightly 
under $2.50 per gallon. With this combination, a typical 
ethanol plant would be expected to realize 6 cents per gallon 
in net income. While positive, these profit levels are not as 
likely to spur additional investment. Clearly, this is the 
reason why some proposed ethanol plants have put their plans on 
hold. However, for those plants already built, it is in their 
best interest to continue to produce as long as they can cover 
the variable costs increasing the amount a plant would actually 
pay for corn.
    Recent requests for a waiver to the RFS inspired research 
looking at whether a waiver, if granted, would have a 
significant impact. The initial RFS, instituted under the 
energy bill of 2005, always had a limited probability of 
binding, given that the powerful market incentives for ethanol 
production that prevailed in the 2 years following its 
establishment. The new RFS, instituted under the 2007 energy 
bill, requires significantly higher levels of blending.
    We analyzed the possible market outcomes under the RFS and 
under partial waivers of one-quarter and one-half of the 
conventional biofuel RFS. The waivers are assumed to be 
immediate and permanent.
    As indicated in table 2, the expected national average 
wholesale market prices for ethanol are likely to remain in the 
mid-$2 per gallon range, with expected prices being somewhat 
lower if the RFS is relaxed by one-quarter and even lower still 
if the RFS is relaxed by one-half. Under all scenarios, these 
expected levels of ethanol production are above the RFS by a 
billion gallons or more, except for 2008 when the margin is 
much smaller. This again reflects the fact that high fossil 
energy prices will result in high demand for ethanol as a fuel 
extender. Partial relaxation of the conventional biofuel RFS 
would result in somewhat lower expected levels of production.
    Like ethanol prices, expected corn prices are fairly steady 
near current levels under all scenarios. Expected prices across 
scenarios gradually diverge, with the one-quarter RFS waiver 
price falling about 30 cents per bushel below the full RFS 
price and the one-half RFS waiver price falling about 50 to 60 
cents per bushel lower.
    To summarize the results, a sustained reduction in RFS by 
one-quarter to one-half of the RFS would not significantly 
reduce ethanol production or prices. These policy changes would 
be expected to result in corn prices that are 5 to 10 percent 
lower than under current policies.
    At the bottom of page 3, I would like to note a typo. It 
says 7 billion acres of corn. It should be ``million.'' If it 
was 7 billion, we would not be here today.
    [Laughter.]
    Mr. Outlaw. In an attempt to quantify the impact of key 
economic variables on selected retail food prices, we examined 
the dynamic interrelationships among retail food prices and the 
prices of labor, crude oil, and corn. Using data from January 
1990 to February 2008, the results indicate that higher corn 
prices can be passed through to consumers relatively quickly 
for bread, in this case, through acreage competition with wheat 
acres, milk, and eggs, with retail prices of those products 
rising by amount commensurate with the quantities of grains 
used in their production.
    We also find, however, that the contribution of higher corn 
prices to recent increases in the retail prices of bread, milk, 
and eggs are smaller than the contributions of other factors 
such as national and international weather variability and 
production cycles.
    Labor cost increases have also contributed to increased 
retail prices of these commodities, but the effects of 
increased energy prices have been minimal through February 
2008.
    By contrast, we detected no statistically significant 
effect of corn on retail meat prices to date. Taken as a whole, 
this evidence suggests that over the short term livestock 
producers have been unable to pass higher feed costs to 
consumers due to their industry structure and competitive 
pressures. There is no doubt, however, that these industries 
are experiencing dramatic financial losses due to increases in 
their cost of production. If current market conditions persist, 
meat supplies will eventually decline due to producer attrition 
and capacity reduction, which will lead to higher retail prices 
for meats. In short, retail meat prices must eventually adjust 
to reflect increased feed costs. The only uncertainty is the 
timing and the duration of adjustment.
    Mr. Chairman, that completes my statement.
    [The prepared statement of Mr. Outlaw follows:]

   Prepared Statement of Joe L. Outlaw, Agricultural and Food Policy 
           Center, Texas A&M University, College Station, TX

    Mr. Chairman and members of the Committee, thank you for the 
opportunity to testify on behalf of the Agricultural and Food Policy 
Center at Texas A&M University on our research regarding the 
relationship between U.S. renewable fuels policy and food prices. For 
more than 25 years we have worked with the Agricultural Committees in 
the U.S. Senate and House of Representatives providing Members and 
committee staff objective research regarding the potential affects of 
agricultural policy changes.
    Due to the growing interdependence of agriculture and energy, over 
the past 5 years our Center has been focusing a considerable amount of 
research toward renewable energy policy and the likely consequences for 
U.S. agricultural producers, consumers, and renewable energy industry 
participants.
    My testimony today summarizes the results from a number of our 
reports and analyses that evaluate the potential impacts of changes to 
U.S. renewable fuels policies. The most recent study, which I have 
provided for the record, is entitled ``The Effects of Ethanol on Texas 
Food and Feed''.* This report included an analysis of the impacts of 
farm level corn prices on the retail prices of selected food products 
at the national level and alternative RFS levels.
---------------------------------------------------------------------------
    * Report has been retained in committee files.
---------------------------------------------------------------------------
    Over the past few years, the U.S. ethanol industry has been 
expanding as fast as plants could feasibly be built. Currently, as corn 
prices have increased, some of the proposed ethanol plants have dropped 
their plans and/or put them on hold. Most industry observers realize 
the Renewable Fuels Standard (RFS) contained in the Energy Policy Act 
of 2005 was never binding. However, this may not be the case with the 
RFS of 15 billion gallons of grain based ethanol mandated in the Energy 
Independence and Security Act of 2007. Depending on corn and ethanol 
prices, the higher mandate will likely encourage the expansion of 
ethanol capacity to, at least, the 15 billion gallon per year level.
    Governments around the world have enacted policies designed to 
encourage biofuels production, use, and protect biofuel producers from 
international competition. The U.S. has chosen to utilize a combination 
of the three: 1) the volumetric ethanol excise tax credit that is 
generally referred to as the ``blender's credit'', 2) the ethanol 
import tariff, and 3) the renewable fuels standard (RFS). There is no 
question that these three policy tools have influenced the amount of 
ethanol produced and consumed in the United States, as well as the 
level of ethanol imports.
    In the short-run, it can be argued that economic encouragement is 
needed to develop a new industry through government policies. However, 
in the long run, the cost of production will determine whether biofuels 
are a viable energy alternative. The answer as to whether the corn 
based ethanol industry will be viable over the long-run is--it depends. 
The price of oil and the cost of ethanol feedstocks, both more than 
double where they were only last year, will determine ethanol 
viability. With or without government support, there will likely be 
combinations of low and high oil prices and feedstock costs that result 
in profits or losses for the ethanol sector.
    Table 1 illustrates that the net returns for a typical ethanol 
plant varies substantially depending on feedstock (corn) costs and the 
ethanol price. Currently, the corn price in the U.S. is around $6.00 
per bushel, and the ethanol price is slightly under $2.50 per gallon. 
With this combination, a typical ethanol plant would be expected to 
realize $0.06 per gallon in net income. While positive, these profit 
levels are not as likely to spur additional investment. Clearly, this 
is the reason why some proposed ethanol plants have put their plans on 
hold. However, for those plants already built, it is in their best 
interest to continue to produce as long as they can cover their 
variable costs increasing the amount a plant could pay for corn. There 
are a large number of ethanol and corn price combinations that result 
in negative net returns for a plant. While these numbers are typical of 
a 100 million gallon per year plant, each plant location has attributes 
or drawbacks that could tilt (both positively and negatively) the 
economic picture for that plant location.
    Recent requests for a waiver to the RFS inspired research looking 
at whether a waiver, if granted, would have a significant impact. The 
initial RFS, instituted under the energy bill of 2005, always had a 
limited probability of binding or needing to insure the mandated level 
of ethanol blending given the powerful market incentives for ethanol 
production that prevailed in the two years following its establishment. 
The new RFS, instituted under the 2007 energy bill, requires 
significantly higher levels of blending.
    We analyzed the possible market outcomes under the RFS, and under 
partial waivers of one-quarter and one-half of the conventional biofuel 
RFS. The waivers are assumed to be immediate and permanent. The results 
presented below reflect the averages for selected market variables over 
500 realizations of possible future states of the world. In all 
scenarios, the tax credits for ethanol and biodiesel blending are 
assumed to continue. The high levels of fossil energy prices expected 
over the next few years result in powerful market incentives for 
ethanol production, in the absence of a supply-related spike in corn 
prices.
    As indicated in Table 2, the expected national average wholesale 
market prices for ethanol are likely to remain in the mid-$2.00 per 
gallon range, with expected prices being somewhat lower if the RFS is 
relaxed by one-quarter, and even lower still if the RFS is relaxed by 
one-half. Under all scenarios these expected levels of ethanol 
production are above the RFS by a billion gallons or more, except for 
2008 when the margin is much smaller. This again reflects the fact that 
high fossil energy prices will result in high demand for ethanol as a 
fuel extender. Partial relaxation of the conventional biofuel RFS would 
result in somewhat lower expected levels of production, as production 
would be lower if unfavorable market conditions were realized.
    Like ethanol prices, expected corn prices are fairly steady near 
current levels under all scenarios. Expected prices across scenarios 
gradually diverge, with the one-quarter RFS waiver price falling about 
$0.30 per bushel below the full RFS price a few years out, and the one-
half RFS waiver price falling about $0.50 to $0.60 per bushel below the 
full RFS expected price.
    To summarize our results, a sustained reduction in the RFS by one-
quarter to one-half of the RFS would not significantly reduce ethanol 
production or prices. These policy changes would be expected to result 
in corn prices that are 5 to 10 percent lower than those under current 
policies.
    The boom in corn-based ethanol production in the United States has 
led to sharply higher corn prices and, by extension, higher soybean and 
other crop prices as farmers have shifted acres between crops. High 
prices for some crops like wheat and rice and other commodities such as 
milk have been higher are due to other causes. The ethanol, or biofuel, 
revolution has, in turn, been caused by rapidly increasing oil prices, 
aided by government policies and the desire for cleaner burning fuels 
to ease global warming fears. The overall effect on agriculture and the 
economy, as a whole, is complex. While corn prices have increased, crop 
producers also face higher fertilizer and fuel prices. Higher feed 
costs have caused large increases in production costs for livestock 
producers. These rising production costs are being felt by producers, 
and to a lesser extent, consumers throughout the economy.
    In our opinion the current discussion in the media about ethanol 
causing high food prices is overly simplistic. There is no doubt that 
higher corn prices are being transferred throughout the rest of the 
economy just as higher petroleum prices are impacting the economy. In 
the United States unlike most of the countries in the world, consumers 
spend a relatively small amount of their incomes on food--around 11 
percent. The farmer's share of retail food prices is around $0.19 per 
dollar spent on food. Obviously for some products the share is higher--
especially retail food products such as fresh vegetables that have not 
undergone significant transformation and further processing. That is 
not the case for corn in the United States. Corn is typically used as 
feed in livestock and poultry production or it generally undergoes 
significant processing before it ends up as one of many food 
ingredients such as HFCS in soft drinks.
    Our report identifies a number of other factors that have also 
contributed to higher corn prices such as increased exports. The 
declining value of the dollar makes U.S. corn relatively cheaper to the 
rest of the world even with the highest corn prices on record. Another 
factor that has to be noted when discussing corn prices is the 
competition for land among commodities is another factor. Across the 
United States, not all land is suitable for producing every crop we 
grow. When farmers do have choices among crops, relative returns that 
consider relative prices and costs of production across crops cause 
crops with higher returns to bid land away from crops with lower 
returns. At planting time this year, the returns for soybeans relative 
to corn created an estimated 7 million acre shift from corn acres to 
soybean acres from 2007. This happened even though corn prices were 
relatively high by historical standards. Soybean prices were also high 
for a variety of reasons such as the increased demand for soybean oil 
in biodiesel production and higher export demand for soybeans as a food 
and feed protein.
    And finally, the average person probably does not understand the 
degree to which the weather both in the U.S. and abroad impacts food 
prices. As indicated earlier, weather problems across the world 
contributed to lower wheat availability worldwide, leading to higher 
wheat prices that led to higher bread prices. U.S. retail prices of 
rice and milk have been impacted similarly.
    In an attempt to quantify the impact of key economic variables on 
selected retail food prices, we examined the dynamic interrelationships 
among retail food prices and the prices of labor, crude oil, and corn. 
Using data from January 1990 to February 2008, the results indicate 
that higher corn prices can be passed through to consumers relatively 
quickly for: bread, milk, and eggs; with retail prices of those 
products rising by amounts commensurate with the quantities of grains 
used in their production. We also find, however, that the contribution 
of higher corn prices to recent increases in the retail prices of 
bread, milk, and eggs are smaller than the contributions of other 
factors, such as national and international weather variability and 
production cycles. Labor cost increases have also contributed to 
increased retail prices of these commodities, but the effects of 
increased energy prices have been minimal through February 2008.
    By contrast, we detected no statistically significant effect of 
corn on retail meat prices, to date. Taken as a whole, this evidence 
suggests that over the short-term (less than two years), livestock 
producers have been unable to pass higher feed costs to consumers, due 
to their industry structure and competitive pressures. There is no 
doubt, however, that these industries are experiencing dramatic 
financial losses due to increases in their costs of production. If 
current market conditions persist, meat supplies will eventually 
decline due to producer attrition and capacity reduction, which will 
lead to higher retail prices for meats. In short, retail meat prices 
must eventually adjust to reflect increased feed costs, the only 
uncertainty is the timing and duration of the adjustment period.
    Mr. Chairman, that completes my statement.

    
    
      
    
    

    The Chairman. Thank you very much.
    Dr. Pyle, go ahead.

  STATEMENT OF JASON PYLE, CHIEF EXECUTIVE OFFICER, SAPPHIRE 
                  ENERGY, INC., SAN DIEGO, CA

    Mr. Pyle. Thank you. Mr. Chairman and members of the 
committee, thank you for inviting me to this important panel on 
this critical issue. I'm Jason Pyle, the Chief Executive 
Officer of Sapphire Energy.
    First of all, I would like to thank you for your leadership 
on alternative and renewable fuels. Your vision for the 
Renewable Fuels Standard is guiding our country on the right 
path.
    We are here to talk about a dilemma, though, and that is 
food versus fuel. I think the most important thing that I can 
say here is something that the committee already knows. If you 
empower innovators and entrepreneurs to solve this problem, 
then we can have a future where we do not have to choose 
between food and fuel.
    Sapphire Energy has developed just such a technology, a 
technology that transcends the food versus fuel debate. Here it 
is. This is it right here. This is green crude, a truly 
renewable, truly sustainable alternative fuel product. It 
requires no food and no agricultural land. It is made entirely 
from algae in the desert. It is carbon-neutral. It can be 
produced at enormous scale, tens of billions of gallons a year. 
Best of all, just like petroleum, it can be used to make the 
products that we all use today, and when I say the products we 
all use today, I mean the gasoline, the diesel, and the 
aircraft fuel that are in our cars and our trucks and our 
fleets that are flying and driving right now.
    This is not biodiesel and this is not ethanol. This is 
crude oil. It is green crude, a very real and very permanent 
solution to our energy needs.
    Two weeks ago we announced that Sapphire Energy has 
produced the first renewable, ASTM-compliant, 91 octane 
gasoline from this crude. Using algae, we have turned sunlight 
into fuels, real fuels like the gasoline we all use, completely 
sustainable fuels that are carbon-neutral, highly scalable, use 
no food and no agricultural land.
    Because of the support of visionaries like ARCH Venture 
Partners, Venrock Associates, and the Wellcome Trust, we will 
be putting this completely sustainable and carbon-neutral crude 
in the pipelines within 5 years' time.
    But guess what. According to the current Renewable Fuels 
Standard, it is unclear if this will qualify as a renewable. It 
is kind of hard to believe.
    Americans want energy independence and cleaner fuel 
products, not a specific subsidy for a specific fuel process. 
When this committee put forth the Renewable Fuels Standard, it 
was technology-neutral. You recognized that this country was 
built on innovation and ingenuity. You recognized that beyond 
biodiesel and beyond ethanol, we needed to encourage a new 
generation of sustainable products by allowing a fairer playing 
field for all renewable fuels. What we have is an RFS that 
supports technologies which rely mainly on food and 
agricultural land. What we need is a policy that supports all 
avenues to energy independence.
    The food versus fuel debate is just the first of many that 
the technology-specific nature of the RFS will create. By 
subsidizing only a limited subset of technologies, we run the 
risk of discouraging a real future for America.
    There have been discussions about repealing the Renewable 
Fuels Standard. I think this would be a terrible mistake. This 
would be a stumble backward in our Nation's quest for a cleaner 
and more secure energy future.
    Ethanol and biodiesel will both be parts of a very valuable 
and renewable fuel mix, but they are not enough. The promise of 
cellulosic technologies are not enough. If we are going to 
produce 32 billion gallons of renewable fuel in 2022 and not 
ruin food and agricultural markets in the process, we are going 
to need every possible source of technology and ingenuity 
available. We are going to need all the forms of the technology 
to participate in the Renewable Fuels Standard. This committee 
understood that when the RFS was first proposed, and now I am 
asking you to return to that principle.
    In conclusion, the phrase ``food versus fuel'' suggests a 
conflict, but we have just been forced into this dilemma 
because there have been virtually no alternatives to current 
fossil fuel usage. But now we have one. Green crude is here and 
I am telling you about it and it is something that I believe 
in. A renewable and sustainable source of gasoline and diesel 
and aircraft fuel. It does not use any agricultural land or 
food products. It is completely carbon-neutral.
    Sapphire Energy can help you give the American people what 
they want: a cleaner and more secure energy future. Please help 
me and other innovative companies in this country to provide 
for the evolving Renewable Fuels Standard by creating a fair 
playing field for all of the products out there. If you take 
the handcuffs of technical progress, we can solve this food 
versus fuel debate and we can solve our energy problems before 
they really become a tragedy.
    Thank you again, Mr. Chairman, for the opportunity to 
appear before you, and I will gladly take questions at the 
appropriate time.
    [The prepared statement of Mr. Pyle follows:]

  Prepared Statement of Jason Pyle, Chief Executive Officer, Sapphire 
                      Energy, Inc., San Diego, CA

    Mr. Chairman and members of the Committee, thank you very much for 
inviting me to participate on this important panel, and on this 
critical issue.
    First, let me thank the Committee for its leadership on 
alternative, renewable fuels. Your keen focus and vision have resulted 
in the first ever Renewable Fuel Standard. Although there will 
inevitably be elements of RFS that will improve over time, you've 
guided the country along on the right path. Second, within the RFS 
debate, I want to thank this Committee for its vision and support for 
technology neutrality in RFS legislation, even though that vision did 
not survive final passage. As you predicted by supporting a technology 
neutral position, we are now seeing the evolution of an entirely new 
generation of renewable fuels. These fuels transcend the use of food as 
fuel feedstock. The current dilemma that pits fuel against food is just 
the first of many consequences of a technology-specific RFS. Without a 
technology-neutral RFS, this nation will not meet its goals of 
providing 32 billion gallons of renewable fuel by 2022. Although last 
year's Energy Independence and Security Act has yet to foster such 
solutions, this Committee should be applauded for anticipating an ever-
expanding universe of alternative and renewable fuels.
    That's why I am here. I'm Jason Pyle, Chief Executive Officer of 
Sapphire Energy. Sapphire is one of several of this nation's best 
technology companies working to produce the next generation of 
renewable fuels. At Sapphire, we focus on the production of current 
fuel products, such as gasoline, diesel and aircraft fuel, from 
completely renewable sources, such as photosynthetic microorganisms, or 
algae. Our mission is to produce fuels for today's oil and gasoline 
infrastructure, and two weeks ago we announced that Sapphire had 
produced the first ever renewable, ASTM-compliant, 91 octane gasoline 
from microorganisms. Please refer to the attached two documents for 
more background on Sapphire Energy.

                              THE PROBLEM

    One of the many reasons we have cheap food is the availability of 
cheap energy. We cannot expect to turn large amounts of food back into 
energy in an economic manner. In today's debate between food and fuel, 
we should not have to make a choice. Both are critical to the economy, 
the environment and the world at large; we should not match one against 
the other. But when price and demand rise for one, both suffer. Instead 
of a Pyrrhic choice between food and fuel, I offer the opportunity to 
transcend the debate and produce ample supplies of both, leading this 
nation toward energy independence. Instead of a dispute between two 
basic necessities, we need a dialogue that supports truly sustainable 
alternative fuel sources.
    Over the past year we have all seen prices and demand rise for 
commodities such as corn, sugar and vegetable oil. The entire world now 
feels the pressure. Daily we are faced with reports of people who 
struggle to afford essentials. A host of factors has contributed to 
price increases for food and fuel: weather, heightened demand, a weaker 
dollar, decreasing supplies.
    Just like energy, food is linked in a global market. Once we begin 
fueling our cars with food crops, we witness international 
repercussions. Riots occurred in Mexico earlier this year over 
expensive corn flour. This price increase has been attributed to U.S. 
demand for corn-based ethanol products, leaving less maize available 
for export. Protests over similar issues have occurred around the 
world, contributing to inflation and political instability.
    Even at an increased rate of production, current domestic biofuel 
processes will meet part, but not all, of U.S. demand. If the entire 
annual domestic soybean crop of 3 billion bushels were converted to 
biodiesel at the current efficiency of 1.4 gallons per bushel, it would 
provide about 6.5% of U.S. diesel fuel production. Though certainly a 
valuable asset to our fuel supply, it is clear that a spectrum of 
additional and diverse biofuels sources will be necessary to fulfill 
demand.
    Congress first adopted the Renewable Fuels Standard in 2005, but 
wisely recognized that neither biodiesel nor ethanol would be the final 
solution. It created the program as a bridge to a new generation of 
fuels, and established a system of incentives to create a marketplace 
for new technologies. Congress should consider whether the incentives 
are neutral and fair. Ask whether these mechanisms will lead to the 
support and development of fuels that will give America true energy 
independence. Congress should ensure that the next round of incentives 
can be applied to advanced technologies such as Sapphire's. American 
innovation is the heart of our people and our economy; I urge you to 
support this with additional legislation that promotes a technology-
neutral RFS.

                              THE SOLUTION

    Food for fuel concerns are real, but can be managed. Industries 
such as ethanol from corn and biodiesel from vegetable oil can continue 
to play an important role in the energy mix. However, if we intend to 
practically and economically reach the goals of the RFS, we must be 
ready to rapidly embrace new fuel technologies. We must call on 
American ingenuity and entrepreneurialism for the solutions.
    When Congress passed the Energy Policy Act of 2005, it put the 
country on a path toward an energy future independent of imported 
resources. As Americans, we must support this vision. We should strive 
to maximize production, create fuel-efficient cars, reduce the amount 
of driving we do and, finally, develop alternatives to fossil fuels. 
All these efforts deserve increased support. But without a truly new 
source of fuel, the system will remain in turmoil, prices will soar and 
the conflict between food and fuel will persist.
    Senators, my colleagues and I at Sapphire Energy have been thinking 
about this for a long time. We knew that an energy source based on 
agriculture would serve this country best as a stepping stone to a 
green energy future. We knew that energy requiring vast amounts of 
fresh water resources was not a viable option. And, finally, if we 
wanted to make a difference quickly, we knew we needed a fuel that 
could be transported and refined just like petroleum. Two years ago we 
asked ourselves, ``In a perfect world, how should the next generation 
of fuel be produced and distributed?'' These were our founding 
principles:

          1. Fuel production must not use farmland. Period.
          2. Fuel production must be carbon neutral.
          3. Fuel production and delivery must use the existing 
        petroleum infrastructure.
          4. Fuel production must scale domestically to reach tens of 
        billions of gallons per year.
          5. The next generation of fuels must be compatible with 
        today's vehicles.

    That sounded like a tall order. But Americans have dreamed big and 
delivered in the past--atomic energy, highways and railroads that 
crisscross our nation, a man on the moon, mapping the human genome. 
Now, a similar ingenuity has developed a completely renewable and 
homegrown source of gasoline. I offer that we do not have to sacrifice 
food production for fuel production. We do not have to choose between 
powering our industries and feeding the hungry.
    The Sapphire processes and technologies are so revolutionary that 
the company is at the forefront of an entirely new industrial category 
called ``Green Crude Production''. Products and processes in this 
category differ significantly from other biofuels because they are made 
solely from photosynthetic microorganisms, sunlight and CO2; 
do not result in biodiesel or ethanol; enhance and replace petroleum-
based products; are carbon neutral and renewable; and don't require any 
food crop or agricultural land. The Sapphire process produces a replica 
of light sweet crude, green crude that can be used in traditional 
refining to make real gasoline, diesel, and aircraft fuel. Our 
feedstocks produce 10 to 100 times more energy per acre than cropland 
biofuels. A side benefit of our process is that the microorganisms 
consume pollutants and convert them to fuel. Using the Sapphire 
process, we have dramatically altered the domestic energy and 
petrochemical landscape and avoided the food versus fuel debate.
    Please allow me to reiterate, the Sapphire process does not create 
ethanol; it does not produce biodiesel; it does not use crops or 
valuable farmland. Sapphire fuel is the fuel we use today, the kind 
that is in your car or truck or airplane right now. It's gasoline, 
diesel and aircraft fuel. Senators, this is a solution. This is a truly 
renewable, truly sustainable, alternative fuel--``Sapphire's green 
crude oil''.
    This fuel, Sapphire fuel, is the world's first truly renewable 
petrochemical product, produced by converting sunlight and 
CO2 into a renewable, carbon-neutral alternative to 
conventional fossil fuels, without the drawbacks of current biofuels.
    This fuel is compatible with the current energy infrastructure--
cars, refineries, and pipelines.
    Sapphire's scalable production facilities will produce this fuel 
economically because production will be modular, transportable, fueled 
by sunlight, and not constrained by arable land, crops, or other 
natural resources. Sapphire has turned sunlight into gasoline.

                         THE GOVERNMENT'S ROLE

    Governments often offer subsidies in areas in which they hope to 
create incentives for certain economic behaviors. Naturally, 
governments must act as arbiters to separate those who qualify from 
those who do not qualify for the subsidies. Unfortunately, sometimes 
those separations create an artificial division that prevents the 
subsidies from achieving their goal. The nation has asked for energy 
independence and cleaner fuel products. Thankfully, our lawmakers have 
responded and given us a Renewable Fuel Standard. Unfortunately, the 
artificial division of technology within that standard is hindering the 
most promising fuel technologies from developing alongside existing 
renewable industries. The nation asked for energy independence and 
cleaner fuel products, not a specific subsidy for a specific fuel 
process. If we want to have 32 billion gallons of renewable fuel in 
2022, we are going to need every source of technology and development 
possible to deliver it. Please take the handcuffs off of innovation and 
allow all forms of renewable technology to participate in the Renewable 
Fuel Standard.
    We at Sapphire are fortunate in that we receive financial support 
from top venture capital firms such as ARCH Venture Partners and 
Venrock, and from one of the world's largest and most visionary 
foundations, the Wellcome Trust. Not all emerging producers of green 
crude or renewable gasoline, however, will be so fortunate. By 
continuing to subsidize mostly the existing technologies instead of 
emerging alternatives, the government runs the risk of discouraging a 
real future of renewable energy.
    I support technology neutrality when it comes to subsidies for 
renewable fuels. In other words, none of the technologies and products 
that would help achieve the RFS should receive favorable treatment--not 
biodiesel, not cellulosic ethanol, and not fuels from algae. A growing 
competitive market should separate winners from losers. A subsidy 
system should support a constantly changing landscape of fuel and fuel 
technology. I recommend a technology-neutral platform that supports 
criteria rather than specific feedstocks, fuels or fuel processes. I am 
offering a future that relies on non-arable, non-agricultural land; a 
future based on domestic fuel production and a supply of fuel we use 
today within 5 years time. I believe this will be an essential part of 
the renewable fuel landscape and I urge you to assist me and other 
innovative companies with technology-neutral legislation.

                               CONCLUSION

    The unfortunate phrase ``food vs. fuel'' suggests a conflict, a 
dilemma. We have faced this dilemma because there have been virtually 
no viable alternatives to existing sources of fossil fuel. Until now. 
At Sapphire Energy, we can change all that. This is the fuel that can 
address the food versus fuel dilemma by enabling ample production of 
both.
    Thank you again, Mr. Chairman, for the opportunity to appear before 
you. I will gladly take questions from you and the Committee at the 
appropriate time.

               Attachment.--Sapphire Energy News Release

        SAPPHIRE ENERGY UNVEILS WORLD'S FIRST RENEWABLE GASOLINE

  Pioneering effort alters `food vs. fuel' debate, supports American 
    energy independence with revolutionary platform that harnesses 
                microorganisms, sunlight, CO2
 Leading investors commit over $50 million to scale effort; production 
  innovator Brian Goodall hired, team leader behind first biofuel 747 
                                 flight
    Sonoma, Calif.--May 28, 2008--Sapphire Energy announced today they 
have produced renewable 91 octane gasoline that conforms to ASTM 
certification, made from a breakthrough process that produces crude oil 
directly from sunlight, CO2 and photosynthetic 
microorganisms, beginning with algae.
    ``Sapphire's goal is to be the world's leading producer of 
renewable petrochemical products,'' said CEO and co-founder Jason Pyle, 
speaking from the influential Simmons Alternative Energy Conference. 
``Our goal is to produce a renewable fuel without the downsides of 
current biofuel approaches.
    ``Sapphire Energy was founded on the belief that the only way to 
cure our dependence on foreign oil and end our flirtation with ethanol 
and biodiesel is through radical new thinking and a commitment to new 
technologies.''
    The end result--high-value hydrocarbons chemically identical to 
those in gasoline--will be entirely compatible with the current energy 
infrastructure from cars to refineries and pipelines.
Not biodiesel, not ethanol. And no crops or farm land required
    The Sapphire platform offers vast advantages--scientific, economic 
and social--over traditional biofuel approaches.
    Company scientists have built a platform that uses sunlight, 
CO2, photosynthetic microorganisms and non-arable land to 
produce carbon-neutral alternatives to petrochemical-based processes 
and products. First up: renewable gasoline.
    Critically important, in light of recent studies that prove the 
inefficiencies and costs of crop-based biofuels, there is no `food vs. 
fuel' tradeoff. The process is not dependent on food crops or valuable 
farmland, and is highly water efficient.
    ``It's hard not to get excited about algae's potential,'' said Paul 
Dickerson, chief operating officer of the Department of Energy's Office 
of Energy Efficiency and Renewable Energy ``Its basic requirements are 
few: CO2, sun, and water. Algae can flourish in non-arable 
land or in dirty water, and when it does flourish, its potential oil 
yield per acre is unmatched by any other terrestrial feedstock.''
Scalability key to success
    Sapphire's scalable production facilities can grow easily and 
economically because production is modular, transportable, and fueled 
by sunlight--not constrained by land, crops, or other natural 
resources.
    ``Any company or fuel that hopes to solve the biofuel conundrum 
must be economically scalable--and that requires conforming to the 
existing refining distribution and fleet infrastructure,'' said Brian 
Goodall, Sapphire's new vice president of downstream technology. 
Goodall led the team responsible for the highly visible, first-ever 
Virgin Atlantic ``green'' 747 flight earlier this year. In addition to 
a three-decade career in the petrochemical industry, he is a corporate 
inductee at the National Inventors Hall of Fame.
Domestic production a matter of national security, economic growth
    A new domestic energy platform based on sunlight and CO2 
has the economic potential to herald a tectonic market shift as well as 
make the country more secure. Last year, the nation imported over $200 
billion of foreign oil, and, with oil prices reaching record heights 
every week, that number is expected to increase dramatically. 
Protecting these strategic overseas interests is an increasingly 
expensive proposition.
    ``It is imperative, both economically and for national security 
reasons, that American companies figure out ways to produce oil here at 
home,'' said Sapphire co-founder Kristina Burow of ARCH Venture 
Partners, the company's founding investor. ``Imagine if even a portion 
of the $200 billion we spend on foreign crude stayed here: The payoff 
in new jobs, and domestic economic growth would be huge.''
Developments require new industrial category: Green Crude Production
    In fact, Sapphire's processes and science are so radical, the 
company is at the forefront of an entirely new industrial category 
called `Green Crude Production.' Products and processes in this 
category differ significantly from other forms of biofuel because they 
are made solely from photosynthetic microorganisms, sunlight and 
CO2; do not result in biodiesel or ethanol; enhance and 
replace petroleum-based products; are carbon neutral and renewable; and 
don't require any food crop or agricultural land.
    The final products meet ASTM standards and are completely 
compatible with the existing petroleum infrastructure, from refinement 
through distribution and the retail supply chain.
Leadership team stars in their fields
    Sapphire's founders and leadership team includes top scientists in 
the fields of petro chemistry, biotechnology, algal production, plant 
genomics, and biogenetics. ARCH Venture Partners, with a long history 
of taking innovative life-science technologies to market, is the 
founding investor. ARCH is joined by the Wellcome Trust, the world's 
largest biomedical research charity, and Venrock, one of the oldest and 
most respected venture capital firms in the country. The strength of 
the syndicate is unparalleled: between ARCH and Venrock, they have 
launched well over 500 companies. Sapphire is also collaborating with 
the leading scientists and organizations in the field including the 
DOE's Joint Genome Project; University of California, San Diego; The 
Scripps Research Institute; and the University of Tulsa.
    ``Sapphire's interdisciplinary team hit milestones within three 
months that everyone thought were impossible,'' said ARCH managing 
director Robert Nelsen.
    ``We realized at that point we could change the world, so we sat 
them down and told them, `the checkbook is completely open; tell us 
what you need'.''
    ``When the Wellcome Trust made the decision to invest in Sapphire, 
we evaluated the energy landscape to find a solution with the potential 
to realistically address the world's current challenges in energy 
production,'' said Danny Truell, Wellcome's chief investment officer.

About Sapphire Energy
    Sapphire Energy was founded to address the overwhelming 
inadequacies of current biofuel approaches and the profound costs of 
American dependence on foreign oil. The company has built a 
revolutionary platform using sunlight, CO2 and 
microorganisms such as algae to produce renewable, 91 octane gasoline 
that meets ASTM standards; it is not ethanol and not biodiesel. 
Sapphire is led by an interdisciplinary team of entrepreneurs and 
experts in cell biology, plant genomics and algal production, as well 
as investors with long histories of taking innovative technology to 
market, including co-founder ARCH Venture Partners, along with the 
Wellcome Trust and Venrock. Sapphire's scientific supporters include 
Scripps Research Institute; University of California, San Diego; the 
University of Tulsa, and the Department of Energy's Joint Genome 
Project. The company is located in San Diego. For more information, 
visit www.sapphireenergy.com and www.greencrudeproduction.com.

About ARCH Venture Partners
    ARCH Venture Partners is a premier provider of seed and early stage 
capital for technology firms, with a special competence in co-founding 
and building technology firms from startup. ARCH invests primarily in 
companies co-founded with leading scientists and entrepreneurs, 
concentrating in innovations in life sciences, physical sciences, and 
information technology. ARCH enjoys special recognition as a leader in 
the successful commercialization of technologies developed at academic 
research institutions and national laboratories. The company manages 
seven funds totaling over $1.5 billion and has invested in the earliest 
venture capital rounds for more than 120 companies over 22 years. 
Portfolio companies where ARCH was a co-founding or early investor 
include Illumina, Aviron, Impinj, Xenoport, Alnylam, Ikaria, 
Microoptical Devices, New Era of Networks, Netbot, Trubion 
Pharmaceuticals, Adolor, Nanosys, Caliper Life Sciences, Ahura, Xtera, 
Array Biopharma, Everyday Learning Corporation, Nanophase Technologies, 
and deCode Genetics, among others.

About The Wellcome Trust
    The Wellcome Trust is the largest charity in the UK. It funds 
innovative biomedical research, in the UK and internationally, spending 
around #650 million each year to support the brightest scientists with 
the best ideas. The Wellcome Trust supports public debate about 
biomedical research and its impact on health and wellbeing.

About Venrock
    Venrock is a premier venture capital firm with offices in Menlo 
Park, New York, Cambridge, MA, and Israel. Originally established as 
the venture capital arm of the Rockefeller family, Venrock continues a 
seven-decade tradition of partnering with entrepreneurs to establish 
successful, enduring companies. Having invested $1.9 billion in 405 
companies resulting in over 120 IPOs over the past 39 years, Venrock's 
investment returns place it among the top tier venture capital firms 
that have achieved consistently superior performance. With a primary 
focus on technology, healthcare, and energy, portfolio companies have 
included Adnexus Therapeutics, Apple Computer, Centocor, Check Point 
Software, DoubleClick, Gilead Sciences, Idec Pharmaceuticals, Illumina, 
Intel, Millennium Pharmaceuticals, Sirna Therapeutics, StrataCom, and 
Vontu.

      Attachment 2.--Green Crude Jet Fuel: On Spec, Reliable and 
                           Entirely Domestic

    The United States Air Force consumes over 3 billion gallons of fuel 
each year, which is more than half the fuel consumed by the U.S. 
Government. Nearly 90% of this fuel is used for aviation. Currently, 
the U.S. military aviation fuel supply is inextricably linked to 
commercial oil production. Yet domestic petroleum resources continue to 
dwindle year after year. With over 60% of the earth's proven oil 
reserves beneath the ground in the Middle East, the future of national 
defense is growing progressively more reliant on one of the world's 
most politically turbulent regions.
    Competition for fossil fuel products will skyrocket over the next 
decade. Emerging economies have a greater dependence on GDP growth than 
developed nations, and China, with both rapid expansion and history's 
largest standing army, will soon outpace the U.S. as the world's 
dominant energy consumer. As most energy products are traded on an 
international commodities market, rising worldwide demand will strain 
fuel availability to all nations. We are already seeing markets 
fracture, as Asian nations aggressively negotiate special supply 
contracts with Middle Eastern and African producers.
    The Department of Defense is aggressively pursuing technologies 
that will reduce our energy vulnerabilities and strengthen our national 
security. Secretary of the Air Force Wynn states, ``The reliance on 
imported oil continues to threaten the economic, financial, and 
physical security of the nation, while the use of domestic fossil fuels 
contributes to nationwide pollution problems. The Air Force believes 
that development of renewable energy sources for facility energy is one 
important element of our comprehensive strategy.''
    The Air Force Office of Scientific Research and the Defense 
Advanced Research Projects Agency are studying how to produce cleaner 
jet propellants by adding plant oils. Both are looking at triglyceride 
oils, such as algae oil, as potential feedstocks because they do not 
emit any carbon during production. Sapphire stands ready to provide the 
best strains and the most advanced proteoic algae technology available 
today.

                      ENERGY SECURITY BY SAPPHIRE

    Sapphire has developed a process to produce on-spec jet aircraft 
fuels. The core technology relies on Sapphire's Green Crude production. 
Green Crude is a product that can be used as a petroleum replacement in 
existing oil refineries to produce gasoline, diesel, and aircraft fuel. 
Rendering it yet more valuable to the United States Armed forces, Green 
Crude possesses these additional properties:

          1. Green Crude can be produced entirely within the 
        continental United States.
          2. Green Crude is a perfect substitute for petroleum crude, 
        and requires no change to existing aircraft or fuel 
        infrastructure.
          3. Production is stable and reliable.
          4. It is economically competitive with fossil fuel products.
          5. By adopting Green Crude, the U.S. Air Force would become 
        the most environmentally friendly fuel consumer in the world.

    Sapphire uses transgenic technology originally developed for the 
production of pharmaceuticals. We have modified the metabolic pathways 
of photosynthetic organisms to convert the energy from the Sun into 
pure hydrocarbon molecules. This product is Green Crude, a biosynthetic 
oil that can be introduced directly into the existing petroleum 
infrastructure to produce products chemically identical to current 
liquid transportation fuels.
    Sapphire has assembled some of the Nation's most distinguished 
scientists, engineers, entrepreneurs, and investors to develop a 
completely integrated fuel production process that is independent of 
international petroleum resources.
    Sapphire's R&D team has already proven the viability of Green Crude 
production, and we are currently at the research facility stage. Our 
process does not use food, fresh water or agricultural land, and thus 
is exempt from many of the recent concerns surrounding other biofuel 
production methods. Our photosynthetic organisms consume vast amounts 
of carbon dioxide as the building block for liquid hydrocarbon fuels, 
reducing greenhouse gases and providing a fuel that is carbon-neutral 
or carbon-negative.
    Sapphire's development target, currently slated for New Mexico, is 
a facility capable of producing 10,000 barrels of Green Crude each day. 
Once the process has been demonstrated at this scale, Sapphire will 
improve and replicate the modular system to produce 200,000 barrels per 
day, providing the Air Force with a reliable domestic supply of 
aviation and transportation fuel.

    The Chairman. Thank you for your testimony.
    Dr. von Braun, go right ahead.

STATEMENT OF JOACHIM VON BRAUN, DIRECTOR GENERAL, INTERNATIONAL 
                 FOOD POLICY RESEARCH INSTITUTE

    Mr. von Braun. Thank you, Mr. Chairman and members of the 
committee.
    The high and unstable food and energy prices have led to a 
world food crisis because they are leading causes of inflation, 
especially in Asia, but also in other parts of the world, 
causing macroeconomic problems. They are affecting low-income 
countries where this contributes to political unrest and 
instability. Global markets for food are becoming increasingly 
disrupted through export stocks, export bans to protect 
domestic consumers. High prices are undermining nutrition and 
health among many of the world's poorest 2 billion people. All 
these crisis symptoms have long-term consequences.
    Last week the International Grain Council reports an 
overall growth in the use of cereals for biofuels globally by 
32 percent in the season 2007/8 and an estimated 31 percent 
growth in the coming year. The U.S. has a share of about 80 
percent in the total world quantity of grains, including corn 
used for biofuels. The total quantity used globally this year 
is about 95 million tons, and that is large relative to world 
trade--total world corn trade is 100 million tons, so roughly 
the same amount--and also large relative to total world corn 
production, about 780 million tons.
    Biofuels are not per se bad or good. There are smart 
technologies as we have just heard also in agriculture. Sweet 
sorghum is one such alternative. Imagine a sorghum plant where 
you have the sugar in the stem and the grain on top of it. You 
have both good things. You can produce the ethanol and still 
harvest grain. It is already in larger scale testing in fields 
in India.
    In any case, the hungry poor cannot wait for getting relief 
from second-generation biofuels technology.
    Let me come to the much disputed price effects. The study 
of my institute did a careful comparison between a simulation 
of actual demand for food crops as biofuel feedstock for the 
time period from 2000 to 2007 and compared that with the 
simulation of the biofuel growth at the rate of what we had in 
the 1990s. So it is a with versus without comparison, but 
taking the past trend forward in the demand for bio-ethanol 
sector.
    The result is increased biofuel demand during the period 
2000 to 2007 accounted for 30 percent--3, 0--30 percent of the 
increase in weighted average grain prices. Not surprisingly, 
the biggest impact was on corn prices for which increased 
biofuel demand is estimated to account for 39 percent of the 
increase in real prices. So if corn prices went up from $100 to 
$200, that is a 100 percent increase. Then $39 of these $100 
were due to biofuels.
    These are very conservative estimates as they portray price 
effects from market fundamentals only and not factor in 
indirect additional effects from speculation that accelerate 
the price effect in the more tight markets which we have today.
    The grain-based biofuels would not be a problem if the 
world could draw on a pile of grain, but it does not have a 
pile of grain. Productivity growth in grain production has 
declined over the past 2 decades for complex reasons. A 
comprehensive policy response will be fundamental to address 
the world food crisis. Biofuels must be part of that.
    Four actions need to be addressed with a sense of urgency.
    First, cut back on biofuels that are based on grain and 
corn, including a freeze or a temporary moratorium. This would 
have fast impact on the markets.
    Second, invest in agriculture crop productivity globally. 
That is investment in science and technology. The U.S. science 
system has a lot to offer here that would compensate for the 
use of grains in biofuels.
    Third, markets and trade policies call for building a 
global system for biofuels markets and trade that is 
undistorted and operates with low transaction costs.
    Finally, protection of the food-insecure poor which is a 
necessity given the current food crisis is upon them. Such 
protection would include employment programs, school feeding, 
cash and food transfers, et cetera. Without such a social 
component, the current food crisis cannot be addressed.
    Thank you for your attention.
    [The prepared statement of Mr. von Braun follows:]

      Prepared Statement of Joachim von Braun, Director General, 
             International Food Policy Research Institution

                              INTRODUCTION

    World agriculture is at a turning point: economic growth, energy 
needs, and climate change redefine the equations of agricultural supply 
and demand and contribute to accelerate food prices. Biofuels have been 
particularly high on the global agenda largely due to rising concerns 
about national energy security, high energy prices, and global climate 
change, as well as the income expectations of farmers and other 
investors (von Braun and Pachauri 2006).
    The International Grain Council reports an overall growth in the 
use of cereals by 32% in 2007/8 and an estimated 31% in the coming 
year, and by 41% and 32% in the USA respectively (see table 1). The USA 
has a share of about 80% in the total quantity. The total quantity used 
globally this year (95 Mill. Tons) is large, relative to total world 
trade of corn (100 Mill. Tons) and relative to total world corn 
production (777 Mill. Tons).
    The rapid expansion of ethanol and biodiesel has increased 
dependency on natural vegetation and crops grown specifically for 
energy. Biofuel production has also introduced new food-security risks 
and new challenges for the poor, particularly when resource constraints 
have lead to trade-offs between food and biofuel production and rising 
food prices. For the further development and use of biofuels, it is 
necessary to carefully assess the impact of different technologies, 
products (ethanol, bio-diesel, bio-gas), and feed stocks (e.g. sugar 
cane, corn, oilseeds, palm oil, agricultural waste and biomass). 



        energy and agriculture in a broader conceptual framework
    A comprehensive policy framework will be fundamental to developing 
biofuels in such a way that they contribute to energy security, climate 
change mitigation, and environmental sustainability, and at the same 
time they do not negatively affect food prices and the food security of 
the poor. The three main domains upon which biofuels have an impact-
namely the political/social, the economic, and the environmental-
interact when agriculture and energy become more closely linked through 
the production of biofuels (Figure 1).* This interaction will lead to 
changes in the dynamics of agriculture as well as changes in the impact 
on households, businesses, and the private sector.
---------------------------------------------------------------------------
    * Figures 1-3 have been retained in committee files.
---------------------------------------------------------------------------
    Participants in the biofuel discussion come from many sectors and 
include farmer representatives, the energy industry, global 
environmental movements, large capital funds, and science and 
technology lobbies. The extent to which biofuels remain on the agenda 
will depend on political pressures and security concerns. High levels 
of rent seeking as well as political lobbying are part of the picture, 
and their impact can be seen in the current subsidy and trade policies 
adopted by some countries. The implemented biofuel subsidies are 
regressive and anti-poor because low-income households lose much on the 
food consumption side if food prices rise, and gain little on the 
energy side if energy prices decline.
    The quantities of biofuels required to meet energy needs vary 
between countries and depend on the choice of feedstock. For example, 
if 20 percent of the maize crop in the United States were to be used 
for ethanol production, it would meet only one-third of the country's 
10-percent ethanol blending target. On the other hand, if 20 percent of 
the sorghum crop in India were to be replaced with sweet sorghum, it 
would be sufficient to meet India's entire 10-percent ethanol blending 
target (Winslow 2008). Less-known crops such as Jatropha curcas and 
sweet sorghum also represent an area of opportunity for using 
marginalized lands and reducing greenhouse gases.
    Whether biofuel production is a viable and sustainable source of 
energy depends not only on the choice of feedstock, but also on 
cultivation practices, technologies employed, or the security, trade, 
and environmental policies that are adopted. Many countries have 
already established ambitious biofuel expansion plans and blending 
targets, and yet biofuel production remains uncompetitive in many 
places of the world. Since second-generation biofuel technologies, 
which may lessen the food-fuel competition and the negative effects on 
the poor, are still a long way away, it makes sense for many countries 
to wait for the emergence of these technologies and ``leapfrog'' onto 
them later.
    However, it is also important to recognize that technology may not 
necessarily overcome the food-fuel competition. The trade-offs between 
food and fuel may actually be accelerated when biofuels become more 
competitive relative to food with a further increased demand as a 
consequence. Therefore, it is not a question of either or: It is 
essential to simultaneously invest in energy and other agricultural 
technologies to soften the trade-offs. The Consultative Group on 
International Agricultural Research (CGIAR) can play a vital role in 
this process.

                    BIOFUELS AND RISING FOOD PRICES

    Feedstock makes up the principal share of total biofuel production 
costs. It accounts for 50-70 percent and 70-80 percent of overall costs 
for ethanol and biodiesel, respectively (IEA 2004). Net production 
costs, which refer to all costs related to production (including 
investments), differ widely across countries. For instance, Brazil 
produces ethanol at about half the cost of Australia and one-third the 
cost of Germany. However, feedstock costs have increased by 50 percent 
and more during the past few years, impinging on comparative advantage 
and competitiveness. While the biofuel sector will contribute to price 
changes, it will also be a victim of changes in feedstock prices.
    The high price of energy is a key factor behind rising food prices. 
Energy and agricultural prices have become increasingly intertwined. 
With oil prices at an all-time high and the U.S. government subsidizing 
farmers to grow crops for energy, U.S. farmers have massively shifted 
their cultivation toward biofuel feedstocks, especially corn (see Table 
1), often at the expense of soybean and wheat cultivation.
    An IFPRI study by Mark Rosegrant (2008) did a comparison between a 
simulation of actual demand for food crops as biofuel feedstock through 
2007 and a scenario simulating biofuel growth at the rate of 1990-2000 
before the rapid takeoff in demand for bioethanol. This approximates 
the contribution of biofuel demand to increases in grain prices from 
2000 to 2007. The percentage contribution of biofuel demand to price 
increases during that period is the difference between 2007 prices in 
the two scenarios, divided by the increase in prices in the baseline 
from 2000 to 2007. The increased biofuel demand during the period, 
compared with previous historical rates of growth, is estimated to have 
accounted for 30 percent of the increase in weighted average grain 
prices. The biggest impact was on maize prices, for which increased 
biofuel demand is estimated to account for 39 percent of the increase 
in real prices. Increased biofuel demand is estimated to account for 21 
percent of the increase in rice prices and 22 percent of the rise in 
wheat prices (Rosegrant 2008).
    Scenario analyses undertaken with IFPRI's International Model for 
Policy Analysis of Agricultural Commodities and Trade (IMPACT have 
examined the effects of biofuels on food prices as they may occur in 
the future. The developed scenarios include:

          Scenario 1--based on the actual biofuel plans of countries 
        and biofuel expansion for identified high-potential countries. 
        Under this scenario prices increase ceteris paribus by 18 
        percent for oilseeds and 26 percent for corn by 2020.
          Scenario 2--based on a more drastic expansion of biofuels, 
        assuming a doubling of the production expansion rate over 
        Scenario 1 levels. Under this drastic biofuel expansion 
        scenario (Scenario 2), the price of corn rises by 72 percent 
        and of oilseeds by 44 percent.

     would the poor go even hungrier with more biofuel production?
    Poor people are impacted by biofuels as consumers in food and 
energy markets, producers of agricultural commodities in small 
businesses, and workers in labor markets. The increase in agricultural 
demand and the resulting increase in agricultural prices will affect 
poor people in different ways. Some poor farmers could gain from this 
price increase. However, net buyers of food, which represent the 
majority of poor people, would respond to high food prices with reduced 
consumption and changed patterns of demand, leading to calorie and 
nutrition deficiencies.
    Under the two IMPACT scenarios, the increase in crop prices 
resulting from expanded biofuel production is also accompanied by a net 
decrease in availability and access to food. Calorieconsumption is 
estimated to decrease across regions under all scenarios compared to 
baseline levels (Figure 2). Food-calorie consumption will fall the most 
in Sub-Saharan Africa, where calorie consumption is projected to 
decrease by more than 8 percent if biofuels expand drastically.
    As a result of rising food prices, cuts will likely be made to food 
expenditures, exacerbating diet quality and micronutrient malnutrition. 
A study of the effects in an East Asian setting suggests that a 50-
percent increase in the price of food, holding income constant, will 
lead to the decline of iron intake by 30 percent. As a result, the 
prevalence of micronutrient deficiency among women and children will 
increase by 25 percent (Bouis 2008). Studies also show that current 
malnutrition of mothers and children has long lasting effects (Lancet 
2008) and will show in deteriorated health and income decades later.

                        IMPLICATIONS FOR POLICY

    A comprehensive policy framework will be fundamental to developing 
biofuels in such a way that they contribute to energy security, are 
environmentally sustainable and that complementary policies protect the 
pro-poor as long as grain based biofuels contribute to high food 
prices. Such a framework requires a strategic approach with three 
pillars:

          1. Science and technology policy , which calls for 
        accelerated agricultural productivity to maintain and improve 
        food security, accompanied by an expanded focus on agricultural 
        and biofuel technologies and close coordination with biofuel 
        users-for example, the automobile industry.
          2. Markets and trade policy, which calls for building a 
        global system for biofuel markets and trade that is undistorted 
        and operates with low transaction costs. Transparent standards 
        are needed, including sustainability and performance-based 
        standards rather than technology-based standards that will 
        quickly become outdated.
          3. An insurance and social-protection policy for the food-
        insecure poor, which is a necessity given existing large-scale 
        food and nutrition insecurity and the growing number of changes 
        in the food system which are partly driven by the expansion of 
        biofuels. Such protection could include employment programs, 
        school feeding and food for schooling programs, conditional and 
        unconditional cash transfer programs, and social security 
        systems for the poorest.

    The Chairman. Thank you very much for your testimony.
    Mr. Huttner, you are the final witness. Go right ahead.

STATEMENT OF JACK HUTTNER, VICE PRESIDENT, BIOREFINERY BUSINESS 
              DEVELOPMENT, GENENCOR, ROCHESTER, NY

    Mr. Huttner. Thank you, Chairman Bingaman and the 
committee, for this invitation today. I am here on behalf of my 
company, Genencor, a division of Danisco, and the Industrial 
and Environmental Section of the Biotech Industry Organization, 
of which Genencor is a longstanding member.
    We are a leading industrial biotechnology company 
specializing in biotech enzymes for the ethanol, detergent, 
textile, and feed industries.
    BIO's members include enzyme companies like ours, oil 
companies, first and second-generation biofuels companies, and 
dedicated energy feedstock developers.
    Each of us is working to deliver products that enhance 
agricultural productivity, energy security, and boost the rural 
economy, contributing to a more sustainable bio-based economy.
    I wanted to start by thanking you and your colleagues in 
Congress for your continued support of the emerging biofuels 
industry here in the U.S. The Renewable Fuels Standard included 
in the energy bill this year and the biofuels provisions in the 
farm bill are essential to the shared vision we have of a 
strong, sustainable economic future.
    I have submitted prepared testimony and I will just 
summarize my remarks briefly.
    As other speakers have commented today, the biggest cause 
of higher food prices is the cost of energy, particularly oil. 
Some small measure of the price increase likely can be 
attributed to the production of ethanol in the U.S. We admit 
that. While it is minimal, the question I would like to address 
today is how we can reduce that impact further. More 
importantly, how do we provide the world's growing population 
with abundant supplies of food while also meeting our growing 
energy needs?
    First will be increasing agricultural yields here and 
around the world. Over the past 30 years, new hybrid and 
biotech varieties of corn, for example, have increased corn 
yields from 90 bushels to nearly 150 bushels per acre, and we 
are on our way to delivering 200 bushels per acre in this next 
decade. The consulting company McKinsey estimates that if 
current yield trends continue, no additional acres of corn will 
be needed to meet the 15 billion gallons of conventional 
ethanol required by the RFS.
    One big problem we face today is the huge fall-off in yield 
seen in developing economies. Indeed, the worldwide average 
yield per acre is just 50 percent of the United States. There 
was an interesting story in Tuesday's Wall Street Journal 
reporting on changing attitudes among development agency 
economists who are now revising their thinking to conclude that 
investments in agriculture will improve, not thwart economic 
development. Policy and investment should focus on spreading 
technologies to improve yields here and around the world. We 
have no doubt that sustainable agricultural development can 
provide both abundant food and biofuel.
    The second big development that gives us confidence is the 
emerging second-generation biorefinery. Just last month, for 
example, DuPont and Genencor announced a joint venture to 
produce cellulosic ethanol. This technology will use non-food 
portions of the corn crop, namely cobs and corn stalks, to make 
ethanol. In the U.S., we will deploy this technology directly 
to the current ethanol industry by offering bolt-on units. This 
strategy uses the existing ethanol infrastructure to bring 
cellulosic ethanol to the market just as quickly and as 
efficiently as possible. By using these agricultural residues, 
we can greatly increase the volume of ethanol produced from an 
acre of land. That is why the infrastructure being developed 
for today's ethanol industry is so vital to second-generation 
biofuels. Our pilot plant will be operating in 2009, and within 
5 years, we plan to be producing commercial volumes.
    Beyond corn, we are also working with other companies in 
BIO to prepare for dedicated energy crops like switchgrass. The 
first commercial switchgrass seeds will be available next year 
for planting. Of course, other biomass feedstocks like wood 
chips, forest thinnings, and sugar cane are all targets for 
sourcing renewable carbon.
    Many BIO member companies are also working aggressively to 
commercialize other advance biofuels such as bio-butanol. 
Several cutting-edge companies are even developing renewable 
hydrocarbons to make gasoline and diesel from carbohydrates and 
algae.
    Cellulosic ethanol is on the verge of becoming a viable 
industry. Longstanding support of the U.S. Government for basic 
research, applied R&D, and demonstration facilities will soon 
be paying off. Congressional authorization and funding of the 
USDA and DOE, for example, have made the transition to 
cellulosic ethanol possible. These investments and the policy 
framework provided by the recently enacted energy and farm 
bills have laid the groundwork for a new, low-carbon economy 
that uses renewable carbon from biomass to replace fossil 
carbon for the production of fuels and chemicals.
    In the future, biorefineries will be scattered throughout 
the rural landscape. This is the promise we see of the bio-
based economy. We are at the beginning of the journey, not the 
end. 10 years from now, second-generation biorefineries will 
produce a variety of products and liquid fuels, but today's 
ethanol plants and the infrastructure supporting them is the 
foundation we will be building upon. Without a robust, stable 
policy framework, the journey is going to be much more 
difficult, if not impossible. We hope Congress will not be 
persuaded by our critics to reverse the biofuels policy you 
have worked so hard to develop and enact. We must keep the RFS 
in place, staying on course to realize the great commercial and 
environmental potential that a bio-based economy can bring.
    Thank you for your attention and the invitation today.
    [The prepared statement of Mr. Huttner follows:]

    Prepared Statement of Jack Huttner, Vice President, Biorefinery 
             Business Development, Genencor, Rochester, NY

    I would like to thank the committee for inviting me to testify 
today. I am here on behalf of my company, Genencor, a division of 
Danisco A/S, and the Industrial and Environmental Section of the 
Biotechnology Industry Organization--BIO, of which Genencor is a long-
standing member.
    Genencor is a leading industrial biotechnology company with over 
1500 employees around the world. Our specialty is the development and 
production of biotech enzymes for the ethanol, detergent, textile and 
feed industries.
    BIO's members include enzyme producers, like Genencor, as well as 
agricultural seed companies, oil companies, first and second generation 
biofuels companies and dedicated energy feedstock developers. Each is 
helping to deliver technologies that enhance agricultural productivity 
and energy security, boost the rural economy and deliver a cleaner 
environment.
    I wanted to start by thanking you and your colleagues in Congress 
for your continued support of the emerging biofuels industry in the US. 
The Renewable Fuels Standard included in the 2007 energy bill and the 
biofuels provisions in this year's farm bill are essential to the 
shared vision of a strong, sustainable future in which America's 
farmers continue to produce abundant supplies of food and feed while 
also helping to meet our growing energy needs. We at Genencor, and our 
colleagues in BIO, are working hard to help make this vision a reality.
    Recently, the media has been full of stories linking food price 
increases to ethanol production. This is a false debate. We have the 
ability to produce both food and biofuels in abundance. Many 
commentators have noted the various factors driving global food price 
increases, including dramatically rising oil prices, booming demand for 
animal feed in China and India, drought in agricultural producing 
regions and the weak US dollar. And yes, biofuels production, although 
experts have repeatedly pointed out that biofuels production is a 
relatively minor cause of food price increases. I would note that the 
prices of agricultural commodities that have little or no relationship 
to biofuels, such as rice and wheat, have risen right along with corn 
and soybeans. As Dr. Otlaw has testified, the study recently released 
by Texas A&M University found that the primary underlying force driving 
price increases in the agricultural industry, as with the economy as a 
whole, is higher energy prices--$100 + per barrel oil in particular--
and that somehow freezing, rolling back or eliminating the RFS would 
not result in significantly lower corn or food prices. In fact, Merrill 
Lynch estimates that without ethanol, gasoline prices would be at least 
50 cents higher than they are today, further exacerbating the pressures 
on food and commodity prices.
    There is another story that the media has not been telling so 
effectively--the story of steadily increasing agricultural 
productivity. We have seen a decade's long year-on-year crop yield 
improvement. And, we are about to see a dramatic increase in that rate 
of improvement in the near future. New plant varieties are steadily 
becoming more drought and pest resistant and more efficient in their 
use of fertilizer. Yields, the amount of corn, soybeans, or other 
product per acre, are rising steadily. This is partly why we believe 
there is no long term food and fuel tension. In the last decade global 
production of corn has risen almost 35%, and soybeans over 50%. That 
increased production was achieved with only a 6% increase in planted 
acres--that is the power of increasing yields, which act like 
compounded interest adding more production each and every year. In the 
mid-1970s America was producing about 90 bushels of corn per acre. 
Today, just 30 years later, that number has increased to 150 bushels 
per acre, and we are on our way to 200 bushels per acre in the next 
decade. In fact, McKinsey & Company estimates that if current biotech-
based yield trends continue, no more additional acres will be needed to 
meet the 15 billion gallons of conventional starch based ethanol 
required by the RFS.
    Improving agricultural yields have not been uniformly achieved, 
however. Many parts of the world are still using agricultural practices 
that are many decades old, and have agricultural yields one quarter 
that of the US. Indeed, the world wide average corn yield per acre is 
50% of the yield in the US. In some countries, corn yields are below 30 
bushels per acre, just one-fifth of ours. On Tuesday, the Wall Street 
Journal featured a story on the food crisis. The story reported on new 
thinking by development agencies that have refocused attention on the 
need for increased investment in seeds and fertilizers in the 
developing world. The real policy focus should be on how to help other 
parts of the world such as Africa, Eastern Europe and Asia, expand 
agricultural productivity. There is huge upside opportunity in 
agricultural productivity from the existing acreage. We can grow our 
way out of this if we can expand the distribution of agricultural 
progress.
    In addition to our contributions to increase yield, the US biofuels 
industry is on the verge of commercializing second generation 
technologies that will use non-food feedstocks, like corn stover, 
switch grass and waste wood. Indeed, Genencor and DuPont have just 
formed a joint venture to develop this technology and we hope to have 
our pilot plant operational next year. Within five years, we expect to 
be producing commercial quantities of cellulosic ethanol. Is there 
enough biomass to produce a significant amount of second generation 
biofuels? To answer this question, BIO recently produced a report on 
the sustainable harvest of cellulosic biomass for biorefinery 
feedstock. Based on published USDA data, it concluded that farmers 
could supply over 200 million dry tons annually of corn stover, enough 
feedstock to double ethanol production from America's corn acres. Much 
of this biomass will be processed at existing ethanol facilities 
retrofitted to handle cellulosic feedstocks in addition to grain. 
That's why the infrastructure being developed for today's ethanol 
industry is so vital to the next generation as well.
    Everyone understands the impact of higher commodity input costs 
that we all face. I am very concerned, however, that critics of 
biofuels and the RFS are pointing the finger of blame at the wrong 
culprit. If Congress over-reacts, our ability to bring next generation 
biofuels to market could be badly damaged. We need the RFS to set the 
floor for biofuels demand so companies like Genencor and DuPont will 
continue to invest in second generation biorefineries. BIO's member 
companies believe the RFS is the right standard, at the right time, for 
the right reasons.
    Of course, we can't simply depend on corn alone. In addition to 
agricultural residues, BIO member companies like Ceres and Mendel are 
developing dedicated energy crops like switchgrass and Miscanthus as 
biorefinery feedstocks of the near future. In fact, Ceres just 
introduced the first commercial switchgrass variety that will be on the 
market at the end of this year. These crops will bring new revenue to 
farmers, increase biomass yield per acre with the lowest possible water 
and energy inputs per ton.
    Cellulosic ethanol is on the verge of becoming a viable industry. 
The long standing support of the US Government for basic research, 
applied R&D and demonstration facilities will soon be paying off. 
Congressional authorization and funding of the USDA and DOE, for 
example, have made the transition to cellulosic ethanol possible. These 
investments have laid the groundwork for a new, low-carbon economy. 
This is an economy that uses renewable carbon from plants to replace 
fossil carbon for the production of fuels and chemicals in addition to 
food and fiber.
    This is about more than just ethanol. Many BIO member companies are 
working aggressively to commercialize other advanced biofuels, such as 
the bio-butanol that DuPont is developing with BP. Existing ethanol 
infrastructure can be retrofitted with this technology. Several 
cutting-edge companies are developing ``renewable hydrocarbons'' to 
make gasoline and diesel from carbohydrates and algae. In the future, 
biorefineries will be scattered throughout the rural landscape 
converting biomass into many different products, all with a reduced 
life cycle carbon footprint. This is the promise of the biobased 
economy.
    Perhaps the history of the oil refining industry is informative to 
the current biofuels debate. It was in 1853 that the first petroleum 
product--kerosene--was produced from seep oil to replace whale oil. It 
has taken over 150 years for the modern oil refinery to evolve from 
that point to where it can take in a barrel of crude oil and produce a 
myriad of downstream products.
    Modern biorefineries are at about that stage of development. We are 
at the beginning of the biorefinery journey--not the end. Twenty years 
from now, modern biorefineries will use a variety of renewable 
feedstocks and produce a variety of products and liquid fuels. But the 
ethanol plants we are building today, and the infrastructure supporting 
them, is the foundation we will build upon. Without a robust and stable 
policy framework, the journey will be much more difficult, if not 
impossible. We hope our Congressional leaders will not be stampeded by 
the chorus of negativity that seeks to reverse the biofuels policy 
Congress has worked so hard to develop and enact. We must keep the RFS 
in place and stay on course to realize the great commercial and 
environmental potential that a biobased economy can bring. Thank you.

                 Attachment.--Biofuels Myths and Facts

                             THE TECHNOLOGY

Myth: Ethanol takes more energy to produce than it provides in the tank
    FACT: This anachronism has been disproven by a number of 
researchers. According to scientists at Argonne National Laboratory, 
today's ethanol production provides roughly 50 percent more useful 
energy per unit of fossil energy input than gasoline. Cellulosic 
ethanol is expected to provide a 10:1 return on fossil fuel investment.
Myth: The Renewable Fuels Standard (RFS) in the 2007 energy bill is too 
        aggressive
    FACT: Over 13.5 billion gallons of ethanol capacity is either 
already installed or under construction. The RFS does not reach 13 
billion gallons until 2010 and caps conventional ethanol production at 
15 billion gallons in 2015 and beyond.
Myth: Commercialization of cellulosic biofuels technology is still over 
        a decade away
    FACT: The world's first commercial cellulosic ethanol plants are 
already under construction and will come on line beginning in 2008. 
Projects under construction include:

   Abengoa Bioenergy (Salamanca, Spain)
   Verenium (Jennings, Louisiana)
   Mascoma (Rome, New York)
   Range Fuels (Soperton, Georgia)

    More than 20 other cellulosic biorefineries are in advanced 
planning or permitting stages.
    FACT: Commercially-ready cellulase enzymes have already been 
introduced, and commercially available seed for switchgrass and other 
next-generation energy crops will be available later this year. 
Genencor, A Danisco Division, introduced Accelerase, the first 
commercial cellulase enzyme, earlier this year. Ceres, Inc, recently 
introduced Blade, the first commercial energy crop seed line, which 
will include varieties of switchgrass and sorghum.
    FACT: Six DOE-sponsored cellulosic demonstration biorefineries are 
moving forward and will be on-line in time to meet the first modest 
production requirement of 100 million gallons in 2010. Seven additional 
pilot biorefineries have received DOE grants to prove out emerging 
technologies. In total, 29 advanced biofuel refineries are planned or 
under construction.

                             FOOD AND FUEL

Myth: Biofuels production is responsible for the global food crisis
    FACT: The primary crops of concern for global food shortages are 
rice and wheat, very little of which is used for biofuels. Poor 
harvests and increased demand globally of rice and wheat have resulted 
in tighter supplies.
    FACT: Biofuels production has not reduced exports of food or feed. 
U.S. corn exports reached record levels in 2007-08, and biofuels 
producers added over 1 billion bushels of dry distillers grains (DDGs) 
to the feed supply last year. Soybean exports are up as well. The U.S. 
livestock industry is still the top user of corn, with more corn 
expected to be fed to livestock this year compared to last.
    FACT: With the help of biotechnology, corn crop yields have 
increased over 30 percent since the technology was introduced in 1996, 
and yield increases are expected to continue into the future. Soybean 
yields have increased over 20 percent in the same time period.
    FACT: Responsible, sustainable biofuels production will be an 
increasingly critical component of global security in the coming 
century, expanding global energy supplies, reducing dependence on 
petroleum, cutting greenhouse gas emissions, and creating economic 
opportunity in rural and developing regions. Biofuels are not a 
panacea, but are a vital part of the global energy future.
Myth: Biofuels are causing a dramatic rise in food prices
    FACT: Energy prices have been the largest single driver for higher 
food prices and a new study from Texas A&M shows that other factors--
primarily skyrocketing prices for fuel and fertilizer, but also 
drought, population growth, the weakening dollar, political 
instability, and speculation by hedge fund and other investors--are the 
primary causes of recent food price increases around the world.
    FACT: In addition to the above factors, corn prices have increased 
due to increased demand for animal feed in developing countries such as 
India and China with growing middle class demand for meat.
    FACT: In the United States, farm costs account for only 19 cents of 
every dollar of retail food costs. Energy and labor are the dominant 
food costs to consumers. In fact, Merrill Lynch estimates that without 
ethanol production, fuel costs would be 15 percent higher than they are 
today, driving the cost of producing food and feed even higher.
    FACT: Biotechnology is already playing a role in helping to meet 
growing demand for biofuels through increased yields of corn and 
soybeans. Higher yields mean more grain for food and fuel. These year-
over-year yield increases are expected to continue or even accelerate 
into the foreseeable future.

                                LAND USE

Myth: There's not enough land to produce food, feed and biofuels
    FACT: A 2005 analysis by the Departments of Energy and Agriculture 
found that there is enough biomass in the United States to displace 
over 30 percent of U.S. gasoline demand without reducing production of 
food and feed. Today's biofuels production represents less than 5 
percent of the transportation fuel supply.
    FACT: There are nearly 5 billion acres of agricultural cropland in 
production worldwide. Less than 2.5 percent of that land is used for 
the production of feedstocks for biofuels.
    FACT: Bioenergy crops can provide food/feed, fuels, and other high-
value co-products from the same crop, making the highest possible use 
of the land.
    FACT: Advances in agricultural and industrial biotechnology are 
constantly increasing biofuel yields, making increasingly efficient use 
of existing lands. Introduction of biotech varieties has helped 
increase corn yields 30% since 1996 alone. McKinsey & Co. estimate that 
if current corn yield improvements continue, zero additional acres will 
be required to meet the new Renewable Fuels Standard of 15 billion 
gallons of conventional ethanol.
    FACT: Many energy crops grow well in poorer soils, and can be 
planted on less productive land, building soil and sequestering carbon 
in the process.
Myth: Biofuels production is destroying the rainforest
    FACT: Only one percent of arable land in Brazil is planted with 
sugarcane. Sugarcane for ethanol is not grown in the Amazon rainforest. 
The Brazilian government has laws in place to protect deforestation of 
the Amazon rainforest.
    FACT: Some critics (such as Searchinger) have recently suggested 
that biofuels--by driving up grain prices--are making it more lucrative 
to grow soybeans, and are therefore indirectly causing rainforest to be 
chopped down to make way for agricultural land. Brazilian rainforest is 
cleared for a complex mix of economic reasons, unrelated to ethanol 
production. Sustainable biofuels production must go hand-in-hand with 
sustainable land use policy.

                             SUSTAINABILITY

Myth: Biofuels increase greenhouse gas emissions
    FACT: The vast majority of research from academia, NGOs, and 
federal labs suggests that biofuels have a positive and increasingly 
beneficial impact on climate. (See reference list.) Today's corn starch 
ethanol reduces GHG emissions up to 30 percent compared to gasoline, 
according to Argonne National Lab. Cellulosic ethanol is expected to 
reduce emissions by 85 percent or more.
    The ethanol produced in the United States in 2007 reduced 
greenhouse gas emissions by approximately 10 million tons--the 
equivalent of removing more than 1.5 million cars from America's 
roadways--according to Argonne National Lab.
    FACT: New fractionation and enzyme technologies are reducing 
biorefinery energy inputs and delivering higher value co-products. 
Biorefineries are also increasingly using renewable energy such as 
stover or animal waste to power their facilities, greatly reducing 
fossil fuel consumption. Cellulosic biorefineries are expected to 
require little or no fossil inputs, and may even return power to the 
grid.
    FACT: Biotech corn varieties, collection of agricultural residues, 
and use of non-food feedstock crops all allow for greater adoption of 
no-till farming, which can increase carbon sequestration in the soil 2-
3 fold. Many non-food feedstock crops continuously sequester carbon 
even as above-ground biomass is harvested.
    FACT: No-till farming actually results in carbon sequestration 
further improving GHG profiles.
Myth: Biofuels consume vast quantities of water
    FACT: 87 percent of U.S. corn acres are non-irrigated, requiring no 
water other than natural rainfall. Ag biotech companies are developing 
new drought-resistant corn varieties, which will further reduce water 
inputs.
    FACT: Many non-food feedstock crops, such as perennial grasses, are 
highly drought tolerant, and will require little or no water inputs.
    FACT: One gallon of ethanol requires approximately 3 gallons of 
water to produce today. This number is constantly improving as 
biorefineries become more efficient. This is roughly the same amount of 
water required to produce a gallon of gasoline. For comparison, a 
gallon of beer takes 40 gallons of water.
Myth: Biofuels require massive amounts of fertilizer and pesticides
    FACT: Ag biotech has helped corn farmers become far more efficient 
in their fertilizer and pesticide applications. Insecticide usage has 
declined over 80 percent per acre in the past 20 years. Nitrogen and 
phosphate applications have declined roughly 30 percent per bushel in 
the last 30 years. Increased use of conservation tillage has 
substantially reduced runoff of all inputs.
    FACT: Many non-food feedstock crop varieties would require little 
or no fertilizer or pesticide inputs.

                               ECONOMICS

Myth: Ethanol subsidies are a huge waste of taxpayer dollars
    FACT: The ethanol industry generated an estimated $4.6 billion in 
tax revenue for the federal government in 2007, or $1.35 for every 
dollar of federal investment.
    FACT: Merrill Lynch estimates that U.S. gasoline prices would be 15 
percent--roughly 50 cents a gallon--higher without current ethanol 
production.
    FACT: The 36 billion gallon RFS is expected to add more than $1.7 
trillion to the GDP, create up to 1.1 million new jobs, and reduce the 
outflow of dollars to foreign oil producers by $817 billion over the 
next 15 years.
    FACT: A typical 100 million gallon per year ethanol plant adds $367 
million to local GDP and boosts local household incomes by an 
additional $100 million.

                                 ENERGY

Myth: Biofuels can only supply up to 10% of our transportation fuel 
        needs so they are not worth pursuing
    FACT: According to the Natural Resources Defense Council, the 
United States can produce enough sustainable biofuels to supply half of 
U.S. transportation fuel needs--100 percent if vehicle fuel economy 
doubles.
        sample references showing lifecycle benefits of biofuels
    http://www.transportation.anl.gov/pdfs/TA/271.pdf

    http://www.nrdc.org/air/energy/biofuels/contents.asp

    http://www.pnas.org/cgi/content/abstract/105/2/464

    http://www.esajournals.org/perlserv/?request=get-
abstract&doi=10.1890%2F05-2018&ct=1

    http://www.sciencemag.org/cgi/content/short/311/5760/506

    http://www.bio.org/ind/biofuel/SustainableBiomassReport.pdf

    http://www1.eere.energy.gov/biomass/pdfs/
final_billionton_vision_report2.pdf.

    The Chairman. Thank you for your testimony.
    Let me start and we will just have 5-minute rounds of 
questions here. We have a lot of Senators that obviously are 
interested and have questions.
    Let me start by talking just a little bit about this whole 
issue of corn production. Obviously, we are all very concerned 
about the tragedies that we are seeing throughout the Midwest, 
last night's tragic tornadoes in Iowa and Kansas, recent 
flooding in the corn-producing areas of our country. I think, 
Dr. Glauber, you referred to the fact that we have got some 
reports coming out, one on the 30th of June and another later 
than that, which are going to be closely watched because people 
are concerned that perhaps some of these weather-related 
factors, along with everything else, could substantially reduce 
the corn crop this year.
    I wanted to ask about the waiver authority that we have in 
this RFS. When it was enacted, there was an effort made to 
provide, I think, to the Administrator of EPA authority to 
waive part or all of the RFS if certain determinations were 
made. I would just be interested in your interpretation of that 
waiver authority and, Secretary Karsner, yours as well, as to 
whether or not this is a--I mean, depending on what these 
reports say here later in the summer, is there a possibility 
that there would be an action by the EPA Administrator in that 
regard? Would it have any effect on the amount of corn that is 
going for production of biofuels?
    Dr. Glauber.
    Mr. Glauber. Yes. Let me take a quick shot at it.
    You are right. There is authority under section 211 of the 
act to consider a waiver to the RFS. Indeed, I think it is 
pretty well known there is actually a request from the State of 
Texas to consider a waiver, and I believe by the 24th of July, 
EPA, in consultation with DOE and USDA, will make a 
determination on that waiver.
    As far as the 2008 Renewable Fuels Standard is concerned, 
the standard sets a level of 9 billion gallons of ethanol. If 
you look at current production estimates by the EIA, the Energy 
Information Agency, they are projecting somewhere around 8.9 
billion gallons of ethanol being produced in 2008. If you add 
to that potential imports that come in, also biodiesel 
production which would be applied toward that, it would appear 
that we are over the standard. So the waiver in effect, at 
least from our projections right now, would have no effect on 
whether or not that ethanol is produced.
    Now, there is a caveat to that and that is what happens to 
the size of this year's crop. It is anyone's guess right now. I 
think it was reported by Joe and others currently while margins 
have declined for ethanol producers, they still currently are 
making money and still producing ethanol. At least by our 
lastest estimates, it does not look like ethanol production is 
being affected.
    If prices were to rise extremely high because of a serious 
floodings or droughts or something like that, unforeseen right 
now, then if all of a sudden it were difficult or the margins 
were not there to produce ethanol, a mandated level would--
indeed, you would have to have ethanol, and the price of 
ethanol would get bid up such that they would continue to 
produce over time.
    I think that is the only circumstance and again fairly 
rare, a small probability at this point, but a lot depends on 
what we see in acreage. Right now we think 86 million acres was 
planted. If that is substantially under that, that would be an 
issue I think. If the corn yield looked substantially under 
what we are carrying, then I think that would be a potential 
cause for concern. But otherwise, we see this mandate as not 
being binding.
    The Chairman. Secretary Karsner, did you have a point of 
view on this?
    Mr. Karsner. Yes, sir. It is actually complementary to my 
colleague's at USDA in the sense that their analysis is 
focusing on the now. So when you talk about no real 
interruption to the production of ethanol, you are really 
talking about installed capacity of existing ethanol production 
or planned production, if you will.
    Our interest at the Department of Energy is in moving 
forward with actual metrics, as you know, since this Energy 
Committee put them in place, in terms of technological 
achievement for next-generation cellulosic and advanced 
biofuels. That actually means we need capital formation, equity 
investment, and stimulation in the debt markets.
    So while it might not affect the net production capacity of 
already installed conventional corn-based ethanol, the simple 
word to define what the impact would be from a waiver is 
``devastation'' to capital formation for advanced biofuels if 
we were to send an erratic or unreliable signal that we had 
political risk or change of law risk and noncontinuity for the 
projection going forward, which is actually not addressing the 
installed current corn-based capacity. But you have got to go 
through that precursor of production of ethanol today to get 
capital markets to invest, as they are today, as you have heard 
from these fine companies, in the ethanol sources from 
nonedible waste streams that we are working on at DOE.
    The Chairman. My time is up.
    Senator Corker.
    Senator Corker. I do not know that I was prepared to be so 
quickly asking questions. It is very unusual being where I sit 
on this committee.
    Thank you, Mr. Chairman, for this hearing and for all of 
the witnesses for being here today.
    Dr. Pyle, I would like for you, if you would, to talk a 
little bit about the lack of--focusing on one technology. To me 
that was the major drawback in the provisions that we put in 
place. We discussed, as you mentioned in the beginning of our 
hearings here, about being agnostic as it related to 
technology. We actually had some amendments looking at 
addressing that. I wonder if you could expand just a little bit 
more, knowing you only had 5 minutes to talk a little bit to 
this committee, about the fact if we were not so technology-
specific, exactly what that would mean, if you will, about the 
innovation and investment.
    Mr. Pyle. As you correctly pointed out, Senator, it really 
was the leadership of this group here that first proposed a 
technology-neutral position for the RFS. I thank you for that. 
Unfortunately, that is not how the legislation occurred.
    Just to summarize the way that the current legislation 
supports the introduction of renewables is virtually every 
means by which you can produce ethanol as a fuel product from 
all the various different possibilities, including farm food 
products, cellulosic technologies, and a vague reference on 
biomass-produced diesel. So, unfortunately, it does not expand 
the concept of alternative fuels to basically any renewable 
feedstock to produce a renewable fuel product.
    When Sapphire proposed that we would provide the Nation 
gasoline, there was a very specific reason why we proposed to 
provide the Nation gasoline. It is because we use it right now. 
We have the infrastructure to support the use of gasoline. It 
became clear to us that the RFS does not support the 
introduction of renewable gasoline as a renewable product. That 
was quite upsetting to us, as it was to the many very visionary 
both entrepreneurs and financiers that support these kinds of 
projects.
    When I talk about some of the visionaries, I talk about 
people like the Wellcome Trust who are very concerned about 
world food prices, like the venture capital organizations, 
Venrock and ARCH, who are willing to support technologies at 
risk, but we are really hoping that the wisdom of this is seen 
clearly that we need to support all technologies that could 
potentially lead to energy security.
    Focusing on one technology is going to be fraught with 
problems along the way, as we have seen with the eruption of 
this food versus fuel debate. This will just be the first of 
them, I promise you.
    What we need to do is open this up to what Americans do 
best, and what we do best is innovate in the face of a 
challenge.
    Senator Corker. If you could--I am going to run out of 
time--but, say, in 15 seconds or so, give the attributes of how 
we might address that. In other words, if we said 36 million 
gallons and we defined what we were using, what would we say?
    Mr. Pyle. I think that what needs to happen is that we need 
to define what exactly is renewable, and then we need to leave 
it open to technologists and entrepreneurs to provide fuels and 
processes that meet the definition of what is renewable, not 
specify a technology or a fuel. That is kind of where we are 
today. We have a specified fuel, which is ethanol, or a 
specified set of technologies like the conversion of soy to 
biodiesel. So we need to be more broad about what is renewable 
and allow all things which are renewable into the fuel mix.
    Senator Corker. I could not agree more, and I hope we can 
work with you and other members of the committee to see that 
that happens. That alone would be a way, would it not, of 
addressing the issue we are talking about right now as it 
relates to the relationship between fuel and food? That would 
easily do that. Is that correct?
    Mr. Pyle. I completely agree with that.
    Senator Corker. That would be a responsible market response 
to the issue today. Is that correct?
    I see our Government officials are actually shaking their 
head agreeing with an entrepreneur, which is most pleasant to 
see.
    As a matter of fact, one of the things that I think is most 
awkward about talking about our energy policy here and most 
unpleasant is the very thing we are talking about right now, 
and that is we continue to pick winners and losers. To me, what 
I saw last week with the climate change debate was an 
opportunity--and hopefully that will come back up--to stop 
picking winners and losers. Let us figure out what is 
acceptable in this country as it relates to carbon, and then 
let us quit picking winners and losers. Let us do away with 
many of the subsidies. We have people who come in and out. I 
know new technologies need some on the front end, and I do not 
want you to frown, Dr. Pyle. I realize that.
    But I want to ask the two Government witnesses how they 
would feel about on ethanol in general, corn ethanol in 
specific, but ethanol in general--we have tariffs today. We 
have tax credits today. Yet, we had corn ethanol suppliers in 
here telling us that they needed a floor on petroleum at $40 a 
barrel in order to be successful. We are at $138 or so a 
barrel. What would happen in the marketplace if we were to do 
away with one or both of those in your opinion?
    The Chairman. Why don't you answer those questions and then 
we will take a short recess.
    Mr. Karsner. Senator Corker, you are exactly right. I would 
rather not comment on the precision of the mechanism, whether 
it is cap and trade, whether it is taxes, whether it is 
subsidies, but talk to the principles that you are asserting. 
The Administration is in complete agreement with you that we 
have got to get to a consolidated, single point of stimulus 
that is technology-neutral, predictable, long-term, and that 
includes the attributes that we seek as a Nation, the security 
externalities, and carbon weighted. So whatever mechanism or 
manifestation that comes in, those core principles of 
simplification and consolidation into a single set that 
cultivates the conditions for the results rather than selecting 
the technologies is where we have to go.
    I would call your attention to the original proposal of the 
Administration for the ``20 in 10'' that was sent to the Hill 
and included the 1992 definition of renewable fuels under the 
Energy Policy Act which in fact was all inclusive and generally 
technology-neutral. That may be something that could be 
revisited in the days and weeks ahead.
    Senator Corker. Thank you.
    The Chairman. Dr. Glauber, did you want to make a comment? 
Then we will adjourn.
    Mr. Glauber. Sure. I do think it is important to recognize, 
one, the recently passed farm bill actually brings the blender 
credit down from 51 cents to 45 cents. My understanding is that 
will get implemented in 2009.
    There is no question at $130 oil, ethanol is probably 
profitable without the subsidy. The real question is what 
happens when the price of oil falls back to the levels that we 
saw a year or 2 ago. There is no question that the blender 
credit has been very instrumental in helping to establish an 
industry.
    So, yes, as far as the other duty and charge or the tariff, 
so-called tariff, for the ethanol, certainly that is an outlet 
to bring ethanol into this country. Ethanol made from sugarcane 
tends to be at lower cost than corn. But as we develop these 
new varieties and increase efficiency, there is no question 
that corn-based ethanol has seen very large cost savings and 
efficiency gains over the last 5-10 years.
    The Chairman. Why don't we leave it at that? We will take a 
short recess. I think Senator Dorgan went to vote early, and 
when he comes back, he will reconvene the hearing. Thank you.
    [Recess.]
    Senator Dorgan [presiding]. We will call the hearing back 
to order. As you know, there is a vote occurring and the 
chairman will be back shortly.
    Let me call on Senator Tester for inquiry.
    Senator Tester. Yes, thank you, Senator Dorgan.
    I will jump around a little bit. Mr. Karsner, you had 
talked about emissions being 25 percent less on biofuels, could 
be up to 52 percent. This is something that I am hearing a lot, 
that the emissions on biofuels are greater, not less than 
petroleum fuels. Do you have any idea where this misinformation 
is coming from?
    Mr. Karsner. Yes, and there are probably multiple sources. 
Obviously, this is an area of hot interest. So there has been a 
lot of recent work that has galvanized around it.
    Primarily the recent surge in information on the subject 
matter that we would find questionable comes from two of the 
reports that were published in Science magazine. They go by 
Searchinger and Tillman. Even the authors have said that some 
of this has been taken out of context. We have actually seen it 
rehashed almost verbatim through multiple outlets. It spread 
like wildfire.
    I am often amazed that very few people know that the 
President and Congress have worked out a reduction plan for 20 
percent of our gasoline, but within a week of this report 
coming out on assumptions that we would find highly 
questionable and, in fact, contrary to what is in the law and 
including the protections that were built into the law, there 
is sort of an implausible, extreme scenario that then has no 
sensitivities run alongside of it. So our work at Argonne 
National Laboratory and across the national laboratory system 
rapidly went into a validation mode to work with that.
    Forgive me for going a little long here, but there was an 
interesting element that came out, which is the study and need 
for indirect and direct land use as an element of emissions and 
off-gassing. That work is also something that has been underway 
at DOE and across the Government for some time, but it has 
aroused a new level of debate. It is a matter that should be 
included in the discussion, but we think across more plausible, 
realistic assumptions and scenarios.
    Senator Tester. Thank you.
    Mr. Pyle, I have just got a few questions about the green 
crude. What does it cost a barrel now?
    Mr. Pyle. Obviously, we are not at full production, but the 
projected production costs of this will be comparable to that 
of existing means by which we can get new oil products. So when 
I am speaking about those, I am speaking about deepwater 
drilling, oil shale, oil sands. So we are looking in the range 
of about $50 to $80 a barrel.
    Senator Tester. Good. When you talk about being carbon-
neutral, I assume--correct me if I am wrong--that you are 
taking into account tailpipe emissions also.
    Mr. Pyle. Absolutely.
    Senator Tester. Is it done inside, outside? How available 
is it?
    Mr. Pyle. This is done outside. It has a lot of 
similarities to agriculture in the sense that it is an outdoor 
kind of crop-like system, but does not use agricultural land or 
agricultural products.
    Senator Tester. Is the process so unique that--can it be 
done on a smaller scale I guess is what I am asking. Can it be 
done on a decentralized basis?
    Mr. Pyle. It could be on a decentralized basis, but my 
business is to do it on a very large scale to provide very 
large supply to the existing infrastructure like pipelines and 
refineries. But there is a potential to do it on a 
decentralized basis.
    Senator Tester. Mr. Huttner, very quickly. Cellulosic 
ethanol is something that we have been talking about for a 
while, and I think that corn ethanol has done its job as far as 
establishing the market. Cellulosic is a direction we need to 
go.
    You talked about a pilot plant in 2009. When do you really 
think that this will become a reality where we can talk about 
cellulosic ethanol the same way we talk about corn ethanol?
    Mr. Huttner. Our plant will be operational in 2009, but 
over the course of the next 2 years, there is a number of pilot 
and demonstration plants funded by the DOE's program that will 
be coming on line. So I think in 2 to 5 years, you will start 
seeing commercial volumes.
    Senator Tester. Will it be as cost competitive as green 
crude or corn ethanol as far as what Senator Corker talked 
about, that, hopefully, once we get these industries off the 
ground, we can pull back the support and they can stand alone. 
Do you see that as the case for cellulosic ethanol?
    Mr. Huttner. At some point as the market develops, 
absolutely. That would be the intent.
    Senator Tester. Thank you very much. I appreciate 
everybody's testimony today. I appreciate the work you are 
doing, and I just thank you.
    Senator Dorgan. Senator Tester, thank you very much.
    Dr. Glauber, I note that the former chief economist at 
USDA, whom I have dealt with for years in various committees, 
Keith Collins--I noted in the press that he has been hired by 
Kraft to assist in the Grocery Manufacturers campaign against 
biofuels. I note that he criticized your analysis of the 
impacts of biofuels on food prices on behalf of his clients.
    Can you explain to me the methodology that you used to 
evaluate the impacts of biofuels on food costs and how that 
might differ from the way Dr. Collins and his client would have 
liked you to have calculated those effects?
    Mr. Glauber. I have not seen his analysis.
    Senator Dorgan. Have you heard of it?
    Mr. Glauber. I am aware that he has been working with 
Kraft.
    I would say this, that our analysis, what we did--and 
again, let me be very clear. It depends very much in terms of 
what timeframe one looks at and what the actual analysis--you 
know, the experiment, if you will, that you are looking at.
    Senator Dorgan. That goes without saying.
    Mr. Glauber. Yes. No, I know. But I think it is important 
here.
    For example, Dr. von Braun talked about IFPRI's analysis 
showing a 39 percent impact on corn. I think that when I looked 
at holding--when we looked at the impact on corn, we held 
ethanol production constant over 2005 to 2007. Over that 
period, we increased corn use for ethanol by about 2 billion 
bushels. By my crude calculations, just as he was talking about 
it, if you looked at what his analysis did, he assumed ethanol 
growth rates over the 1990s applied to the current thing. He 
would be getting very similar--I mean, he gets a higher number, 
but if I were looking at a comparison between, say, 1 billion 
gallons and 3 billion gallons, I would be getting a higher 
number as well.
    So I do not know exactly what Dr. Collins did. All I know 
is we held it constant at 2005 and looked at the price effects, 
translated those price effects into the CPI number, and derived 
it that way.
    Senator Dorgan. You know what? It is no clearer to me now, 
but that is not necessarily your fault.
    Dr. Pyle, I am chairman of the subcommittee on 
appropriations that funds a lot of these, including Secretary 
Karsner's operation. I included money for the first time. We 
stopped research on algae about 15 years ago. Last year, I 
included money in the fossil fuels account to begin that 
research again. I am a big fan of algae. I know some look at it 
and say it is way out in the sweet by and by, and it is kind of 
fanciful in any event. But it just makes sense to me to find 
ways to use algae.
    Now, when you talked about what you are doing, are you 
producing algae in greenhouses? Are you producing it in 
vessels? Tell me how you produce the algae?
    Mr. Pyle. So the overall process is a multi-stage process, 
but the largest component of it is kind of an outdoor pond, for 
lack of a better word.
    Senator Dorgan. You could use the CO2 effluent 
from a plant. Right?
    Mr. Pyle. That is correct. Coal-fired flue gases.
    Senator Dorgan. So it is beneficial use of something that 
we want to get rid of.
    Mr. Pyle. Absolutely.
    Senator Dorgan. You produce the algae. The algae increases 
in bulk in hours. It is an unbelievable product. It grows in 
waste water, single-cell pond scum. It needs water and 
CO2. We want to get rid of CO2. We grow 
algae. You harvest the algae for your green oil or some harvest 
it for diesel. I mean, there are various approaches.
    This just makes a lot of sense to me. The reason I mention 
this to you is I think in many ways if we look in the rear view 
mirror 5 years from now, we are going to say, wow, I had no 
idea this was going to happen.
    A couple guys from Texas came to see me, and they are 
taking off the flue gas--using chemicals to treat the flue gas 
and they come up with three things, hydrogen, chloride, and 
baking soda, and the baking soda contains the CO2. 
Then they landfill the baking soda. Is that not interesting? 
They have got two projects, demonstration projects. The 
question is, do you take this to commercial scale? I do not 
know the answer to that.
    But I think there are a lot of things happening that are 
interesting, and I think one of them is especially the use of 
algae.
    So tell me where are you in the process. You are in a 
demonstration process?
    Mr. Pyle. Yes, sir. We are moving right now to our 
demonstration facility. We have a number of operations mainly 
in San Diego, New Mexico, and Oklahoma. There are a number of 
excellent places in the world and in the United States to 
deploy this kind of technology. In the United States, it is 
primarily in the southern States and ideally in New Mexico.
    Senator Dorgan. One quick question of Mr. Karsner. I wanted 
to ask all of you questions, but we are limited in time. Mr. 
Karsner, you and I visited NREL out in Golden, Colorado, and 
they showed us what they were doing with respect to cellulosic 
ethanol. There are others who tell me that the private sector 
is way ahead of NREL. I do not know if that is true or not.
    Give me your assessment of where we might get to cellulosic 
in a commercial scale in any reasonable timeframe.
    Mr. Karsner. First of all, let me say I hope it is true. 
You know, first past the post. It should not be that the 
Government has to be exclusively the leader. We can be the 
leader by catalyzing commercial feedback loops. We can find out 
that we are not doing enough in algae and open up our program 
with enough agility to begin including those things and 
catalyzing more private sector capital. We are doing that at 
NREL and at Sandia now, opening them up to work with Chevron 
and others on algae.
    But we think that our original metric was to get commercial 
scale process integration by 2012. We actually think, now that 
we have a couple projects that we have measurably stage-gated 
and some of them that have already achieved financing and 
groundbreaking, that it is likely, as you heard earlier, that 
some of these might achieve commercial openings by 2010 or 
2011. Again, they will be reacting to the price signal. Our 
2012 metric was established when we were estimating gasoline 
based on an EIA baseline of $30 to $35 per barrel. So the price 
signals are going to affect our urgency and it is going to 
affect the amount of money coming in if we have policy 
predictability.
    Senator Dorgan. Thank you very much.
    Senator Bingaman, let me thank you for putting together a 
really terrific panel. I thought that you contributed a lot to 
this discussion. I appreciate the work that all of you have 
done.
    Senator Barrasso.
    Senator Barrasso. Thank you very much, Mr. Chairman. Thank 
you for putting together this panel.
    Dr. Outlaw, if I could visit with you. The chairman asked 
earlier one of the other witnesses about the tough year on 
crops in the Midwest, the impact on corn, and the specifics of 
the waiver authority with the EPA. From where you are sitting 
in Texas, could you add a little bit to what your thoughts are 
on the best way to accomplish these things and where we ought 
to be going now?
    Mr. Outlaw. Clearly, our Governor asked for the waiver. He 
did not ask for the particular research that I reported on 
today.
    But the question becomes what are you trying to achieve. If 
you are trying to achieve a slowdown in ethanol production 
which would eventually relate to lower farm prices, our 
research would suggest that this is a very slow way to get to 
that answer because, as most of us said, we do not believe that 
the RFS is going to be binding. So if you relax the RFS, you 
just relax something that was not really the driving force 
anyway.
    Taking it a second step, I would like to make sure you know 
that we do not have any idea what the investment community is 
going to do if that waiver is reduced. I suspect that they 
would have second thoughts about putting a lot of money in 
something that was not going to be supported. But again, I do 
not know that for a fact.
    Senator Barrasso. Thank you.
    For any member of the panel or several that may want to 
comment, wholesale ethanol right now is about $1 cheaper than 
wholesale gasoline. So this could indicate that now ethanol is 
an established substitute in the fuel market. If this is, 
indeed, the case, why is continued support, be it Government 
protected demand or a Government subsidy, justified at this 
point?
    Mr. Karsner. Let me say it is not fully established in the 
market because the price metric you just spoke to, Senator, is 
a temporary blip in time. The price signals are dynamic and 
constantly moving in time. So at times that ethanol price is on 
the floor and cannot support debt payoffs and servicing of the 
facilities that we install, let alone the much higher capital 
cost facilities that we seek to install for cellulosic 
biorefineries, and at times, ethanol price is high. Sometimes 
it is high; sometimes it is low.
    Now because it is low, it is constraining the price that we 
pay at the pumps. We would be paying 20 to 35 cents more per 
gallon were ethanol not being pumped out in the volumes it is 
now, displacing 7.2 billion gallons of gasoline in this 
country, a million barrels per day of production, 17 million 
metric tons of greenhouse gas emissions, let alone the amount 
of money we are exporting abroad. So it is providing an 
enormous service that we need to get to the definition you are 
talking about and establish a place where it can stand on its 
own. It can only do that when the market becomes defined.
    Right now we have defined production with a mandate. We 
have not defined the market that it gets delivered into, and 
until we get intermediate blends in place that allow ethanol to 
rise to E10 and up above it, then you will have an established 
market. Until then, it is just a production mandate with an 
incentive to build.
    Senator Barrasso. Anyone else want to comment on that? I do 
not see any takers on it. Yes, sir?
    Mr. Glauber. I will weigh in.
    I do think that if you look at the studies that have been 
done--and there have been several studies over the last couple 
of years. I would be happy to provide a summary of some of them 
for you. But the ones that look at elimination of the blender 
tax credit show substantial drop-off in fuel production. There 
is no question about that. Now, most of these also assume the 
assumptions on oil prices are considerably lower than the 
current prices. I think, again, there is no question that at 
$130 oil you can make money without the blender credit. But 
most of the studies, again, are focusing--I would say offhand 
that probably the average oil price considered is in the $60 to 
$70 range in their baseline assumptions--would suggest that 
there be a fairly large drop-off in production.
    Senator Barrasso. Dr. Pyle, there is a front-page article, 
business section of the New York Times today, Commodity Prices 
Show No Let-Up. We talk about not just the pain at the pump, 
but clearly the pain for people who are doing their grocery 
shopping. I see it in Wyoming every weekend when I am home.
    I have cosponsored legislation with Senator Hutchison from 
Texas that would limit just the proportion of ethanol mandate 
derived from corn to 9 billion gallons a year. What would the 
impact of this legislation have on the ethanol industry today?
    Mr. Pyle. Kind of following what Secretary Karsner and 
something that Dr. Outlaw said that we have to be very careful 
about here is this is not an established industry. The biofuels 
industry is not established. It is very nascent in investors' 
minds. People are very worried about the future of it. From 
where I sit, even though I provide a fuel product which is, as 
I said, does not use agricultural land nor agricultural 
products, I am very concerned about investors' appetite and 
investors' perception of the future of biofuels in this 
country.
    So kind of following, I agree with Secretary Karsner. It is 
the wrong thing to do to send a signal at this point that 
jeopardizes that future in investors' minds because what we 
really want to do is transition to a market economy that 
provides biofuels and substitute renewable fuels competitively 
with oil. We are not there yet.
    Senator Barrasso. Mr. Chairman, my time has expired. If I 
could have a statement put in the record, I would appreciate 
that.
    The Chairman [presiding]. We are glad to include that in 
the record.
    [The prepared statement of Senator Barrasso follows:]

  Prepared Statement of Hon. John Barrasso, U.S. Senator From Wyoming

    Mr. Chairman and Ranking Member, thank you for holding this hearing 
today.
    I think it is important that Congress explore and address 
unintended consequences from adopted legislation in all arenas.
    The topic of today's discussion--renewable fuels effect on food 
prices--is timely and very important to my constituents.
    I am aware of the lingering questions that have been raised about 
the impact of our biofuels policy on our water supplies, our land use, 
and grain inflation.
    Corn prices are on the rise.
    This is due to:

   Rising transportation and fertilizer costs;
   World growth; and
   Many argue that increased ethanol production mandated by 
        Congress has contributed to today's higher prices.

    A quick review of some congressional incentives to promote biofuels 
is include:

   the volumetric ethanol tax credit, now at 45 cents per 
        gallon;
   the biodiesel tax credit, o the small agri-biodiesel 
        producer credit,
   a host of guaranteed loans which could be used for biofuels,
   a range of grants through both the Department of Energy and 
        Department of Agriculture,
   biomass research and development initiative, and
   a protective ethanol tariff; and
   of course, the renewable fuels mandate.

    These policies are not without cost:

   To the taxpayers and
   To buyers of corn, especially the nation's livestock 
        producers.

    I believe that it is of utmost importance for our nation to develop 
all sources of energy available to us.
    We need biofuels, wind, solar, coal, gas and nuclear--we need it 
all!
    However, our policies should not provide extraordinary advantage 
for any one source.
    We should carefully consider any ramifications of the selected 
policies.
    There is no doubt the combination of federal policies has more than 
spurred increased investment in corn-based ethanol.
    But, government policies to promote any one source of energy move 
us away from market efficiency.
    The renewable fuels standard expanded and extended by Congress in 
2007 is affecting the grain markets today.
    There is dispute over the magnitude of the impact, but the 
inflationary effects are clear.
    This nation has developed the market demand and infrastructure for 
the ethanol industry to take off and prosper.
    The combination of mandates, subsidies and tariffs are:

   resulting in market inefficiencies;
   frustrating other agriculture and food industries; and
   contributing to inflationary pressures on American families.

    We need to take a hard look at energy policy in this country.
    I hope we can focus on ways to reform these unintended consequences 
and do what's best for all American people.
    Thank you very much, Mr. Chairman.

    The Chairman. Next, Senator Craig.
    Senator Craig. Mr. Chairman, thank you.
    To all of you, thank you. I have found all of your 
testimonies interesting, and of course, to those of us who 
spent a near lifetime here focused on energy and the dynamics 
of the new markets that are out there and the potentials, what 
you say is very exciting.
    I am pleased to hear that you speak about stability because 
we are not necessarily a stable crowd around here when the 
politics of push get to us. The politics of push are on us 
right now, whether it is from the food supply side or the $4.50 
gas at the pump. We tend to sometimes mix things up in the 
wrong way. I have oftentimes thought that as we advance or 
assist in the advancement of technology, we ought to be looking 
at the market and saying where is the breakeven point. Where do 
we floor this and protect it so that it does not get denied by 
some movement in the market or by a valve being turned over in 
the Middle East to affect the market and shut down a technology 
if in fact we are to become more independent? So I appreciate 
your thoughts on that.
    Secretary Karsner, you have, in part, answered a question. 
I think you were referring to it in passing a few moments ago, 
or I should not say in passing. It was a pretty clear 
statement. But EIA does say that absent ethanol in the market 
today and in the blends, the price at the pump is 25 to 30 
cents per gallon higher. Is that not correct?
    Mr. Karsner. Twenty to 35 cents. That is the DOE's estimate 
which is, by most measures, conservative.
    Senator Craig. Yes. Therefore, as a multiplier, we do not 
take that gross value on a daily basis and put it against the 
rising cost of food because usually that person who is 
acquiring food is also acquiring energy.
    Mr. Karsner. Absolutely. It clearly compensates, and there 
is a net offset there. So if you are talking about a 3 to 4 
percent rise in food prices or protecting the strategic supply 
of Doritos, if you will, when you talk about the larger 
geopolitical questions of energy security, environmental, and 
how it affects our pocketbooks at home, it dwarfs it relative 
to the absolute savings.
    Senator Craig. Yes. I think we need to put up a few 
billboards on that one because there is a crowd out there who 
does not like corn-based ethanol to begin with and their shout 
is pretty loud at the moment.
    Dr. Pyle, your discussion about RFS has been fascinating. 
We never do anything around here quite the way it ought to be 
done sometimes. There were some tradeoffs made there. RFS got a 
little bit of political correctness adjusted to it in the 
course of compromise. The chairman might disagree with me a 
little bit or agree to some extent and then add more to it. 
Sometimes when we get into conferences between the House and 
the Senate--frankly, we had a much better version, and if it 
were the version that we had, you might not be--your testimony 
would be different today than it is because I think we ought to 
be out there in this definition accommodating a much broader 
base of technologies and not trying to be the market, but let 
the market be the market. But we get caught up in that.
    I thank you for making that clear. Do not be quiet about 
it.
    Mr. Pyle. Thank you, Senator.
    Senator Craig. Stay with it and maybe we will make those 
kinds of adjustments because we all know energy has become a 
very dynamic issue in this country, and therefore, it is going 
to cause us to make changes and adjustments over time. 
Hopefully sooner rather than later.
    Secretary Karsner, does the U.S. have enough biomass 
resource to meet its Energy Independence and Security Act 
mandate without competing excessively with food usage?
    Mr. Karsner. Senator, as you know, we together with USDA 
and six of the best DOE and USDA scientists across laboratories 
like yours at INL, NREL, Oak Ridge, Nebraska, Tennessee, all 
worked to produce the Billion Ton Study in 2005, which was 
peer-reviewed. I am pleased to validate and affirm that. We 
even put a display out in the hallway so that people would 
understand where we are going with that. It was very 
conservative in all the assumptions undertaken in that study, 
which I could cite to separately and would be pleased to submit 
for the record.
    [The information referred to follows:]

    ``Biomass as Feedstock for a Bioenergy and Bioproducts Industry: 
The Technical Feasibility of a Billion-Ton Annual Supply,'' a report 
jointly sponsored by the Departments of Energy and Agriculture, was 
published in April 2005 and is available on DOE's website at http://
www1.eere.energy.gov/biomass/pdfs/final_billionton_vision_report2.pdf.

    But you should know that Oak Ridge is planning very shortly 
to release an update that would show an even greater yield. We 
estimated at 30 percent by 2030 was possible, conservatively 
discounting and excluding all the conservation resource land, 
but we think with even more data that we have had in the 3 
years since, that the updated Billion Ton Study will validate 
that we are exceedingly plentiful in our capacity to have 
nonedible food sources for biomass cellulosic.
    Senator Craig. Thank you for that work, and I will keep 
asking that question as long as I am here so that my colleagues 
will listen to it a little more.
    I ran into a dairy farmer in Pennsylvania recently who put 
100 acres into switchgrass to create a hunting preserve for 
upland game birds. I thought it fascinating that the types of 
switchgrass that do meet what we are after in cellulosic he 
found had a rigidity so they withstood the first snowfall so 
they did not come down so you could hunt through them. But once 
the hunting season was over, you could cut them and take them 
off, if you will, to--I said brewery. It is a distillery 
actually--for the purpose of cellulosic. Of course, next year 
they returned with the value of the hunting preserve. He was 
focusing on it in a very fascinating way, and I said, well, 
then you need to be more clear with our conservation friends. 
Maybe they would buy that if we first use it to protect birds 
and second to run cars.
    But there are some dynamics out there that are reflected by 
many of you today that really do fit, and I hope that we let 
the marketplace work by opening up to it wide open and letting 
it decide who the winners and losers are going to be in this 
business of energy while not trying to get too politically 
correct around here.
    Thank you all much.
    The Chairman. Thank you very much.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Let me thank the 
witnesses for their testimonies.
    Secretary Karsner, let me ask you. I think Senator Tester 
may have plowed some of this ground, but I would like to visit 
it again.
    When we look more broadly about the environmental impacts 
of the Renewable Fuels Standard, some scientific studies have 
argued that converting grassland to grow corn results in a 
spike in greenhouse gas emissions because of fertilizer use and 
other factors. In addition, using acres to grow fuel here can 
encourage growing more food crops in places like Brazil, 
putting pressure on deforestation rates.
    Is producing over 8 billion gallons of ethanol a year under 
the RFS actually reducing greenhouse gas emissions, or when we 
follow the impacts all the way through, does it exacerbate 
global warming?
    Mr. Karsner. According to our studies, it is a net 
reduction.
    With respect to the indirect land use question and the 
valid questions that you are asking with respect to 
sustainability up and down the food chain and how it affects 
wells to wheels analysis, I should note that this committee put 
into the legislation demands that we actually perform those 
studies ahead of some of the reports that had come out in the 
community. So that was well thought through in the Energy 
Independence and Security Act, specifically section 232, and 
those studies are underway.
    Senator Menendez. Have you done those studies? You have not 
done those studies yet.
    Mr. Karsner. We are performing them now.
    Senator Menendez. You are performing them now. So the 
testimony that you have given to the committee does not include 
an analysis of those studies obviously because you are 
performing them.
    Mr. Karsner. We have detailed analysis of the studies that 
were performed that are bringing these into question that I 
think you are alluding to, the Searchinger study. We have 
published our analysis of those studies online in great detail 
on the front of our Web page and have spoken to what we think 
of the validity of the assumptions.
    Senator Menendez. But you are doing your own independent 
studies.
    Mr. Karsner. The Department, yes, has commissioned the 
studies----
    Senator Menendez. What I am saying is the testimony that 
you gave before the committee today obviously does not have the 
results of those studies yet, the ones that you are performing.
    Mr. Karsner. The studies that are underway we have not 
included the conclusions of in our testimony. That is correct.
    Senator Menendez. All right.
    So let me ask you, Dr. von Braun. I heard your testimony 
and I also read it. Your testimony states that biofuel 
production accounts for 30 percent of the recent increase in 
commodity prices. World Bank economists have blamed that same 
cause as 65 percent of the rise. Yet, Dr. Glauber said it is 
only 3 percent of the price rise. How do we explain the 
differences? Are we all comparing the same items, or are we 
having very fundamentally different calculations? Because that 
is a pretty wide swing.
    Mr. von Braun. Senator, we have different models and 
different assumptions. Let me refer to the international global 
model. You need a global model which has all commodities, all 
countries in there, and political reactions taken by countries. 
The IFPRI model called IMPACT is a well tested model device in 
15 years. It has predicted earlier the change in the world food 
markets 3 years ago. So that is where the widely trusted price 
effects are coming from, a simulation which is running the 
model with past trends versus the increased expansion of 
biofuels from both grains and oilseeds over the past 7 years.
    We also look into the future. Some of the World Bank 
studies are, as far as I understand, also future oriented. Our 
analysis for the next 10 years suggests that if the current 
plans are further implemented around the world, not just in the 
U.S., we could expect another about 15 to 20 percent real price 
increase. If you double those, it would be for corn an increase 
closer to--more than twice of that, about 50 percent.
    Senator Menendez. In what little time I have left, is there 
one or two significant factors? You said there are different 
parts of the equation that everybody is looking at. What is the 
different part of the equation between the world one that you 
just described and the U.S. one? You said you are working under 
different assumptions and different parts of an equation and 
that the world one that you just defined that has existed for 
15 years or so is different than the one that I assume Dr. 
Glauber who just told us earlier that 3 percent is the rise in 
world food prices as a result of biofuels. What are the one or 
two different elements that the world one includes that we do 
not include?
    Dr. von Braun. Our model is one which is a long-run 
scenario model which factors in all policies and all 
investments. We have run our scenarios for the long run which I 
think is essential because you need to factor in the supply and 
demand.
    I understand the USDA scenarios are looking at last year's 
or 2-year price effects, and that may not capture the final 
adjustments. But I think it would be fair to ask the colleagues 
from there to comment.
    Mr. Karsner. Senator, if I may. The obvious difference is 
inputs, what are the commodity inputs, and outputs, what are 
the products going to. Here in the United States, we are almost 
exclusively going to alcohols derived from corn. I am not an 
economist, but the capacity for that corn to affect the rice 
price in Asia is obviously disconnected. You can batch them 
together for global meta-modeling purposes, but the subject of 
the hearing on how are renewable fuels in the United States 
affecting commodity prices is really focusing on actual, real-
time empirical data of what are our corn plantings doing, what 
is the yield growth, what are the inputs, and then where are 
they going.
    In Europe, there is far greater use of biodiesel derived 
from wheat straw by way of example. So it is going to affect 
wheat prices. Palm oil used in Europe from Southeast Asia. 
These are things we do not particularly have a strong presence 
of in the United States. We are really about corn supply, for 
better or for worse, going into alcohols as opposed to 
biodiesel from the myriad sources being imported in Europe and 
in other demand economies.
    Senator Menendez. Thank you.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman, and thank you 
to the panel for your comments here this afternoon.
    I am not quite sure what I go home and tell my constituents 
because right now we are facing the highest energy prices in 
the Nation. The spring barges have just come in and some of our 
villages and some of our regional hubs. I was just out in 
Dillingham, a fishing community out in Bristol Bay, pretty 
sizable by our standards, and they are paying $5.50 for gas 
right now. Diesel is about $6.50. But they are paying 8 bucks 
for a gallon of milk, 10 bucks for a carton of orange juice. We 
are used to paying high prices for our food because our 
transportation costs are what they are, and we deal with that. 
But we can only deal with it to a certain point because right 
now the fishing boats are not able to go out and leave the dock 
and fuel up.
    So as they are looking at their energy costs growing and 
now they are looking at their food costs going through the 
roof, they are like every other American out there. They are 
saying, Lisa, what are you doing about it? What are you doing 
about the high energy costs? If they think that the price of 
their food, a carton of eggs or milk--actually we do not get 
milk in a lot of our villages out there because it goes bad. 
But if they think that the price of food is tied to the fact 
that we are using it for fuels and we are not seeing any relief 
for fuels, it is a tough explanation to folks out there.
    So I am not sure what I am going to tell them. I will make 
sure that I read again the comments from not only you folks 
that have provided us your input to really try to understand 
what is going on as we talk about the RFS.
    Let me ask you, Secretary Karsner. I think most of us 
believe that the real benefit from biofuels is going to be when 
we take that transition from the corn-based ethanol to the 
cellulosic. Given last year's legislation and the increase in 
biofuels required, if we were to slow that for ethanol, what 
kind of a ripple effect would that have, if any, on the 
progress toward cellulosic?
    Mr. Karsner. In terms of private sector capital formation, 
Senator, I believe it would be devastating to have an erratic 
switch turn in policy predictability. This was the first time 
we had come out with a policy that goes beyond aspirations for 
displacing oil with new technology and fuel sources. So all of 
the capital that has galvanized is waiting with bated breath to 
see whether Washington will affirm that policy for the long 
term so that these multiyear investment plans can be lived out 
that some of these companies are dependent on. So while the 
Department of Agriculture stated in real time a net production 
installed capacity may not alter dramatically in terms of the 
new installed capacity for cellulosic sources, I think you 
would see capital dry up to a trickle.
    Senator Murkowski. Let me ask you to answer that, Mr. 
Huttner. You spoke to the promise of cellulosic in your 
testimony here. Do you agree?
    Mr. Huttner. No, absolutely. I think the impact, if there 
was a change in the Renewable Fuels Standard, it would have a 
ripple effect certainly on our company's decision to invest 
capital and the technology investment that is going to be 
required to achieve the breakthroughs we need in the economics 
of the conversion process. If there is no Renewable Fuels 
Standard that we can predict is going to be there for the 
market, we are going to depend on a development of a global 
traded commodity of ethanol which I think is a long ways in the 
future.
    So the policy framework and the ability to predict what 
that is going to be is very important to making investment 
decisions today because it will take 2 years or more for us to 
bring the full technology package to market, and we would not 
be doing that if there was a doubt about the Renewable Fuels 
Standard.
    Senator Murkowski. Let me ask a question about the price of 
gas. There is some implication, I guess, that perhaps motorists 
are showing a reluctance to use the ethanol additive fuels 
simply because of the lower gas mileage than the fuels without 
ethanol. I had seen a GAO report earlier this month that seemed 
to predict that the fuel costs will be higher because of the 
RFS.
    Secretary Karsner, what is your view as to the cost impacts 
to motor fuel as a result of the renewable fuels?
    Mr. Karsner. So we actually have two regulated products 
available to consumers today, E10 on the blend side and E85. 
E85 has a noticeable penalty in terms of the efficiency of the 
use of the fuel, but as long as the pricing--that is, the price 
per Btu--is commensurate, then you suffer no loss on a per-
gallon basis.
    It is very much the same with the E10 blend, but you have 
to remember that 10 percent, which is more than 99 percent of 
all of the ethanol in the market, is actually displacing 
oxygenates. So it is something that the oil companies and 
blenders have favored themselves, and importantly, it is 
allowing them to be in compliance with the Clean Air Act, 
without which we begin to get into toxins like toluene, xylene, 
benzene that begin to affect our air quality. So ethanol is 
actually doing something for compliance in addition to the 
economics.
    But as I stated, the economic data at the Department of 
Energy, 35 cents savings per gallon today, more than 
compensates for any minor incremental loss from using the 
blend.
    Senator Murkowski. Do you think that that is being 
communicated to the consumer, though?
    Mr. Karsner. No. I think the consumer is subject to an 
overwhelming amount of misinformation today on this.
    Senator Murkowski. How do we correct that misinformation?
    Mr. Karsner. I think this hearing will go a long way, 
Senator. I think your leadership in bringing out the facts. We 
cannot compete with the budgets of those who would like to 
misinform. I was asked a question about the source of the 
misinformation. The more important question is the pace of 
misinformation. This seems to be highest whenever commodity 
prices and price spikes on oil are highest.
    We have to keep our eyes on the prize and not get 
distracted. We have got to erode the addiction and blending, 
stepping up that incremental blending to E10 and E15 at a time 
that it is lowering the price--I mean, Alaskans get hit hardest 
when Americans get hit hard. So the difference of an extra 50 
cents if we were not blending it would be enormous. So we have 
got to get that message out.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. I think it has been 
an excellent panel and you are testifying at a key time.
    I have a couple of questions for you, if I might, Secretary 
Karsner, and then you, Dr. Glauber.
    It seems to me that the Renewable Fuels Standard, as it is 
written today, just defies common sense and, in many respects, 
is just totally arbitrary. I want to dig into one very specific 
area.
    Obviously, when our country is so concerned about these 
skyrocketing food prices, we ought to be using as much 
cellulosic material as we possibly can for biofuels. But you 
really cannot do that because anything grown on Federal land is 
out for the purpose of defining biomass and the Renewable Fuels 
Standard. So in my part of the world where people are just 
hungry to use wood waste, for example, for satisfying the 
biomass definition--I know that there is great interest in 
agricultural communities about various kinds of straw, wheat 
straw and others--there would be an opportunity for us to get 
this cellulosic material, take steps that would be good for our 
natural resources, good for our economy, and would hold down 
food prices if the country goes back and looks at this 
Renewable Fuels Standard, particularly as it relates to these 
areas I am talking about, anew.
    So my question for you, Dr. Karsner, does it make sense to 
you to categorically exclude biomass from Federal lands?
    Mr. Karsner. No, it does not. Absolutely it does not. I do 
not know how that happened. I think it was something on the 
trimming room floor at the time that the bill was getting into 
its final----
    Senator Wyden. I will tell you exactly how it happened. 
What happened was Chairman Bingaman and Senator Domenici, to 
their credit, when we were debating this in our committee, 
allowed us to go off and bring together people from the 
agriculture production side and forestry and environmental 
folks, and we got the right definition of biomass so that we 
could get this material from Federal lands, cellulosic 
material. Then it went over to the House of Representatives and 
ended up in the trash can. So we are going to try and----
    Mr. Karsner. I do not want to touch that one, sir.
    [Laughter.]
    Senator Wyden. You can handle it just that way.
    Mr. Karsner. I would, if I may, Senator, say it is the very 
first project that has broken ground in Soperton, Georgia that 
has relied on forestry products, It estimated in its original 
economics, one that we are funding with taxpayer cost share, a 
20- to 50-mile radius where it could access Federal lands. 
Under that provision, it now has to aggregate these and 
introduce new logistics of 100 to 200 miles to import, to go 
around the Federal lands where they originally sited. So there 
is not a good, rational reason why we should exclude woody 
biomass from Federal lands that we are aware of.
    Senator Wyden. The same question for you, Dr. Glauber. Does 
it make any sense to exclude biomass?
    Mr. Glauber. No, I do not believe it does. I would agree. I 
know the Administration in its own farm bill proposals oriented 
some on the development of ethanol from forest products. So, 
yes, it does not make any sense.
    Senator Wyden. We are going to need you two because--we are 
going to let you spare the House of Representatives for 
purposes of this afternoon's conversation, but we are going to 
need you two to help us get back the language championed by 
Chairman Bingaman and Senator Domenici because it made sense. 
It was the subject of an extraordinarily long negotiation. I 
think we got it right. It would provide an opportunity, for 
example, to be sensitive to old growth trees, which was 
something of great concern, of legitimate concern in the 
environmental community. We got it right, and then it 
disappeared when it went to the House. We have got to get it 
back, and you all have helped us make the case. So we thank you 
and we will need you to champion that down the road.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Lincoln.
    Senator Lincoln. Thank you, Mr. Chairman. I apologize for 
being late. It has been a crazy day. But we certainly are very 
appreciative to you and Senator Domenici for bringing the 
committee together to really discuss our Nation's renewable 
fuel policy in the context of rising food prices and, without a 
doubt, something that is on the mind of every one of my 
constituents at this juncture. Just having spent that week at 
home after Labor Day--or Memorial Day, I guess--you know, you 
travel across the State and it is mostly what you hear, 
particularly when you represent a State like I do with a large, 
disproportionate share of low income working families who are 
really getting squeezed.
    But we should all be concerned about both of these rising 
costs in fuel and food. As the Senator from one of those rural 
States that certainly can make a contribution in terms of 
renewable fuels and certainly in terms of food, but also a 
State that, having a lot of low income working families, also 
gets hit. You mentioned Alaska. We are number 48 in terms of 
low income. But we want to work hard to figure it out.
    I just had a visit in my office today from a sheriff from a 
county that is tremendous in forest lands, but they are not 
going to be able to meet their county budget come September 
with the median income of less than $14,000. It is tough out 
there, and when these kind of things get heaped upon them, it 
makes life extremely difficult.
    So I hope that we will work together with this committee 
and the other committees of jurisdiction to make sure that we 
are doing everything we can to accelerate and move our Nation 
forward in terms of renewable fuels lessening our dependence on 
foreign oil but maintaining a critical food supply, which I 
know we are certainly capable of. We worked hard on the farm 
bill and were able to secure new tax incentives and other 
things in renewable fuels areas, but also to maintain the 
integrity of a safety net. That was important.
    I know most of my questions have probably already been 
asked and I will not be redundant, nor will I keep the chairman 
here much longer.
    But I just had one quick question. If it has been asked, I 
apologize. As I said before, I do believe strongly that we can 
balance a biofuels industry and policy with other critical 
economic interests. I think we have to look at the practical 
ways to do that.
    But I do think the circumstances we are in right now 
present us all great concern. Livestock, poultry, and dairy 
producers in my State are already feeling a tremendous impact 
of higher grain prices, and it could lead to constrictions in 
those industries. It is inevitable that higher feed costs will 
ultimately be passed on to the consumers on staples like 
chicken and pork and beef. We have got great concerns over 
that.
    We have set ambitious goals for renewable fuels, but I also 
think that Congress was right to provide flexibility in 
temporarily being able to adjust some of those goals as 
conditions warrant.
    I guess one of the questions mostly for--is it Dr. Glauber 
with USDA? When is the right time to make adjustments so that 
other industries and consumers are not unduly damaged? I think 
that is a question that we have to answer not just today but 
over time. Maybe you can elaborate--and I apologize again if 
you have already done it--what USDA's view of the waiver 
authorities in the 2005 and 2007 energy bill is and at what 
point would USDA support adjusting mandates on a temporary 
basis to ease the cost pressures and mitigate some of those 
unintended consequences.
    The other thing would be does USDA have a contingency plan 
for dairy, livestock, poultry operations, should the feed 
crisis become even worse. We obviously know that you all made a 
projection that the corn harvest is going to be 10 percent less 
than it was last year, and that could pose us some serious 
problem. It is not good news for that much, the livestock and 
poultry industry.
    I do not know. Due to heavy winters and wet weather that we 
have had, we have had wheat crops under water for weeks and 
weeks and weeks and a slowness in getting into the fields and 
planting our crops. There are predictions that it will be as 
low as the late 1980s if that becomes another issue.
    What do you feel like is the authority at USDA that you 
have and are there any, again, contingency plans for what we 
look for down the road?
    Mr. Glauber. Most of the things you are talking about are 
real short-run issues.
    Senator Lincoln. Right.
    Mr. Glauber. I mean, here we are in the middle of a crop 
year that is still unfolding and admittedly, as I went into a 
little earlier, certainly USDA has already taken down its 
projected corn yield. We will know more in August when we have 
firm numbers from our objective yield surveys. We have an 
acreage report that comes out at the end of this month. That 
will be closely watched because want to know. You know, all we 
have right now to go on is what people told us they wanted to 
plant back at the beginning of March. So we know there are 
reports of land that is still under water, the late plantings, 
and so all that again will get reflected. We will know a lot 
more in a month.
    Senator Lincoln. Not to mention the weather during the 
growing time.
    Mr. Glauber. No. That is right. We are not even into the 
summer----
    Senator Lincoln. We do not know if there are going to be 
droughts or a wet summer.
    Mr. Glauber [continuing]. So all that will be closely 
watched.
    What makes it so critical is the fact that we have very, 
very low stocks. So the volatility is there in the market. We 
have seen the price increases within the last week alone, a 
dramatic price increase for corn.
    As I mentioned earlier, USDA, of course, is involved with 
the waiver request. We are consulted, as well as DOE is, in 
that.
    I also said earlier that I did not believe that the mandate 
would be binding this year. That is, we will probably be 
producing more ethanol than the 9 billion gallons that are 
called for in the Renewable Fuels Standard. Again, that is 
predicated on a reasonable corn crop this year. But I do not 
think that it will be binding, and I think Dr. Outlaw here also 
had a similar conclusion.
    In terms of short-run effects, I think one thing that USDA 
has done is allowed haying and grazing on CRP land, again after 
the nesting season is over I think in the southern portions of 
the State. That will begin somewhere on the order of July 1st 
or so. Then from that period through I think about November 10 
or 11 or so farmers who have CRP land will be able to allow 
grazing on that or haying on that for a nominal fee per 
contract. That could provide some relief to livestock 
producers, obviously, who might have an opportunity to graze 
or----
    Senator Lincoln. So that is your contingency plan?
    Mr. Glauber. Frankly, Senator, in the short run there is 
not a lot one can do. One watches this crop and harvests it.
    Senator Lincoln. I am wondering if USDA is having 
conversations about what would be a contingency plan.
    Mr. Glauber. No, we certainly are. We are looking at 
longer-run issues, but in terms of the short run, all I am 
saying is there is very little one can do. You cannot make rain 
or you cannot make it dry up.
    Senator Lincoln. I am a farmer's daughter. I can guarantee 
you I know that.
    [Laughter.]
    Senator Lincoln. But I also know you still have to think 
about the month ahead because----
    Mr. Glauber. Yes. No, I understand, and I think----
    Senator Lincoln [continuing]. You still have got to make 
payroll.
    Mr. Glauber [continuing]. That the Secretary was keen on 
getting an announcement out on CRP early so that farmers and 
ranchers would be able to take advantage of that.
    Senator Lincoln. Dr. Outlaw, just so I can make sure I 
understood your testimony, you had mentioned or you stated in 
your study that you detected no statistically significant 
effect of corn on retail meat prices to date.
    Mr. Outlaw. To date.
    Senator Lincoln. But you are saying that is short-term 
evidence.
    Mr. Outlaw. For sure. We expect, with the research we have 
done on feeding margins and the cost of gain, there is no way 
that the animal feeding industries are going to sustain these 
losses much longer.
    Senator Lincoln. I will guarantee it.
    Mr. Outlaw. So there are going to be changes. They are 
coming and they are going to be significant. We cannot say that 
we have found them yet.
    Senator Lincoln. Right. So you are just predicting that 
everything staying constant, that is what is going to happen is 
a decline in meat supplies.
    Mr. Outlaw. Right.
    Senator Lincoln. So I hope that we do not just predict it 
but that we try to work toward preventing that crisis, knowing 
that we cannot predict rain and we cannot predict weather 
circumstances, but there are contingency plans to figure out 
how we are going to be able to support those industries because 
it is not just our country. We provide the safest, most 
abundant, and affordable supply of food and fiber for the 
world. So I think it is a critical issue.
    Thank you, Mr. Chairman. You have been extremely patient.
    The Chairman. Thank you for your good questions.
    Let me ask a couple of questions before we conclude the 
hearing here.
    There seem to be a lot of variables in this equation as we 
are talking about this RFS. Although there are significant 
problems with the final version of the RFS that we passed and 
we need to try to address those, identify how to do that in a 
way that is acceptable, one good thing about the RFS, as I 
understand it, is that although we have a mandate for how much 
biofuel is to be blended each year, we do not have a mandate 
for how much of it is to come from corn. I mean, there is a 
maximum that can come from corn, but there is not a requirement 
that anything comes from corn. So it is very possible that 
instead of us getting to 15 billion gallons of renewable fuels 
from corn being blended by 2015, I believe it is, instead of 
doing that, we would wind up meeting the mandate from other 
sources. At least that is theoretically possible.
    I wondered, Dr. Glauber or Secretary Karsner or Dr. Outlaw, 
any of you, have you tried to look ahead and make a calculation 
or a prediction as to how much of the RFS you expect to 
actually come from corn as we move through these years of 
mandate that we have described here, anything that you have 
predicted with regard to future corn prices?
    Another question, which is pretty obvious I guess. I saw a 
report out of the Department of Agriculture a week or two ago 
about the percentage of the corn crop that was going to produce 
ethanol. I think there was something about it being 25 percent 
last year and now it is going to be 30-plus percent. Do you 
have a prediction as to where that is going? I mean, are we 
talking about over half of our corn crop going to ethanol at 
some point, or if not, why not?
    So let me stop with those questions and see if you have a 
thought about any of that.
    Mr. Glauber. Let me just speak to the longer run. I think 
this is a very important issue.
    One is that certainly USDA's forecast, the 10-year 
projections that we make, and I would say most of the other 
institutions that do this sort of analysis pretty much expect 
the capacity in the corn ethanol industry to reach 15 billion 
and to pretty much stabilize there. We have seen 2 years of 
very rapid growth from 2005 and 2006 to current levels. We are 
projecting another year of rapid growth in that capacity 
building, but that it should level off next year and start 
leveling off toward the 15 billion. What will determine that, 
what will drive that is, again, the profitability of producing 
ethanol out of corn. Right now, again, based on our 
projections, it looks profitable to produce ethanol from corn.
    In regards to prices, I hesitate just in the sense that 
even when we did our long-term projections, that was based on a 
lot of material back in November. That was even before the 
energy bill, of course, was passed. But what our projections 
showed then--and I would not think that they would change 
much--is that high prices right now would come down a bit.
    The Chairman. High prices of corn?
    Mr. Glauber. High prices of corn. I am sorry and that they 
would begin to moderate some as stocks were rebuilt. Now, 
clearly, we are in a very tight situation right now. A lot will 
depend on this year's crop to see how fast those stocks are 
rebuilt.
    Again, assuming yield growth, fairly modest yield growth, 
over time we should be able to rebuild stocks such that prices 
fall back into the mid-$3 range. That at least is what our 
projections show.
    In terms of the amount of corn made into ethanol as a 
percent of the total crop, that in out-years is projected at a 
third or so of the crop, a third to some 35 percent of the 
crop. But those are large crops too, far larger than--because 
of yield growth, because of a substantial number of acres going 
into corn production, that is a lot of corn, and the amount of 
corn available for other uses such as feed and exports is also 
supposed to remain at fairly high levels. So we are not cutting 
into the amount going to feed, for example.
    The Chairman. Do any of the others have a comment on this?
    Mr. Karsner. I am going to talk more simply and simply say 
that we will assume that whatever the maximum mandated level 
is, that corn can and will rise to it.
    I think it is very important because of, Senator, your 
great leadership on what this was all about to focus back on 
the key question, which is how do we alleviate carbon-based 
fossil fuels and not be contained in the discussion about how 
do we perfect the individual ethanol. We cannot get to the 
advanced biofuels that these companies represent or the 
advanced cellulosic ethanols that we are programmed for and 
investing in as a Nation without going through corn-based and 
conventional ethanol, which is already yielding pricing merits 
on a microeconomic basis at the pump, on a macroeconomic basis 
in alleviating the amount of capital that we send abroad to 
nations that are sometimes hostile to us and, of course, 
already to the environment. All that we are talking about in 
programming technologically are improvements on that.
    But the perfect is the enemy of the good. We have got to 
work on today transportation, logistics, retail outlets, engine 
optimization, terminaling facilities, et cetera. So we are 
working on that through blending alternative alcohols or, in 
the case of diesel, alternative biodiesels so that we can scale 
those in a way that we can integrate them to displace our oil 
addiction. That has to be the primary thing, and we cannot get 
stuck between those who would want to distract us and only 
compete one form of biofuel against another. We are after the 
better nonedible sources, but not at the cost of bringing this 
all to a screeching halt with an erratic reaction to short-term 
ramifications.
    The Chairman. Dr. Outlaw, did you have a comment?
    Mr. Outlaw. I would just add that when we have been looking 
at these different technologies, clearly the answer to your 
question is it depends on the relative costs. If the gentleman 
to my left can move the cost of production of producing fuels 
low enough, substantially lower than corn-based ethanol, then 
they would be the major driver in the market. Right now, I know 
that there are a lot of things in planning, but I believe their 
costs are significantly higher than the cost of production with 
corn-based. But I do know that there are a lot of people that 
think they can get them lower, significantly lower.
    The Chairman. Dr. von Braun, you had indicated you would 
like to comment.
    Mr. von Braun. I think it is important to keep in mind that 
the competition between food and fuel does not just work 
directly, but anything that competes with food, whether you 
produce biomass or corn or soy for energy use, is the central 
issue. So the hope that technology, which goes toward biomass 
production and thereby would resolve the issue, overcome the 
issue of food-fuel competition, is misleading as long as this 
biomass is not produced somewhere where it does not compete 
with food because farmers will go for the highest return.
    The second aspect related to this discussion is we have 
looked with our models in these competitions between food and 
fuel very carefully and the spill-over effects between the 
grains, between corn and wheat and corn and rice and so on. 
These spill-over effects of high prices here, when you take 100 
million tons out of food and feed production, for worldwide 
markets are very large. They are very large. So there can be no 
doubt that these stipulations of the RFS have impacts on poor 
people and on hunger. Whether a waiver for cause of hunger 
should be considered may be as legitimate as considering the 
biofuel feed market competition, which has been discussed 
earlier.
    The Chairman. Let me ask you just to clarify for myself. If 
Dr. Pyle is right and you can produce green crude from 
essentially--as I understand it, the feedstock is 
CO2. I think that is what you are suggesting to us. 
It is not biomass. It is CO2----
    Mr. Pyle. That is correct.
    The Chairman [continuing]. That would be used to produced 
algae or to stimulate the growth of algae which would then 
become a fuel. Now, that would not directly compete, I would 
not think. I mean, that would not entice all of the farmers in 
the country to switch over to production of algae rather than 
crops.
    Dr. von Braun. Senator, these are the opportunities for the 
future, which require a lot of support, but currently the world 
uses a lot of grain and oilseeds and biomass which clearly 
competes with food. So the faster we can move to technologies 
that do not compete, the better it is.
    The Chairman. Right.
    Dr. von Braun. We cannot give a grace period to these 
technologies because poor people do not have that time.
    I think at this point we need a dual strategy, to push and 
invest in these types of technologies which clearly do not 
compete, and at the same time, accelerate the investment in 
agriculture productivity for food crops because the treadmill 
on both sides is running faster and there has been too little 
investment in agriculture, crop productivity. The yields have 
to come up. Then we could bring the world food system back into 
balance, which currently is not.
    The Chairman. I think that is a very good summary of the 
situation.
    Thank you all very much. I think it has been a useful 
hearing. We will conclude the hearing at this point.
    [Whereupon, at 4:25 p.m., the hearing was adjourned.]


                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

   Responses of Alexander Karsner to Questions From Senator Bingaman

    Question 1. Many second-generation biofuel technologies have been 
proven in the lab and are ready to scale up to commercial production. 
Securing financing for first-of-its kind commercial production remains 
a major obstacle from many in this emerging industry. Please update us 
on the progress with the Department's loan guarantee program, which 
Congress enacted in 2005 to address exactly this problem.
    Answer. The two principal goals of the Title XVII Loan Guarantee 
Program are to encourage commercial use in the United States of new or 
significantly improved energy-related technologies and to achieve 
substantial environmental benefits. Supporting renewable energy 
technologies such as those that have been developed by the biomass 
industry is critical to achieving these goals. The final regulations 
for the Loan Guarantee Program were issued on October 4, 2007 and since 
then a remarkable amount of work has been accomplished. In addition to 
the Department inviting sixteen pre-applicants, including six biomass 
projects, from 143 that responded to the first solicitation in 2006 to 
submit a full application, the Loan Guarantee Program Office (LGPO) 
staff has grown from one permanent employee to eleven permanent 
employees, including investment officers with ten to twenty years of 
worldwide project financing experience. The LGPO is also in the process 
of finalizing a credit subsidy model, as required by FCRA, has 
instituted policies and procedures to initiate the application and due 
diligence process and is developing accounting and processing systems 
that will allow the office to monitor and manage the loans for which 
guarantees are issued over the life of the projects. Regrettably, none 
of the project sponsors of the six biomass projects invited to submit 
full loan guarantee applications have yet done so. The LGPO has 
received its first three applications from the sixteen invitees, with 
projects involving solar energy, improved efficiency in electricity 
generation, and electric battery powered cars, and is proceeding with 
the due diligence necessary to assess the technical and financial 
soundness of the proposed projects.
    Additionally, on April 11, 2008, the Department of Energy submitted 
an ``FY 2008 Implementation Plan'' to Congress. The Implementation Plan 
outlines the Department's plans to issue new loan guarantee 
solicitations in two stages this summer for up to $38.5 billion for 
projects that employ advanced technologies that avoid, reduce, or 
sequester emissions of air pollutants or greenhouse gases. The first 
stage will be in the areas of energy efficiency, renewable energy and 
advanced transmission and distribution technologies; nuclear; and 
'front-end' nuclear power facility projects, and the second stage will 
be for advanced fossil ebergy projects. These planned solicitations 
will mark the second and third rounds of solicitations for the 
Department's Loan Guarantee Program, which encourages the development 
of new energy technologies and is an important step in paving the way 
for clean energy projects.
    Question 2. DOE has been very supportive of enzymatic hydrolysis 
pathways for cellulosic ethanol, awarding grants to companies that plan 
to use this pathway. Please describe how the Department is supporting 
other second-generation biofuel technologies.
    Answer. DOE plans to continue supporting technological development 
to spur the cellulosic ethanol industry through all major pathways. DOE 
has announced investments of up to $592.7 million aimed at reducing the 
cost of advanced biofuel technologies through its applied research 
program. These opportunities included DOE investments in advanced 
biofuels for four commercial scale pioneer biorefineries and nine 
biorefineries at a smaller demonstration scale that involve 
biochemical, thermochemical, and hybrid technologies for the production 
of cellulosic-based biofuels. These investments also include projects 
for improved enzymes and fermentative organisms for more efficient 
biochemical conversion and syngas and pyrolysis projects for reduced 
thermochemical conversion costs. DOE also recently closed a university 
solicitation focusing on improving conversion of biomass to advanced 
biofuels via any conversion route.
    DOE will continue to evaluate the potential of a wide range of 
biofuel technologies (e.g., pyrolysis, gasification, hydrothermal 
liquefaction, catalysis, and fermentation) as well as a wide range of 
feedstocks for the production of advanced biofuels beyond cellulosic-
based ethanol. Algal derived fuels, biobutanol, Fischer-Tropsch 
liquids, green diesel, and green gasoline are just a few of the non-
ethanol biofuels included in DOE's plans and investments. Advanced, or 
second generation cellulosic feedstocks such as algae, perennial and 
annual herbaceous crops, and woody crops are also being developed in 
partnership with the Sun Grant Initiative\1\ and USDA to enable future 
biorefinery development.
---------------------------------------------------------------------------
    \1\ All reports are available through the National Sun Grant web 
page (www.sungrant.org). The direct link to the regional feedstock 
partnership reports is http://www.sungrant.org/Feedstock+Partnerships/.
---------------------------------------------------------------------------
    Through its three new DOE Bioenergy Research Centers--led by Oak 
Ridge National Laboratory, Lawrence Berkeley National Laboratory, and 
the University of Wisconsin-Madison in partnership with Michigan State 
University--DOE is providing major support for advanced basic 
scientific research aimed at achieving the transformational 
breakthroughs needed to overcome the limitations of current production 
methods and develop decisively more efficient and cost-effective means 
of producing cellulosic biofuels on a commercial scale. Together, these 
three Centers--each of which brings together a multi-disciplinary team 
of top scientists and researchers--are attacking the problem on 
multiple fronts, utilizing the powerful new tools of genomics-based 
system biology to re-engineer both plants and microbes for efficient 
biofuels production. The Centers are already engaged in promising 
research, including experiments with a wholly new and potentially far 
more effective pretreatment method for lignocellulose (plant fiber) and 
early production of hydrocarbon fuels by both microbial and chemical 
catalytic means. The latter work could eventually enable the Nation to 
move beyond cellulosic ethanol, to cellulosic gasoline, cellulosic 
diesel, and even cellulosic jet fuel.

   Responses of Alexander Karsner to Questions From Senator Domenici

    Question 1. What percentage of petroleum consumption is offset by 
biofuels?
    Answer. In 2007, assuming no differences in cost per BTU between 
gasoline and ethanol, U.S. production of 6.5 billion gallons of ethanol 
helped to reduce gasoline consumption by approximately 4.3 billion 
gallons.\2\ This amount represents about 2.1 percent of U.S. demand for 
petroleum liquid fuels\3\ in 2007 and roughly 3.1 percent of the 
Nation's gasoline demand.
---------------------------------------------------------------------------
    \2\ BTU equivalent conversion calculation from ethanol gallons to 
gasoline gallons = 6.5 billion gallons of ethanol x 2/3 = 4.3 billion 
gallons of gasoline. 2007 ethanol production numbers are from the 
Renewable Fuels Association.
    \3\ Total U.S. Liquid fuels demand equates to 140 Billion Gallons 
of Gasoline and 67 Billion Gallons of Diesel and Jet Fuel, based on EIA 
data.
---------------------------------------------------------------------------
    Question 3. What would be the short-term and long-term effects of 
relaxing the RFS mandate?
    Answer. DOE does not believe that there would be any short term 
energy benefits of relaxing the RFS mandate. Further, the removal or 
reduction of the mandate would likely result in a short term increase 
in gasoline prices as additional gasoline must backfill the decrease in 
ethanol availability. The primary reason for this is that high crude 
oil and gasoline prices provide favorable ethanol blending economics 
for refiners. Therefore, even with relatively high corn and ethanol 
prices, refiners find it economically attractive to continue increasing 
their use of ethanol as a gasoline blending component.
    Creating a stable, predictable policy environment for investors, as 
established by the expanded RFS, is conducive to scaling up biofuels 
and deploying next generation biofuel technologies. Any efforts to 
repeal or relax that mandate should be carefully evaluated in terms of 
progress toward reducing the Nation's dependence on imported oil, and 
reducing greenhouse gas emissions.
    Reducing market uncertainty to the renewable fuels market--such as 
that established by the RFS--is critical to ensuring growth in all 
parts of the biofuels supply chain, from feedstocks, to biorefineries, 
to infrastructure, and including pipelines. In both the short and long-
term, relaxing of the RFS will undercut private sector investments in 
new capacity of both conventional and advanced biofuels as well as in 
research, development, and demonstration necessary to usher in the 
large scale deployment of cellulosic ethanol and other advanced 
biofuels.
    Responses of Alexander Karsner to Questions From Senator DeMint
    Question 1. Mr. Karsner, last year's energy bill requires the 
Department of Energy to be consulted by EPA when evaluating waiver 
requests for ethanol mandates. Food prices are complex, but when you 
burn 25 to 35 percent of a crop--it is a straight forward [sic] concept 
to understand the severe harm that dairy, livestock and poultry 
producers are feeling. In your communications with EPA, can we expect 
you to support or remain neutral on the waiver request that EPA is 
evaluating on the food-to-fuel mandate?
    Answer. The waiver requirements of Section 211(o) of the Clean Air 
Act requires EPA to consult with the Secretary of Agriculture and the 
Secretary of Energy in determining if the RFS requirements would 
severely harm the economy or the environment, or if there is inadequate 
domestic supply of fuel. The Department of Energy assisted EPA in 
evaluating the energy supply impacts of the RFS as part of the 
evaluation of the economic impacts and adequacy of domestic fuel 
supply. The assessment of the RFS impacts on dairy, livestock, and 
poultry producers and other agricultural commodities was the 
responsibility of EPA in consultation with USDA. As described in the 
Federal Register Notice, signed on Thursday, August 7, 2008, EPA 
determined that a waiver of the RFS mandate was not appropriate at that 
time. After weighing all of the evidence before it, EPA determined that 
the evidence did not support a finding that implementation of the RFS 
would harm the economy of a State, region, or the United States, 
because the evidence does not reach the generally high degree of 
confidence required for issuance of a waiver under Clean Air Act 
section 211(o). DOE supported EPA's decision on the Texas waiver 
request.
    Question 3. Using current average prices, if the price of E20 
ethanol and regular gasoline (without ethanol) were compared based on 
energy content and not by volume, how much more would E20 cost in 
comparison?
    Answer. DOE is currently evaluating fuel economy effects of varying 
ethanol and gasoline blends. Preliminary estimates indicate that 
vehicle fuel economy tracks closely to the energy content of fuels 
tested, which is consistent with recent similar analysis performed by a 
major automobile manufacturer.\4\ E20 and El0 have approximately 7 and 
3.5 percent less energy per gallon respectively, than gasoline without 
ethanol. Using the average East Coast retail reformulated gasoline 
(RFG) price of $4.127/gallons\5\ for the month of June 2008, and 
assuming that an E20 gasoline blend was priced the same as an El0 
gasoline blend (East Coast RFG) on a volumetric basis, a consumer would 
pay approximately $0.14/gallon more for E20. This estimate assumes a 
consumer must purchase 3.5 percent more E20 to travel the same distance 
as El0.
---------------------------------------------------------------------------
    \4\ Kevin Cullen GM Powertrain Engineering Compliance & 
Certification, Presentation, Emissions & Fuel Economy: Ethanol Blends 
vs. Gasoline, 2008 National Ethanol Conference, February 2008.
    \5\ Energy Information Administration, Weekly Retail Gasoline and 
Diesel Prices, (Cents per Gallon, Including Taxes) Form EIA-878, 
``Motor Gasoline Price Survey'' Last Updated 07/28/2008.
---------------------------------------------------------------------------
                                 ______
                                 
     Responses of Joseph Glauber to Questions From Senator Bingaman

    Question 1. Please explain the relationship between U.S. biofuels 
policy and the world food crisis. Is the root cause of the food crisis 
based on the price of agricultural commodities, or the physical supply 
of those commodities?
    Answer. The rise in price of agricultural commodities is due to 
both an increase in the demand for commodities as well as supply 
disruptions. Higher incomes and population growth are increasing the 
demand for agricultural commodities. On the supply-side, drought, dry 
weather, and flooding have lowered production and reduced stocks; and 
some countries have imposed export restrictions. In addition, record 
prices for gasoline and diesel fuel are increasing the costs of 
producing, transporting, and processing food products.
    Biofuels represent an added source of demand for agricultural 
commodities and therefore contribute to the upward pressure on the 
price of agricultural commodities. We estimate that in the absence of 
any growth in biofuel production in the United States over the past 
year, the International Monetary Fund (IMF) global food commodity price 
index would have risen by 40.6 to 42 percent as opposed to 45 percent 
from April 2007 to April 2008.
    Question 2. U.S. agricultural yields have increased dramatically, 
while yields in developing countries have not improved at all. It seems 
that something in the international system is broken, when developed 
countries are producing more than they can consume, while developing 
countries are becoming ever less able to feed themselves. How has this 
happened, and what can we do to reverse this trend?
    Answer. At the recent United Nations Food and Agriculture 
Organization High-Level Conference on World Food Security, Secretary 
Schafer identified several ways to address world food security, 
including: improving agricultural productivity, alleviating market 
bottlenecks, and promoting market-based principles. Secretary Schafer 
called for greater investment in scientists and research institutions, 
market information, distribution networks, and improved access to rural 
credit. The IMF has suggested a similar policy approach. The IMF noted 
that ``the most effective response for developing countries is to seize 
the opportunity and step up efforts to encourage expansion of domestic 
agricultural production by improving infrastructure, distribution, and 
storage systems; increasing competition; providing a stable regulatory 
environment and access to financing; and removing trade barriers. This 
will increase productivity and food supply (http://www.imf.org/
external/np/exr/faq/ffpfaqs.htm).''
    Question 3. The link between oil prices and U.S. food aid is 
troubling, as U.S. food aid is diminished by every uptick in world oil 
prices. The U.S. is giving less in aid just as people need the aid the 
most. How can we break this link between oil prices and food aid?
    Answer. Higher world oil prices increase the cost of transporting 
food to people in other countries who face starvation due to crop 
failure caused by drought, flooding, or other natural disasters. The 
link between food aid and world oil prices could be partially broken if 
Congress followed through on the Administration's request to authorize 
the use of up to 25 percent of food aid funds for the procurement of 
food from selected developing countries near the site of a food 
security crisis and abandoned the ``hard earmark'' for development 
assistance that was included in the 2008 farm bill.

     Responses of Joseph Glauber to Questions From Senator Domenici

    Question 4. In your opinion, is the sharp increase in corn prices 
due to ethanol production, or are other factors major contributors to 
the price?
    Answer. In my opinion, the sharp increase in corn prices reflects a 
combination of factors with one of these factors being increased 
production of corn-based ethanol. Over the period covered by marketing 
years 2005/06-2007/08, the average price of corn more than doubled. We 
estimate that over this period, increased production of corn-based 
ethanol in the United States accounted for about 30 percent of the 
increase in corn prices. A partial list of other factors also 
contributing to the sharp increase in corn prices include:

   Higher incomes and population growth are increasing the 
        demand for processed foods and meat in rapidly growing 
        developing countries, such as India and China. These shifts in 
        diets are leading to major changes in international trade. For 
        example, U.S. corn exports are projected to reach a record of 
        2.45 billion bushels in 2007/08 despite record high corn 
        prices.
   Drought, dry weather, and flooding have affected grain 
        production in Australia, Canada, Ukraine, European Union, and 
        the United States. These weather events have helped to deplete 
        world grain stocks. The tight stocks situation is leading to 
        increasing concerns that prices could move sharply higher if 
        this year's harvest falls below expectations. These concerns 
        are causing some importers to purchase for future needs, 
        pushing prices higher.
   Many exporting countries have put in place export 
        restrictions in an effort to reduce domestic food price 
        inflation. By reducing supplies available for world commerce, 
        these actions have exacerbated the surge in global commodity 
        prices.
   Record high prices for diesel fuel, gasoline, natural gas, 
        and other forms of energy affect costs throughout the food 
        production and marketing chain. Higher energy prices increase 
        producers' expenditures for fertilizer and fuel, driving up 
        farm production costs and reducing the incentive for farmers to 
        expand production in the face of record high prices. Higher 
        energy prices also increase food processing, marketing, and 
        retailing costs. These higher costs, especially if maintained 
        over a long period, tend to be passed on to consumers in the 
        form of higher retail food prices.
    Question 5. In your testimony you mention that the expansion of 
biofuels production appears to be a relatively modest contributor to 
food inflation globally and in the U.S. Please explain.
    Answer. The Department estimates that the expansion in biofuels 
production in the United States accounts for a modest portion of the 
increase in food price inflation in the U.S. and globally. We estimate 
the IMF global food commodity price index would have increased by 40.6 
to 42 percent from April 2007 to April 2008, assuming no expansion in 
biofuels production, compared with the actual increase of 45 percent. 
In the U.S., the CPI for all food would have increased by 4.55-4.60 
percent during the first four months of 2008, compared with the actual 
increase of 4.8 percent, assuming no expansion in U.S. biofuel 
production.
    Question 6. How many billion acres of land is used for agricultural 
cropland? How much of that land is used for the production of 
feedstocks for biofuels?
    Answer. According to the Food and Agriculture Organization (FAO) of 
the United Nations, there are about 3.5 billion acres of arable land in 
the world. We estimate that worldwide about 60-65 million acres of 
cropland are currently used for the production of ethanol and biodiesel 
feedstocks, or about 1.7 percent of world's arable land is currently 
used to produce feedstocks for biofuels production.
    Question 7. In your opinion, as ethanol use stabilizes, do you see 
annual increases in corn production outpacing increases in corn use for 
ethanol? Why or why not?
    Answer. We see corn production and corn use in about balance over 
the next several years. Continued improvements in seed genetics and 
cropping practices are expected to lead to increases in corn yields per 
acre and corn production. On the demand side, continued improvement in 
diets around the world, population growth, and other factors are 
expected to lead to increases in domestic use and exports.
     Responses of Joseph Glauber to Questions From Senator Menendez
    Question 8. Although I asked Dr. von Braun this question during the 
hearing, there was not sufficient time for a detailed response, and I 
wanted to give you both the opportunity to respond in writing. The 
International Food Policy Research Institute reports that biofuel 
production accounts for 30% of the recent price increase agricultural 
commodities. World Bank economists have made similar claims. Yet the 
testimony of Mr. Glauber, based on USDA calculations, argues that 
biofuels only explain 3% of the rise in food prices. How do you explain 
the difference?
    Answer. In his testimony, Dr. von Braun stated that ``The increased 
biofuel demand during the period, compared to historical rates of 
growth, is estimated to account for 30 percent of the increase in 
weighted average grain prices.'' Grains account for about 22 percent of 
the International Monetary Fund (IMF) food price index.
    In contrast, we estimate the percentage increase in price of corn 
from April 2007 to April 2008 would have been 23 percent lower in the 
absence of any growth in biofuel production in the United States since 
crop year 2005/06. Based on information from Dr. von Braun's prepared 
testimony, IFPRI estimated that the increase in biofuel production from 
2000 to 2007 accounted for 39 percent of the increase in corn prices. 
The one difference between the two studies is the time period. While we 
look at the growth in biofuel production in the United States over the 
past two years, the IFPRI study looks at the growth in biofuel 
production in the United States since 2000.
    Question 9. Do either or both of your models account for indirect 
impacts of increased corn production on wheat and soybean plantings?
    Answer. Our model provides estimates of the impact of increased 
corn production on soybean and wheat plantings. We do not know whether 
the IFPRI analysis took into account the indirect impacts of increased 
corn production on wheat and soybean plantings.
    Question 10. Are different time periods for calculating baselines 
or for making predictions?
    Answer. We analyzed the effects on crop and livestock markets of 
the growth in the amount of corn used for ethanol production and 
soybean oil used for biodiesel production during marketing years 2005/
06-2007/08. We believe the IFPRI study looks at the growth in biofuel 
production in the United States since 2000.
    Question 11. Do differences between the IMF global food commodity 
price index and domestic metrics like the Consumer Price Index 
contribute to differing estimates of the impact of biofuels? Are there 
real differences between the domestic and international marketplaces 
which lead to biofuels having a disproportionate impact?
    Answer. Differences in the IMF global food commodity price index 
and domestic metrics like the Consumer Price Index (CPI) for food 
contribute to the differing estimates of the impact of biofuels. The 
IMF global food commodity price index is often quoted as an indicator 
of the change in global food prices. The IMF global food commodity 
price index includes a bundle of agricultural commodities, including 
cereals such as wheat, corn (maize), rice, and barley as well as 
vegetable oils and protein meals, meat, seafood, sugar, bananas, and 
oranges.
    Alternatively, the CPI for food is based on the prices of food 
items purchased by consumers at retail establishments. The CPI for food 
consists of two components--the CPI for food at home with a weight of 
55 percent and the CPI for food away home with a weight of 45 percent. 
The CPI for food at home includes a bundle of finished food products, 
such as cereals and bakery products, meats, dairy products, and fruits 
and vegetables, while the CPI for food away from home measures the cost 
of meals purchased away from home. Because the farm value of 
agricultural commodities accounts for a relatively small share of 
retail food costs in the U.S., changes in farm commodity prices 
contribute to substantially larger increases in the IMF food commodity 
price index than the CPI for food. For example, while the IMF food 
commodity price index increased by 45 percent from April 2007 to April 
2008, the CPI for food in the United States increased by only 5 percent 
over the same time period.
    The impacts of higher commodity prices on consumers vary from 
country to country depending on diet and the proportion of staples 
versus highly processed food consumed. It is unclear how the list of 
commodities and the prices used in the IMF index relate to the foods 
purchased and the prices paid for food items by consumers in less 
developed countries.

      Responses of Joseph Glauber to Questions From Senator DeMint

    Question 12. USDA's recent crop report indicate that producers 
intend to plant about the same amount of acres as in years past and 
about 7 percent less corn. Yet, prices for these crops are at 
substantially higher levels. What explains this mismatch between the 
higher prices and static production and less production for corn?
    Answer. In 2006, farmers planted 304 million acres to grains, 
soybeans, cotton, and hay. Planted area to those same crops increased 
to 308 million acres in 2007. According to the Acreage report issued by 
the Department at the end of June, farmers planted 313 million acres to 
grains, soybeans, cotton, and hay in 2008. The Acreage report indicates 
farmers planted 7 percent less corn, but the decline in corn acreage 
was more than offset by a 17 percent increase in soybean acreage and a 
5 percent increase in wheat acreage.
    Strong increases in the prices of fertilizer and fuel likely 
dampened the incentive for farmers to expand crop production despite 
record high prices for most major crops. In March 2008, the prices 
farmers paid for fertilizer and fuel were up 67 and 47 percent, 
respectively, compared to one year ago.
    Question 13. What was the total 2007 global supply of ethanol 
derived from corn-based, non-cellulosic sources? Under current law, 
when will the U.S. ethanol mandate exceed 2007's global supply of 
ethanol derived from corn-based, non-cellulosic sources?
    Answer. The United States accounts for nearly all of the global 
production of corn-based ethanol. The renewable fuel standard (RFS) 
established under the Energy Independence and Security Act of 2007 was 
4.7 billion gallons for 2007. In 2007, 6.5 billion gallons of corn-
based ethanol were produced in the U.S. In 2008, the RFS increases to 
9.0 billion gallons and thereby exceed 2007's global supply of ethanol 
derived from corn-based, non-cellulosic sources.
    Question 14. We have seen that in tight markets, even the smallest 
changes in supply and demand can have dramatic affects on prices. And 
we all know that corn, rice, and other food commodity reserves around 
the world have been reduced over the past several years. Is it your 
testimony that we are not in a tight market and that the diversion of 
corn to ethanol production does not have an appreciable affect on food 
prices?
    Answer. We are certainly in a tight market situation for corn, 
wheat, and some other crops. My testimony indicates that corn-based 
ethanol has contributed to the increase in corn prices and to higher 
food prices. There are also many other factors that have caused corn 
prices to increase and have pushed food prices higher.
    Question 15. Including both the growing cycle for corn and the 
production cycle for ethanol, how many gallons of water are required to 
produce one gallon of corn-based ethanol? Based on recent droughts and 
other water shortages in the United States, have you studied the 
impacts of water access and supply disruptions on other commodities as 
resources are diverted to producing ethanol? Are you concerned that 
water access will become an issue for farmers and ranchers? Please 
elaborate as to why?
    Answer. A recent study released by the National Research Council 
(NRC) of the National Academy of Sciences titled ``Water Implications 
of Biofuels Production in the United States'' presented an estimate of 
the consumptive water use from an ethanol facility at 4 gallons of 
water per gallon of ethanol produced. Therefore, a 100 million gallon 
per year ethanol plant would use about 400 million gallons of water per 
year. This estimate is similar to a study by the Institute for 
Agricultural Trade Policy which estimated that Minnesota ethanol plants 
in 2005 averaged 4.2 gallons of water per gallon of ethanol.
    With respect to the amount of water used in the production of corn, 
the most cited research indicates that it takes about 4,000 gallons of 
water to produce each bushel of corn. Assuming each bushel of corn 
yields 2.8 gallons of ethanol, it takes about 1,400 gallons of water to 
grow the corn to produce each gallon of ethanol, but is much higher for 
corn produced on irrigated land. Based on data from the 2002 Census of 
Agriculture, about 14 percent of corn acres in the United States are 
irrigated, representing 16 percent of U.S. corn production. Those corn 
acres that are irrigated use, on average, 1.2 acre-feet of water 
(almost 400,000 gallons) per harvested acre of corn. In States such as 
Iowa, Illinois, Indiana, and Minnesota which currently supply much of 
the corn for ethanol production, less than 3 percent of corn acres are 
irrigated, and the amount of water used on irrigated cropland in those 
States is about half the national average. The reliance on corn from 
States such as Iowa, Illinois, Indiana, and Minnesota likely led to the 
conclusion by the NRC that ``In the next 5 to 10 years, increased 
agricultural production for biofuels will probably not alter the 
national-aggregate view of water use.''
    Continued growth in ethanol production as well as the introduction 
of new feedstocks for cellulosic-based ethanol could, however, have 
significant regional and local impacts. We recognize the importance of 
issues related to both water availability and water quality, especially 
as we continue to increase biofuel production as prescribed under the 
Energy Independence and Security Act of 2007.

       Responses of Joseph Glauber to Questions From Senator Burr

    Question 16. What impact do you anticipate higher food prices will 
have over the next few years on U.S. foreign aid, specifically 
unilateral and U.S. contributions to international food aid programs?
    Answer. The future level of food aid program funding depends on the 
amount of money the U.S. Congress appropriates for food aid programs. 
Assuming no increase in appropriated funding, higher food prices reduce 
the volume of food that can be purchased for food aid. In response to 
rising food prices and to improve the effectiveness of existing food 
aid programs, the Administration has requested increased funding for 
food aid programs and proposed allowing up to 25 percent of food aid 
funds be used to procure food from selected developing countries near 
the site of a food crisis.
    Question 17. How do the expected 2009 U.S. corn stocks compare to 
U.S. stocks of corn for the last ten years, in terms of weeks-of-
supply?
    Answer. The Department projects U.S. corn stocks will be 673 
million bushels on August 31, 2009 which is the equivalent of about 3 
weeks of supply. Over the previous 10 years, ending stocks ranged from 
a low of 958 million bushels to a high of 2,114 million bushels. In 
terms of weeks of supply, corn ending stocks ranged from a low of 5 
weeks to a high of 10 weeks over the previous 10 years. Question: What 
would USDA expect to happen if an additional four billion bushels of 
corn were introduced into the market tomorrow? In what ways would you 
expect the price of corn to change as a result of a sharply increased 
supply? Response: We would expect the price of corn to decline 
appreciably if an additional four billion bushels of corn were 
introduced into the market tomorrow.
    Question 18. What analysis has USDA conducted to examine the 
secondary and tertiary effect increased corn prices and reduced 
production for 2008 will have on industries dependent on corn, 
specifically US hog production? What were the results?
    Answer. In 2008, the Department expects pork production to increase 
6.6 percent due to expansion triggered by positive returns to producers 
in 2006 and 2007 and strong productivity gains. The growth in 
production is expected to slow later in the year as producers respond 
to much higher feed costs. The most recent Quarterly Hogs and Pigs 
report indicated that producers farrowed 5 percent more sows during 
December 2007-February 2008, but intend to farrow 2 percent fewer sows 
during June 2008-August 2008. In 2008, hog prices are expected to 
average $46-$48 per cwt, compared with $47.09 per cwt in 2007.
    In 2009, pork production is forecast to decline by 3 percent in 
response high feed costs. Lower pork production, coupled with declining 
supplies of competing meats, is expected to boost hog prices to $47-$51 
per cwt in 2009. Higher hog prices will help to mitigate the effects of 
higher feed costs on hog producers.
    Question 19. Dr. Outlaw testified that there could be dramatic 
financial losses amongst meat producers that use corn as feed, as a 
result of the high corn prices. He expects that if current market 
conditions persist, the industry would be hit ``with producer 
attrition.'' Given the heavy presence of hog and poultry production in 
North Carolina, can you quantify the negative impact these high corn 
prices could have on the livestock, dairy, hog, and poultry industries 
if the current market conditions persist? I am very concerned about 
what 'attrition' means in real terms, including livelihood and jobs in 
North Carolina and elsewhere, and think Congress needs to consider 
possible unintended economic and employment impacts that increased corn 
prices could be causing in the meat sector.
    Answer. The effects of high corn prices on the livestock sector 
depend on many factors. High corn prices increase livestock producers 
feed costs. In response to high corn prices, some producers may be able 
to substitute alternative feeds that are less costly than corn. Other 
producers may be able to adjust their feeding rations to increase 
weight gain per pound of feed fed to livestock. In addition, the 
ability of individual producers to withstand high corn prices depends 
on the duration of the increase in corn prices, the debt position of 
the producer, the efficiency of the operation, and other financial and 
managerial characteristics of the operation. Furthermore, strong 
domestic and export demand may support livestock prices, helping to 
offset the increase in feed costs resulting from higher corn prices. 
Due to the complexity of the many factors that determine the 
profitability of individual livestock operations and the ability of 
operators to withstand the effects of higher feed and other costs, the 
Department does not have estimates of the employment impacts of 
increased corn prices on the meat sector.
                                 ______
                                 
       Responses of Jason Pyle to Questions From Senator Domenici

    Question 1. In your opinion, would there be an effect on non-food 
based biofuels if a reduction to the RFS mandate was allowed?
    Answer. Yes. The entire alternative fuel sector is a nascent 
industry. Where many crop-based biofuel industries have demonstrated 
outcomes on a commercial scale, non-food biofuel alternatives have yet 
to prove themselves and as such are in a disadvantaged position. A 
wide-spectrum RFS mandate reduction could severely hamper non-food 
biofuel opportunities. Volatility in the RFS will directly impact the 
development of non-food alternatives in the following ways:

   The RFS, coupled with tax and investment subsidies, signals 
        to entrepreneurs and investors that the Government supports the 
        commercial benefits and domestic-security potential of 
        renewable fuel technologies. This support provides incentives 
        to investment in new processes and enables emerging 
        technologies to bridge the gap between development and 
        commercial production.
   New fuel technologies are competing with the current 
        petroleum industry which already has significantly depreciated 
        capital equipment, low operating risk and has benefited from 
        decades of various subsidies and incentives.
   The current RFS has been used by major US investors to 
        analyze cost, risk and profit models. It is the same capital 
        investors, using the same models, that non-food alternative 
        fuel companies rely on for capital investment.
   Uncertainty in government policy is perceived as risk. 
        Concerns over a possible RFS retraction could already be 
        hindering investment in new technologies.
   An ambitious RFS, especially one that is technology-neutral 
        by not favoring certain advanced biofuels with large carve-
        outs, sends a threefold message: interest in a domestic and 
        renewable fuel source, stewardship for environmental stability 
        at a national and global scale, and support for 
        entrepreneurship and innovation. The United States have 
        historically pioneered new technologies and supported their 
        ideologies worldwide.
   A reduction to the RFS mandate signals a lack of commitment 
        to a new energy future. The country has made the correct choice 
        by moving to a domestic and environmentally responsible energy 
        mix while there is still time. There will be many ups and downs 
        along the road to an alternative energy mix. These will be far 
        milder and far more manageable than a true oil shock or wide-
        scale war for energy products.

    Question 2. In your testimony you discuss Sapphire Energy's ``Green 
Crude Production.'' Would you please explain the technology used to 
make Green Crude and its benefits?
    Answer. Botanical production of hydrocarbons is not a new 
phenomenon. Petroleum is derived from ancient algal fields. In a very 
real fashion, we are currently driving and flying on algal crude.
    Unfortunately, wild algae growing in ponds, rivers and oceans are 
not suitable for world-scale cultivation, nor do they produce large 
quantities of useful fuel oils. This is similar to the fact that wild 
grains, fruits and vegetables are not suitable for wide-scale 
industrial farming--only the very specialized commercial varieties of 
these plants feed the world.
    Sapphire has perfected the science of developing algal strains 
suitable for world-scale production. The result is Green Crude 
Production, a process where a properly developed algal strain produces 
hydrocarbon-rich oils nearly identical to petroleum crude oil.
    Sapphire Energy has developed proprietary technology to develop 
strains of algae that produce the petroleum-substitute `Green Crude'. 
These are the stages of Green Crude Production:

   Strain Development. Sapphire biologists develop an algal 
        strain that has a collection of vital traits, including 
        abundant oil production, crop protection properties, and 
        environmental tolerance.
   Production. Sapphire Energy is now developing test-
        production facilities that will enable cost-effective algal 
        growth at the enormous scale that will make in impact on U.S. 
        energy needs. The oil is extracted into Green Crude, while the 
        biomass serves a variety of uses, such as fertilizer or 
        livestock feed.
   Refining. The resulting Green Crude can be introduced 
        seamlessly into the existing U.S. petroleum refining 
        infrastructure, replacing fossil fuel crude oil and producing 
        gasoline, diesel, and jet fuels.

    The benefits of Green Crude are as follows:

   Domestic. With adequate land and sunlight (of which the U.S. 
        has abundant resources), Green Crude can reliably reduce and, 
        ultimately, replace imported crude oil. The result is reduced 
        spending on imported oil (currently $200 billion each year).
   Security. The U.S. relies heavily on imported petroleum 
        resources, many of which are buried beneath countries with 
        unstable or undesirable political climates. A renewable source 
        of domestic crude oil will liberate the U.S. from international 
        oil sources and ensure national energy security.
   Economy. As Sapphire's Green Crude Production becomes more 
        efficient, the opportunity for less expensive oil will only 
        increase, resulting in lower fuel prices for military and 
        industrial applications, as well as for the individual consumer 
        at the gas station.
   Food vs. Fuel. Algae are preferentially produced on non-
        arable land, using non-potable water. Green Crude Production 
        requires no agricultural crops and no clearing of existing 
        plant growth. Capable of thriving on barren desert land, algae 
        can reduce the alternative fuel industry's need for valuable 
        food crops.
   Infrastructure. Green Crude Production results in gasoline, 
        diesel, and jet fuels, the same products already in use today 
        in our existing military and civilian transportation fleet. 
        Sapphire's fuel requires no costly alterations to vehicles, nor 
        to refining and distribution technologies; the same systems in 
        use today will refine and distribute Green Crude fuels.
   Environment. Algae absorb enormous amounts of carbon 
        dioxide, the most prevalent greenhouse gas. Green Crude 
        Production reduces carbon dioxide emissions. While the 
        combustion of the resulting gasoline in car engines will re-
        emit some of this carbon, Sapphire's fuel will generate far 
        less carbon in its entire life cycle than existing petroleum, 
        ethanol, or biodiesel industries. In addition, algae use 
        pollutants found in many industrial water and waste streams as 
        nutrients. If collocated with industrial facilities, algae 
        ponds can ``scrub'' the effluents of industrial facilities and 
        remove contaminants and greenhouse gases before they reach the 
        atmosphere.

        Response of Jason Pyle to Question From Senator Lincoln

    Question 1. Arkansas is well-positioned to be a leader in the 
biofuels industry with the abundance of raw materials, including 
forestry waste. I am very interested in the development of cellulosic 
biomass technology. Would you describe for the Committee your 
perception of the current state of cellulosic biomass technology? Where 
do we go from here?
    Answer. Sapphire does not refine ethanol; however, we are 
supportive of the role that the ethanol industry contributes to the US 
energy future. Ethanol will be a valuable component to a nationwide 
renewable fuels plan. Ethanol is an excellent additive agent for 
gasoline because of its oxygenating properties.
    The future of non-food ethanol lies in cellulosic technology. 
Logging and lumber waste, crop stover, leftover paper, switchgrass, 
certain types of algae, and even some municipal waste contain abundant 
cellulose that can be broken down into sugars to feed the ethanol 
fermentation process. If the refining process for cellulosic input can 
be worked out, there are many promising feedstock streams for 
cellulosic processes. Cellulosic ethanol can be produced domestically 
with renewable, waste feedstock, and as such should be developed as a 
liquid fuel option. The most significant step, at this point, is to 
develop a method for efficient conversion of cellulose to sugar.
    The energy density of cellulosic biomass is relatively low; pound 
for pound, even a dense cellulose source like lumber waste will produce 
less energy than an equivalent weight of seed stock, such as corn, 
petroleum, or algae. In order to effectively move the US energy mix 
away from foreign petroleum, cellulosic fuel will not be sufficient. We 
will need several additional alternative liquid fuel technologies to 
meet the goals of energy security.
    Though we at Sapphire Energy are commercially biased toward 
hydrocarbon fuels derived from algae, we recognize that cellulosic 
ethanol technology may prove to be a viable part of a national 
renewable fuels mix.
                                 ______
                                 
       Response of Jack Huttner to Question From Senator Domenici

    Question 1a. In your testimony you mention that Genecor is on the 
verge of commercialization of second generation biofuels.
    When do you expect to be producing commercial quantities?
    Answer. A number of second generation biorefineries will be coming 
on line over the next 24 months. Most are pilot plants. Genencor, as 
part of its Joint Venture with DuPont, has announced that it will build 
its own pilot plant for operation in late 2009. We anticipate producing 
commercial volumes in a demonstration plant two years, or so, after 
that. At that point, the JV will be selling its integrated biorefinery 
solution to the market for deployment around the country.
    Question 1b. Will there be enough biomass to produce significant 
amounts of advanced biofuels?
    Answer. It is difficult to precisely quantify biomass availability 
since there is currently no market for lignocellulosic biomass and 
therefore no supply chain to harvest, collect, store and deliver it. 
However, based on data provided by the USDA and other sources, we 
estimate that there is near future (2020) potential of about 50 billion 
gallons of ethanol from biomass. This estimate is based on moderate 
improvements in yield but without any significant land use changes. 
This estimate assumes use of corn stover, rice straw, wheat straw, 
forest product residues and energy crops.

       Response of Jack Huttner to Question From Senator Lincoln

    Question 1a. In your testimony, you describe the U.S. biofuels 
industry as on the verge of commercializing second generation 
technology that will use non-food feedstocks such as corn stover, 
switch grass, and waste wood in its process. You discuss retrofitting 
existing ethanol infrastructure to handle the next generation of 
biofules such as cellulosic feedstocks in addition to grain.
    Could you elaborate on how the use of ethanol facilities serves as 
a stepping stone to the development of additional biofuels?
    Answer. We envision the first cellulosic ethanol plants will be 
attached as a front end to existing dry mill corn ethanol plants. It 
will utilize shared equipment, utilities and processes. As the 
technology matures, green field second generation biorefineries will be 
built. Obviously, the ethanol distribution systems and blending 
facilities of first generation ethanol will be needed as the starch 
based volumes are supplanted or expanded by cellulosic ethanol volumes.
    Question 1b. How can Congress help transition the biofuels industry 
from ethanol to cellulosic and other second generation biofuels?
    Answer. Industry needs a stable regulatory regime to make the 
investments in 2nd generation biofuels. Namely, the RFS needs to remain 
intact. Of particular importance is the preferential incentive for 
producers of cellulosic ethanol.
                                 ______
                                 
   Responses of Joachim von Braun to Questions From Senator Bingaman

    Question 1. Please explain the relationship between U.S. biofuels 
policy and the world food crisis. Is the root cause of the food crisis 
based on the price of agricultural commodities, or the physical supply 
of those commodities?
    Answer. The root cause is the low growth in physical supply 
relative to growth in demand, and that is driving prices and price 
expectations. As a result of underlying market fundamentals as well as 
speculation, rising expectations, and hoarding food prices have surged 
drastically. Therefore, the current food crisis is driven by surging 
demand, aggravated by slow production response, and manifested in high 
food prices.
    Question 2. U.S. agricultural yields have increased dramatically, 
while yields in developing countries have not improved at all. It seems 
that something in the international system is broken, when developed 
countries are producing more than they can consume, while developing 
countries are becoming ever less able to feed themselves. How has this 
happened, and what can we do to reverse this trend?
    Answer. Yield growth has been slowing down throughout the world--
both in developing and in developed countries. This can be explained 
with underinvestment in agriculture and agricultural R&D, as well as 
the switch in agricultural research priorities in developed countries 
away from productivity enhancement. For the long-run investments for 
sustained agricultural growth should be made. These include expanded 
public spending for rural infrastructure, services, agricultural 
research, science, and technology. Also, developed countries should 
facilitate the sharing of agricultural innovation and research that are 
relevant to enhancing productivity and transforming small-farm 
agriculture.
    Question 3. The link between oil prices and U.S. food aid is 
troubling, as U.S. food aid is diminished by every uptick in world oil 
prices. The U.S. is giving less in aid just as people need the aid the 
most. How can we break this link between oil prices and food aid?
    Answer. Food aid is indeed hard hit by rising oil prices through 
increasing food prices and freight costs. World Food Programme needs 
further support and that support should be made more reliable. To 
maintain a reliable food aid flow the food aid budget would need to 
become price indexed, i.e. increase at the rate of international food 
prices to protect the poor whose lives that depend on it. An additional 
option to respond to this problem is to switch more to local purchase 
of food for aid. Another option is to partly switch to cash transfers 
to households in need of food aid where markets offer sufficient food.
    Question 4. Could you describe the elements of a sustainable 
biofuels industry that does not have negative implications for global 
agricultural commodity markets?
    Answer. A sustainable biofuels industry uses technologies that have 
a positive energy balance and reduce greenhouse gas emissions. It does 
not have negative implications for markets when the choice of 
feedstock, cultivation practices, technologies employed does not 
compete for land, water, and biomass for food and feed. Feedstocks, 
cultivation practices, technologies should minimize the food-fuel 
competition and ensure environmental benefits. Examples are sweet 
sorghum, algae based technologies, jathropa, and sugar cane based 
technology at appropriate locations, as well as the use of by-products. 
Biofuel trade barriers should be removed to facilitate biofuel 
production in countries with a comparative advantage for such 
sustainable production that does not compete with food and feed.
    Question 5. The current food crisis clearly requires the world's 
immediate attention. However, over the long term, is it possible that 
today's high prices could yield benefits for the agricultural sectors 
of developing countries that have not been able to compete with 
relatively inexpensive imports from developed countries?
    Answer. Long-run benefits for farmers in developing countries are 
possible, if they are given the opportunity to benefit from the rising 
demand and prices for their products. This requires investment in 
infrastructure and science. Short-term action to provide access to 
seeds, fertilizers, and credit for the small farm sector, as well as 
long term agricultural investments would be crucial in that respect to 
facilitate early gains. Development aid to agriculture must increase.

      Responses of Jack Huttner to Questions From Senator Domenici

    Question 1. In your opinion, is the growth in global population, 
global income, meat consumption, and corn and soybean consumption 
related to the increased price of corn and soybeans?
    Answer. Yes, all of these factors contribute to the increase in 
demand for corn and soybeans and put an upward pressure to their price.
    Question 2. In your opinion, how much of an impact is corn-based 
ethanol having on food prices?
    Answer. Our (the International Food Policy Research Institute, 
IFPRI) estimates suggest that the increase of corn demand for ethanol 
has contributed 39 percent to the total increase in the real world 
price of corn (2000 to 2007). For more information, please refer to: 
Rosegrant, M. W. 2008. Biofuels and Grain Prices: Impacts and Policy 
Responses. Testimony for the U.S. Senate Committee on Homeland Security 
and Governmental Affairs. Washington, D.C.
    Question 3. What are the primary crops of concern for global food 
shortages? Are those crops used for biofuels?
    Answer. Staple grains are of primary concern for food shortages in 
the world, in particular for the poor in developing countries. The 
major grain used for ethanol production is corn (mainly in the USA) and 
oil seeds (mainly in Europe). As demand and prices of these crops 
increase, they affect the other crops through two channels: 1) on the 
supply side, the switch to greater energy crop cultivation leaves less 
resources available for the production of other crops; 2) on the demand 
side, higher energy crops prices increase demand for other crops and 
put upward pressure on their price as well. For instance the increase 
in the price of corn due to ethanol is a significant factor for the 
increase in prices of wheat and soy.

      Responses of Jack Huttner to Questions From Senator Menendez

    Question 1a. Although I asked Dr. von Braun this question during 
the hearing, there was not sufficient time for a detailed response, and 
I wanted to give you both the opportunity to respond in writing. The 
International Food Policy Research Institute reports that biofuel 
production accounts for 30% of the recent price increase agricultural 
commodities. World Bank economists have made similar claims. Yet the 
testimony of Mr. Glauber, based on USDA calculations, argues that 
biofuels only explain 3% of the rise in food prices. How do you explain 
the difference?
    Answer. IFPRI's estimations (corn based ethanol contribution to 
price increase total 30% for all grains and 39% for corn) refer to 
accumulated real world grain price from 2000 to 2007 due to the 
increase in world biofuel demand.\1\ The result is based on a global 
multi-country and multi-commodity model. Only on such a comprehensive 
basis a realistic price estimate is possible, due to the market 
linkages.
---------------------------------------------------------------------------
    \1\ For more information see Rosegrant, M. W. 2008. Biofuels and 
Grain Prices: Impacts and Policy Responses. Testimony for the U.S. 
Senate Committee on Homeland Security and Governmental Affairs. 
Washington, D.C.
---------------------------------------------------------------------------
    Related USDA statements: I am sure the USDA colleagues can best 
address the question related to their estimates; I only note that the 
USDA estimates seem to be based on a Council of Economic Advisors 
statement. Quote: ``. . . total global increase in corn-based ethanol 
production accounts for about 13 percentage points of the 37% increase 
in corn prices, or about 1/3rd of the increase in corn prices over the 
past year[2007]. But because corn only represents a small fraction of 
the IMF Global Food Index, we estimate that the increase in total corn-
base ethanol production has pushed up global food prices by about 1.2 
percentage points of the 43% increase in global food prices, or about 
3% of the increase over the past twelve months.'' Quote from Testimony 
of Edward P. Lazear, Chairman, council of Economic Advisors, before 
Senate Foreign Relations Committee Hearing on ``Responding to the 
Global Food Crisis'' May 14, 2008.
    This seems to be the source cited by USDA's Chief Economist Joe 
Glauber--see May 19 Briefing from USDA officials USDA www; the figure 
that is comparable to other studies is the ``1/3rd of the increase in 
corn prices'' mentioned above, which is in the range of our estimates 
and those of others. We have not seen the details of a model analysis 
behind these estimates. The expression relative to IMF Global Food 
Index (the ``about 3%'') may have led to different interpretations of 
the main finding which actually seems to be quite similar in regard to 
the corn price effect (IFPRI: 39 percent over 2000-2007; USDA /CEA: 33 
percent in 2007).
    Question 1b. Do either or both of your models account for indirect 
impacts of increased corn production on wheat and soybean plantings?
    Answer. IFPRI's IMPACT model captures the cross-effects between the 
major grains and other important crops, like soybeans, in terms of area 
response to price changes--so that when one crop's area goes up (and 
effects its own price through increased supply), then that price signal 
is responded to by the area that is harvested in another crop. Thus, 
the model does account for the effect of increased corn production on 
wheat and soybean plantings. Example: a hypothetical moratorium 
(closing down grain and oil seeds based biofuel production) could 
reduce international corn prices by about 20 percent and wheat prices 
by about 10 percent within 2 years.
    Question 2. Are different time periods for calculating baselines or 
for making predictions?
    Answer. IFPRI's base year was 2000, while USDA estimates only refer 
to 2007.
    Question 3. Do differences between the IMF global food commodity 
price index and domestic metrics like the Consumer Price Index 
contribute to differing estimates of the impact of biofuels? Are there 
real differences between the domestic and international marketplaces 
which lead to biofuels having a disproportionate impact?
    Answer. Since there are differences in global and national food 
price indexes, it does matter which index is used for estimations of 
the effects of biofuels on food price. Global prices are transmitted to 
varying degrees from international to domestic markets.
                                 ______
                                 
                                      Department of Energy,
                                 Department of Agriculture,
                                                     June 11, 2008.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: Thank you for your May 12, 2008, letter 
concerning the current and projected impacts of biofuels on food and 
gasoline prices, among other issues. We emphatically agree with the 
suggestion in your press release of May 15 concerning this letter that 
``it's wise for folks to catch their breath and get better educated on 
the complexities before charging ahead with changes.'' We appreciate 
your leadership in this matter as well as this opportunity to address 
the current debate over the role of biofuels in our Nation's energy 
portfolio.
    All of us recognize that high food prices and high gasoline prices 
are important ``pocketbook'' issues for American consumers. We also 
recognize the national and economic security importance of reducing our 
dependence on imported oil as well as the urgency of developing new, 
cleaner fuels to reduce greenhouse gas emissions. Our biofuels policy 
makes important contributions to each of these goals.
    The food and fuel pricing issues about which you have raised 
questions are complex. We would again caution, therefore, against hasty 
judgments driven by highly questionable, agenda-driven calculations, 
some of which have been featured prominently in the popular press. Many 
analysts both within and outside of government are currently working to 
model these questions, and the one certainty is that our data will 
improve substantially in the months ahead.
    It is clear, however, that biofuels are already moderating gasoline 
prices. That impact is likely to grow substantially as more biofuels 
come to market. Our preliminary analysis further suggests that current 
biofuels-related feedstock demand plays only a small role in global 
food supply and pricing. Moreover, the impact of biofuels on U.S. 
consumers is even smaller since the farm price of commodities accounts 
for less than twenty percent of U.S. consumers' food costs.
    Our shared vision is a sustainable domestic biofuels industry 
centered in rural America. To that end, both our agencies as well as 
the Federal Biomass Research and Development Board, co-chaired by the 
Department of Agriculture's Under Secretary for Rural Development Tom 
Dorr and the Department of Energy's Assistant Secretary of Energy 
Efficiency and Renewable Energy Andy Karsner, are collaborating to 
build an integrated biofuels action plan. In order to achieve these 
goals, continued private sector investment is needed. Creating a 
stable, predictable policy environment for investors, as Congress did 
with the expanded Renewable Fuels Standard, is essential to scaling our 
biofuels use and deploying next-generation biofuels. Efforts to repeal 
that mandate would hinder progress toward reducing our dependence on 
imported oil and reducing greenhouse gas emissions.
    At the same time, our agencies are committed to collecting and 
presenting accurate data, projecting potential impacts, and initiating 
the necessary and appropriate actions to ensure the sustainable growth 
of biofuels. To that end, both of our agencies have significantly 
ramped up our analytical efforts to ensure that we proceed with caution 
but also determination. Our agencies will continue to work closely with 
the Environmental Protection Agency as we undertake our respective 
responsibilities under Title II of the Energy Independence and Security 
Act of 2007.
    Enclosed please find responses to each of your questions.
            Sincerely,
                                          Samuel W. Bodman,
                                               Secretary of Energy.
                                         Edward T. Schafer,
                                          Secretary of Agriculture.
[Enclosure.]

    Joint Responses of the Departments of Energy and Agriculture to 

                    Questions From Senator Bingaman

    Question 1. How has increased U.S. ethanol and biodiesel 
consumption affected domestic agriculture, and domestic food prices?
    Answer. In 2007, the expansion in ethanol and biodiesel consumption 
is estimated to have increased the Consumer Price Index (CPI) for all 
food by 0.10-0.15 percentage point. In other words, ethanol and 
biodiesel consumption accounted for approximately 3-4 percent of the 
overall rise in retail food prices. During the first 4 months of 2008, 
the all food CPI increased by 4.8 percent, with increased ethanol and 
biodiesel consumption accounting for only about 4-5 percent of the 
total increase while other factors accounted for 95-96 percent of the 
increase.
    Increased demand for biofuel feedstocks has benefited corn and 
soybean producers. Higher prices have encouraged production increases 
and some switching of acreage from soybeans to corn. More dried 
distiller grains are available for feed, but higher grain prices are 
also prompting adjustments by livestock producers. In future years, 
production adjustments by livestock and dairy producers in response to 
higher feed costs resulting from the expansion in ethanol and biodiesel 
consumption could add a total of 0.6-0.7 percentage point to the CPI 
for all food.
    Commodities prices, both agricultural and nonagricultural, have 
risen sharply in recent years for a number of reasons unrelated to 
biofuels development. For agricultural commodities, higher incomes, 
population growth, and depreciation of the dollar are increasing the 
demand for food; drought and dry weather have lowered production and 
reduced stocks; and some countries have imposed export restrictions. 
All these factors contribute to higher commodity prices. In addition, 
record prices for gasoline and diesel fuel are increasing the costs of 
producing, transporting, and processing food products.
    Question 2. Has increased ethanol and biodiesel consumption in the 
United States contributed to increased global prices for agricultural 
goods? And if so, to what extent?
    Answer. As discussed in Question 1, many factors are contributing 
to rising global prices for agricultural goods. From April 2007 to 
April 2008, in the absence of any growth in biofuel production in the 
United States, we estimate that the International Monetary Fund (IMF) 
global food commodity price index would have risen by 40.6 to 42 
percent as opposed to 45 percent.
    It should be noted that the impact on consumers of increased 
commodity prices, including increases driven by ethanol and biodiesel 
production, is subject to considerable uncertainty. The IMF global food 
commodity price index is often quoted as an indicator of the change in 
global food prices. The IMF global food commodity price index includes 
a bundle of agricultural commodities, including cereals such as wheat, 
corn (maize), rice, and barley as well as vegetable oils and protein 
meals, meat, seafood, sugar, bananas, and oranges. In the United 
States, however, the farm price of commodities accounts for 
approximately 20 percent of the retail food cost to consumers. This 
percentage will vary from country to country depending on diet and the 
proportion of staples versus highly processed food consumed. It is 
unclear how the list of commodities and the prices used in the IMF 
index relate to the foods purchased and the prices paid for food items 
by consumers in less developed countries.
    Question 3. How might increased biodiesel consumption, as required 
by EISA beginning in 2009, affect domestic and international food 
prices?
    Answer. The estimated increase in the price of soybean oil due to 
EISA would increase the CPI for all food by about 0.20-0.30 percentage 
point if fully passed on to consumers in the form of increased prices 
for foods containing soybean oil and other oils that compete with 
soybean oil. This increase is likely to occur over a several-year 
period since the EISA mandates a phased increase of biodiesel 
consumption beginning in 2009/10.
    The estimated increase in the price of soybeans and soybean oil 
under the EISA would increase the IMF global food commodity price index 
by 1-2 percent.
    Question 4. How has increased ethanol and biodiesel consumption 
affected gasoline and diesel prices?
    Answer. Biodiesel use has had a negligible effect on diesel fuel 
prices since biodiesel fuel production is so small compared to total 
diesel fuel use. Without ethanol, gasoline prices would be higher. Even 
during the period in which MTBE was being phased out (2006) and ethanol 
prices were very high, had ethanol not been available, gasoline prices 
would have been even higher. After the Renewable Fuel Standard (RFS), 
established in the Energy Policy Act of 2005,\1\ ethanol use has helped 
to reduce the price of gasoline to the consumer. Ethanol use has 
exceeded the requirements of the RFS, demonstrating that refiners and 
gasoline marketers have an economic advantage to use more ethanol than 
is required by law.
---------------------------------------------------------------------------
    \1\ The Energy Policy Act of 2005 also eliminated the reformulated 
gasoline oxygenate requirement.
---------------------------------------------------------------------------
    Table 1 (Appendix IV) shows the estimated reduction of gasoline 
demand due to the use of ethanol. We estimate that in 2008 we will use 
9 billion gallons of ethanol. Without ethanol, we would have to use 7.2 
billion more gallons of gasoline (5% more gasoline) in order to 
maintain current levels of travel. We would only meet the demand for 
more gasoline without using ethanol mixtures by bidding up the price of 
gasoline.
    In addition, ethanol is less costly than the refiner's average mix 
of gasoline components. The cost of ethanol to refiners (after 
accounting for the $0.51/gallon ethanol blender's tax credit) has been 
lower than the production cost of conventional gasoline.\2\ This 
explains why ethanol demand has been higher than required by the RFS. 
We estimate that, if we had not been blending ethanol into gasoline, 
gasoline prices would be between 20 cents per gallon to 35 cents per 
gallon higher.\3\
---------------------------------------------------------------------------
    \2\ Based on OPIS data for spot prices of ethanol (after rebate) 
and conventional gasoline.
    \3\ This estimate relies on data on the current price difference 
between ethanol and gasoline and the elasticity of supply for 
petroleum. Consequently a range is presented.
---------------------------------------------------------------------------
    Question 5. What prices levels for gasoline and diesel fuel would 
be expected if biofuels were removed from the market, both in the 
short-and long-term?
    Answer. This question can be interpreted in two ways: (a) What 
would happen to gasoline prices if the RFS were relaxed or eliminated? 
(b) What would happen to gasoline prices if there were a disruption in 
the supply of renewable fuels?

          a) If we assume the mandates are relaxed, the short-term 
        price effect would likely be minimal given the near-term supply 
        economics for the renewable fuels and petroleum. Over 8 billion 
        gallons of ethanol production is in place, and an additional 6 
        billion is under construction. We can therefore expect that 13 
        billion gallons of ethanol will be available to the market as 
        long as these plants can recover their variable cost of 
        production and have the regulatory certainty of a continued 
        market. The RFS will not require this much corn ethanol until 
        2012, although it will, by 2012, require 2 billion gallons of 
        advanced biofuels, not made from corn. Consequently, we do not 
        expect that the RFS could appreciably raise gasoline prices 
        until after 2012 when the requirements for advanced biofuels 
        become significantly higher. After 2012, the price effect of 
        ethanol will depend on several factors including oil prices and 
        the availability of ethanol tax credits.
          b) If we assumed a supply disruption of ethanol, we would 
        expect a fairly large increase in the price of gasoline until 
        ethanol supply were re-established or new market equilibriums 
        were achieved. We do not have an estimate of how large this 
        price increase would be. Because this is a hypothetical 
        scenario, without a well-defined physical cause, it is 
        difficult to produce with a meaningful price-impact estimate.

    Question 6. What effects are biofuels expected to have on gasoline 
and diesel markets as consumption increases to meet the targets laid 
out in EISA?
    Answer. Unless crude oil prices moderate dramatically, we expect 
that the ethanol use will reduce gasoline prices through 2012. Impacts 
after 2012 depend on a number of assumptions including the rate of 
technology development for the second generation renewable fuels, the 
supply and demand of transportation fuels and crude oil, the market 
mechanisms that develop to ensure increasing market demand for 
renewable fuels, the investment in second generation renewable fuel 
production capacity, the availability of flexible fuel vehicles, 
infrastructure for renewable feedstock and fuel transportation and 
distribution, and whether Clean Air Act RFS fuel waivers are issued.

               Appendix I.--Further Detail on Question 1

How has increased U.S. ethanol and biodiesel consumption affected 
        domestic agriculture, and domestic food prices?
    The amount of corn converted into ethanol and soybean oil converted 
into biodiesel in the United States is projected to nearly double from 
the 2005/06 marketing year (September 1, 2005--August 31, 2006) to the 
current 2007/08 marketing year (September 1, 2007--August 31, 2008). 
The growth in biofuels production has coincided with rising grain and 
oilseed prices. From 2005/06 to 2007/08, the average farm price of corn 
more than doubled, and the price of soybeans nearly doubled, with both 
reaching new record highs.
    While increased biofuels production is partially responsible for 
the increase in corn and soybean prices, many other factors have also 
contributed to the sharp increase in prices for these commodities. Some 
of these factors include:

   Higher incomes, population growth, and depreciation of the 
        dollar are increasing the demand for processed foods and meat 
        in rapidly growing developing countries such as India and 
        China. These shifts in diets are leading to major changes in 
        international trade. For example, U.S. corn exports are 
        projected to reach a record of 2.5 billion bushels in 2007/08 
        despite record high corn prices.
   Drought and dry weather have affected grain production in 
        Australia, Canada, Ukraine, the European Union, and the United 
        States in 2007/08. These weather events have helped to deplete 
        world grain stocks. The tight stocks situation is leading to 
        increasing concerns that prices could move sharply higher if 
        this year's harvest falls below expectations. These concerns 
        are causing some importers to purchase for future needs, 
        pushing prices higher.
   Many exporting countries have put in place export 
        restrictions in an effort to reduce domestic food price 
        inflation. By reducing supplies available for world commerce, 
        these actions have exacerbated the surge in global commodity 
        prices.
   Record high prices for diesel fuel, gasoline, natural gas, 
        and other forms of energy affect costs throughout the food 
        production and marketing chain. Higher energy prices increase 
        producers' expenditures for fertilizer and fuel, driving up 
        farm production costs and reducing the incentive for farmers to 
        expand production in the face of record high prices. Higher 
        energy prices also increase food processing, marketing, and 
        retailing costs. These higher costs, especially if maintained 
        over a long period, tend to be passed on to consumers in the 
        form of higher retail prices.

    Estimating the effects of increased ethanol and biodiesel 
consumption on domestic agriculture and domestic food prices 
necessitates segmenting the portion of the increase in corn and soybean 
prices due to the expansion in ethanol and biodiesel consumption and 
the increase in corn and soybean prices due to other factors. Various 
analytical approaches were used to estimate the effects of increased 
ethanol and biodiesel consumption on corn and soybean prices. Table 1 
(below) compares actual and estimated corn and soybean prices over the 
period 2005/06-2007/08, assuming corn used for ethanol and soybean oil 
used for biodiesel production in the United States remained unchanged 
from the amount used in the 2005/06 marketing year.
    Under the alternative scenario, lower com and soybean oil use 
lowers the prices of com and soybeans. In addition, changes in relative 
returns for com and soybeans cause producers to switch from planting 
corn to planting soybeans. Lower com and soybean prices could also 
result in increased plantings and lower prices for other crops and 
lower feed costs to livestock producers.
    The recent increase in com and soybean prices appears to have 
little to do with the run-up in prices of wheat and rice. Com and 
soybean prices began increasing during the fourth quarter of 2006. By 
this time, producers had already planted the 2007 winter wheat crop. 
Rice and spring wheat plantings could have been affected by increasing 
com and soybean prices, but weather problems, low stocks, and strong 
global demand likely had a much greater impact on wheat and rice prices 
than increasing com and soybean prices in 2007/08. In 2008, U.S. wheat 
producers indicate they intend to plant more acreage to wheat, while 
rice acreage is projected to remain flat, suggesting that higher com 
and soybean prices have not greatly altered wheat and rice producers' 
planting decisions.



    In 2007, the Consumer Price Index (CPI) for all food increased by 
4.0 percent, up from 2.4 percent in both 2004 and 2005. In 2007, the 
retail price of eggs increased by 29.2 percent, retail dairy product 
prices rose by 7.4 percent, retail poultry prices posted a 5.2 percent 
gain, and retail beef prices increased by 4.4 percent. It is very 
unlikely that retail prices for dairy products, beef, poultry, and eggs 
were greatly affected by higher corn and soybean prices in 2007.
    Higher corn and soybean prices increase livestock and dairy 
producers' feed costs. The increase in feed costs, with no offsetting 
increase in livestock prices, reduces livestock producers' margins. 
Livestock producers react to these lower margins over time by reducing 
the breeding herd. In the short term, higher feed costs lead to an 
increase in livestock slaughter and lower livestock prices. For milk 
and eggs, higher feed costs may have lowered production somewhat 2007, 
partially contributing to the increase in retail prices for these food 
products. However, other factors, such as low returns in 2006, strong 
demand, abnormally high international prices, especially for dairy 
products, and increasing use of eggs for hatching to expand broiler 
production likely contributed to the bulk ofthe increase in retail food 
prices for these commodities in 2007.
    To estimate the effects of higher farm commodity prices due to 
growth in ethanol and biodiesel consumption in the United States on 
retail food prices, we assume that all of the increase in farm 
commodity prices is passed on to consumers through higher retail food 
prices. In 2007, the expansion in ethanol and biodiesel consumption is 
estimated to have increased the CPI for all food by 0.10-0.15 
percentage point, or the expansion in ethanol and biodiesel consumption 
accounted for about 3-4 percent of the increase in retail food prices. 
During the first 4 months of 2008, the all food CPI increased by 4.8 
percent, with increased ethanol and biodiesel consumption accounting 
for about 4-5 percent ofthe increase in retail food prices. Over time, 
livestock and dairy producers will adjust to higher feed costs by 
reducing production. In future years, production adjustments by 
livestock and dairy producers in response to higher feed costs 
resulting from the expansion in ethanol and biodiesel consumption could 
add a total of 0.6-0.7 percentage point to the CPI for all food.

               Appendix II.--Further Detail on Question 2

Has increased ethanol and biodiesel consumption in the United States 
        contributed to increased global prices for agricultural goods? 
        And ifso, to what extent?
    The International Monetary Fund's (IMF) global food commodity price 
index is often quoted as an indicator of the change in global food 
prices. The IMF global food commodity price index includes a bundle of 
agricultural commodities including cereals such as wheat, corn (maize), 
rice, and barley as well as vegetable oils and protein meals, meat, 
seafood, sugar, bananas, and oranges. A complete list ofthe commodities 
included in the index, the percentage change in each commodity price, 
and the estimated contribution of each commodity to the overall 
percentage change in the food price index from April 2007 to April 2008 
are presented in Table 1 (below). It is unclear how the list of 
commodities and the prices used in the IMF index relate to the foods 
purchased and the prices paid for food items by consumers in less 
developed countries.



    The IMF global food price commodity price index increased by an 
estimated 45 percent from April 2007 to April 2008. Sunflower oil and 
rice exhibited the largest price changes, with prices for both 
commodities increasing by over 200 percent. Prices for wheat, soybeans, 
soybean oil, palm oil, and rapeseed oil also exhibited relatively large 
price increases. Prices for wheat and soybeans increased by 82.7 and 
78.6 percent, respectively, while the prices for beef and swine meat 
actually fell by 11.8 and 6.5 percent, respectively.
    The price ofcom increased by 61.7 percent from April 2007 to April 
2008. Combining the change in com prices with the com weight of 8.1 
percent, the change in com prices contributed5.0 percentage points to 
the estimated 45 percent increase in the global food commodity price 
index. Soybeans, soybean oil, and soybean meal exhibited larger price 
increases and playa much larger role in the global food commodity price 
index, a combined weight ofover 15 percent. The combined effects ofthe 
increase in soybean, soybean meal, and soybean oil prices contributed 
11.7 percentage points to the estimated 45 percent increase in the IMF 
global food commodity price index from April 2007 to April 2008.
    In order to estimate the impact of the increased production of U.S. 
biofuels on global food prices, one needs to estimate the direct and 
indirect effects of the increased use of com and soybeans on individual 
commodity prices. Last month, CEA testified before the Senate Foreign 
Relations Committee about com-based ethanol's impact on global food 
prices using this strategy. The analysis below continues in this 
spirit, but it considers a broader category of factors and costs and a 
slightly different time period. Here the analysis is updated to the 12 
months ending in April, and the analysis considers a broader mix of 
biofuels-focusing on com-based and soybean oil-based biofuels.
    Table 2 (below) presents the estimated effects of ethanol and 
biodiesel production in the United States on global prices for com 
(maize), soybeans, soybean meal, and soybean oil as well as the impact 
on the IMF global food commodity price index. It is important to point 
out that the price impacts reflect greater ethanol and biodiesel 
production and not only ethanol.
    The estimated impacts on global food prices are consistent with the 
estimates in response to Question 1. We estimate that the percentage 
increase in price ofcom from April 2007 to April 2008 would have been 
23 percent lower in the absence of any growth in biofuel production in 
the United States. Based on this analysis, we estimate that the price 
of com would have increased by 47.5 percent assuming no growth in 
biofuel production in the United States, down from the actual increase 
of61.7 percent, from April 2007 to April 2008.



    The growth in biofuel production in the United States also has 
pushed up soybean, soybean meal, and soybean oil prices. We estimate 
the percentage increase in the prices of soybeans, soybean meal, and 
soybean oil from April 2007 to April 2008 would have been about 25 to 
30 percent lower in the absence of any growth in biofuel production in 
the United States. Assuming no growth in biofuel production, the price 
of soybeans, soybean meal, and soybean oil in the global food commodity 
price index would have increased by 54.2, 51.2, and 61.5 percent, 
respectively, down from actual increases of78.6, 69.3, and 80.9 
percent, respectively, from April 2007 to April 2008.
    The effects ofbiofuel production in the United States on global 
price for agricultural goods is estimated by combining the individual 
commodity price impacts with their relative weights in the IMF global 
food commodity price index. Assuming no growth in biofuel production in 
the United States, the IMF global food commodity price index would have 
increased by 40.6 percent compared to the actual increase of 45 
percent, from April 2007 to April 2008. Lower com prices contributed 
1.2 percentage points, lower soybean, soybean meal, and soybean oil 
prices contributed 3.2 percentage points to the total reduction in the 
global food commodity price index.
    However, combining soybeans, soybean meal, and soybean oil in the 
same index overstates the impact ofbiofuels on global prices. Soybeans 
are processed into soybean meal and oil and by including the effects 
ofbiofuels on the prices of all three commodities we magnify the 
impacts of biofuels on the global price index. If we exclude the impact 
of biofuels on soybean meal and oil prices, the IMF global food 
commodity price index would have increased by 42 percent assuming no 
growth in biofuels production compared to the actual increase of 45 
percent, from April 2007 to April 2008.

              Appendix III.--Further Detail on Question 3

How might increased biodiesel consumption, as required by EISA 
        beginning in 2009, affect domestic and international food 
        prices?
    Under pre-EISA policies, USDA had projected that soybean oil use 
for biodiesel would be4.2 billion pounds in 2009/1 0 and average 4.4 
billion pounds over 2013-2018. EISA requires the use of 500 million 
gallons of biomass-based diesel fuel by 2009; 650 million gallons by 
2010; 800 million gallons by 2011; and 1 billion gallons of biomass-
based diesel fuel by 2012. This would raise soybean oil consumption for 
biodiesel by about 70 percent by 2011/12.
    To estimate the effects on soybean oil and soybean prices, we 
derived price multipliers from a recent analysis ofthe EISA by the Food 
and Agricultural Policy Research Institute (FAPRI). In estimating the 
effects of the EISA on biodiesel use and soybean prices, the FAPRI 
analysis shows that for a 10-percent increase in soybean oil use for 
biodiesel, soybean oil prices were estimated to rise by about 4 
percent, while soybean prices were estimated to rise by about 1 percent 
(see Table 1, below). Based on these values, it is estimated that 
increased biodiesel consumption could cause soybean oil prices to rise 
by about 32 percent over pre-EISA baseline levels by 2012/13. 
Similarly, it is estimated that soybean prices would rise by about 7 
percent relative to pre-EISA baseline levels.
    The estimated increase in the price of soybean oil would increase 
the CPI for all food by about 0.20-0.30 percentage points if fully 
passed on to consumers in the form of increased prices for foods 
containing soybean oil and other oils that compete with soybean oil. 
The total increase of 0.20-0.30 percentage points in the CPI for all 
food could occur over a several-year period, especially as the EISA 
mandate increases biodiesel consumption beginning in 2009/10. The 
estimated increase in the price of soybeans and soybean oil under the 
EISA would increase the IMF global food commodity price index by 1-2 
percentage points.



               Appendix IV.--Further Detail on Question 4
How has increased ethanol and biodiesel consumption affected gasoline 
        and diesel prices?

        
        
      
                                 ______
                                 
     Responses of Joe L. Outlaw to Questions From Senator Domenici

    Question 1. In your opinion, what is the underlying driving force 
for changes in the agricultural industry?
    Answer. There are a number of underlying driving forces of change 
in agriculture. I am a co-author of one of the leading undergraduate 
textbooks on agricultural policy. In our book we identify eight forces 
of change in agriculture: instability of agriculture, globalization, 
technology, food safety, environment, industrialization, politics, and 
unforeseen events. While the importance of each of these factors varies 
over time, in my opinion, over the past few years the most important 
factors have been the instability of agriculture, technology and 
unforeseen events. Specifically, this past year saw unforeseen weather 
events negatively impacted crop production worldwide. Combining the 
reduction in supply with the inelasticity of supply and demand of 
agricultural products gives us huge swings in commodity prices due to 
shifts in supply and demand causing the price and income instability we 
have recently realized. And finally, improvements in seed and GPS 
technology have perpetuated the technology treadmill effect where early 
adopters garner most of the financial benefits of new technology that 
decrease costs and induce others to follow in order to stay in 
business.
    Question 2. In your testimony, you state that a reduction to the 
RFS mandate would not significantly reduce ethanol production or 
prices. Why?
    Answer. At the time of the testimony, our models indicated that 
U.S. production of ethanol would easily exceed the RFS. Even though 
corn prices had increased to $6.00 per bushel, our results indicated 
that, on average, U.S. ethanol plants were still realizing small $0.06 
per gallon profits at an ethanol price of $2.50 per gallon. This level 
of profitability, while not high enough to encourage new plant 
construction, is still positive so existing plants and those that were 
expected to come online later in 2008 would continue and surpass the 
RFS level.
    Question 3. In your opinion, what is the long term viability of 
biofuels as an energy alternative?
    Answer. The answer to this question depends entirely on 1) the 
level of oil prices and the corresponding gasoline and diesel prices, 
2) the relative costs of production of each of the biofuels including 
corn and cellulosic based ethanol and biodiesel. If the costs of 
biofuels are relatively competitive with petroleum based fuels then 
there will be a future. If not, there will not be a future for them 
barring government subsidies.

       Response of Joe L. Outlaw to Question From Senator Lincoln

    Question 1. Based on your recent study, what is your opinion on the 
potential negative impacts a Renewable Fuel Standard waiver may have on 
second generation biofuels, such as the development of cellulosic 
biomass?
    Answer. My answer is strictly my opinion and unfortunately is not 
backed up with the empirical analysis that was the basis for my answers 
to the previous questions. We have all witnessed substantial investment 
in ethanol and biodiesel that followed the enactment of the Energy 
Policy Act of 2005 and Energy Independence and Security Act of 2007. 
The question is how would potential second generation fuels investors 
react to a one year removal of the RFS mandate? Again, in my opinion, 
the removal of the mandate could be interpreted by potential investors 
as the beginning of the decline in government support for biofuels 
which may make them at least pause from going forward. Unlike, corn 
based ethanol which is generally competitive without the subsidies, 
most if not all of the cellulosic ethanol projects are not expected to 
initially be competitive with petroleum based fuels so there would have 
to be substantial government support for investors to move those 
projects forward.
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                          Midwestern Governors Association,
                                      Washington, DC, June 3, 2008.
Hon. Stephen Johnson,
Administrator, Environmental Protection Agency, 1200 Pennsylvania 
        Avenue, N.W., Washington, DC.
    Dear Administrator Johnson: On behalf of the Midwestern Governors 
Association (MGA), we respectfully urge you to uphold the new and 
higher Renewable Fuels Standard (RFS) in the Energy Independence and 
Security Act of 2007 as passed by Congress and signed by the President. 
Granting waivers to the RFS would be contrary to your agency's mission 
to protect human health and the environment.
    A waiver would also contradict the President's ``Twenty in Ten'' 
plan that you worked on to pass. In his 2007 State of the Union 
Address, President Bush announced the plan to reduce U.S. gasoline 
usage by 20 percent in 10 years. One of the objectives of the plan is 
to strengthen our nation's energy security by reducing foreign oil 
dependency, and by promoting the development of homegrown, renewable 
energy sources. The plan called for increased use of renewable and 
alternative fuels, and set a goal of 36 billion gallons of renewable 
energy sources to be used in the U.S., as is reflected in the Energy 
Independence and Security Act of 2007.
    The EPA's own analysis of the current RFS shows the increased use 
of renewable fuels, like ethanol, will reduce traditional car 
pollutants, such as benzene and carbon monoxide. Ethanol is non-toxic, 
water soluble, and biodegradable. In addition, ethanol poses no threat 
of contamination or degradation of surface or ground water.
    The blame placed on ethanol for higher food prices is misguided. 
Higher food prices are the result of many factors, including rising 
transportation and production costs due to record oil prices, increased 
demand for grains and meat from developing countries, increased 
speculator investment and influence in all commodities markets, and 
extended global drought. As a result, all food commodity prices are 
high, not just the price of corn. In short, granting any waiver to the 
RFS will not reduce current food commodity prices.
    The RFS actually helps move the ethanol industry toward use of 
cellulosic materials. The RFS will encourage the investment and 
technological innovations needed to make production of ethanol from 
cellulose a commercial reality.
    When you addressed the National Ethanol Conference last year, you 
stated, ``Bottom line--alternative domestic sources of energy are good 
for our economy, good for our energy security ... and are good for our 
environment.'' We could not agree more. We thank you for your time and 
consideration.
            Sincerely,
                                         M. Michael Rounds,
                                Governor of South Dakota and Chair.
                                         Jennifer Granholm,
                               Governor of Michigan and Vice Chair.
                                 ______
                                 
             National Petrochemical & Refiners Association,
                                     Washington, DC, June 27, 2008.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Chairman Bingaman: NPRA, the National Petrochemical & Refiners 
Association, appreciates the opportunity to submit comments for the 
record regarding the Senate Energy and Natural Resources Committee's 
hearing on June 12, 2008 on the relationship between U.S. renewable 
fuels policy and food prices. NPRA is a national trade association with 
close to 500 members, including those who own or operate virtually all 
U.S. refining capacity, as well as most of the nation's petrochemical 
manufacturers with processes similar to those of refiners. We 
specifically wanted to comment on answers the U.S. Department of Energy 
(DOE) and the U.S. Department of Agriculture (USDA) provided to the 
committee in response to your May 12, 2008 questions to both agencies. 
The answers below highlight our views on some of the questions you 
raised in that letter.

    Question 1. How has increased U.S. ethanol and biodiesel 
consumption affected domestic agriculture, and domestic food prices?
    Answer. Increased ethanol production in the U.S. has resulted in 
higher demand for corn. The U.S. Department of Agriculture (USDA) 
estimates that the amount of corn used at domestic ethanol plants was 
2.1 billion bushels in 2006/2007 (9/1/06--9/1/07) and 3.0 billion 
bushels in 2007/2008, and the latest projection is 4.0 billion bushels 
in 2008/2009. This represented 23.3% of domestic corn demand in 2006/
2007, 28.5% in 2007/2008, and 38.1 % in 2008/2009.\1\ This growth in 
demand for corn to provide the feedstock for domestic ethanol 
production plants is substantial. Several recently released studies 
highlight the fact that this trend has significantly increased food and 
commodity prices well above the 3-4 percent range noted by USDA and the 
U.S. Department of Energy (DOE) in the June 11, 2008 response to your 
May 12, 2008 questions.
---------------------------------------------------------------------------
    \1\ USDA, ``World Agricultural Supply and Demand Estimates,'' 
WASDE-459, June 10, 2008, p. 12. This is a monthly report. ``Year A/B'' 
is a marketing year beginning September 1 for corn: http://
www.usda.gov/oce/commodity/wasde/latest.pdf
---------------------------------------------------------------------------
    Global grain prices have increased dramatically over the last two 
years. It is unlikely that this is just a coincidence with U.S. 
biofuels programs. The chart below shows USDA data on wheat, corn and 
soybean price changes before and after EPAct05 was passed.
    The increase in corn demand by ethanol production plants is a key 
factor in rising corn prices. As one recent study notes:

          Between 2006/07 and 2008/09, USDA forecasts indicate the 
        increase in corn going to ethanol plants is expected to exceed 
        the increase in total U.S. corn use. Because corn stocks are 
        expected to fall to such low levels relative to total corn use 
        and expected corn prices are so high, any surge in corn demand 
        has an amplified effect on corn prices. In this environment, if 
        substantially less corn were to be used in ethanol production 
        than now expected, corn prices would be much lower. A 
        simplified analytical approach suggests that expected corn 
        prices may be 40 percent higher than they would be had corn 
        used in ethanol production remained at the 2006/07 level. 
        Expressed in an alternative way, the increase in corn expected 
        to be used in ethanol between 2006/07 and 2008/09 may account 
        for up to 60 percent of the increase in corn prices between 
        2006/07 and 2008/09.\2\
---------------------------------------------------------------------------
    \2\ Dr. Keith Collins, ``The Role of Biofuels and Other Factors in 
Increasing Farm and Food Prices,'' June 19, 2008, p. 25.

    Recent studies also highlight the fact that--contrary to USDA and 
DOE's opinion--prices for products such as dairy, beef, poultry and 
---------------------------------------------------------------------------
eggs are in fact impacted by higher corn prices.

          For example, since corn is mainly used as a feed grain, 
        higher corn prices in one year may not affect livestock prices 
        for up to several years. That is the case today as U.S. meat 
        production is expected to be record high in 2008 partly because 
        high feed prices are causing increased slaughter of beef and 
        dairy cows and sows. The consequence of this is more meat 
        production today, but the reduction in breeding animals and 
        herd sizes will mean lower meat production and higher meat 
        prices over next several years.\3\
---------------------------------------------------------------------------
    \3\ Ibid, p. 23.

    Corn shortages from the recent flooding in the Midwest will likely 
exacerbate this trend. In addition, such commodity inflation is locked 
in by the RFS, given the dramatic increases in quantities required to 
meet the mandate.
    Energy prices are certainly a factor in rising prices for many 
products. High energy prices are of particular concern to the refining 
and petrochemical industry and are having a substantial, adverse impact 
on our businesses and consumers. However, energy prices have 
significantly less of an impact on food prices than commodity price 
increases. The USDA ERS's own model of retail food costs show that 
energy is three percent of the retail food dollar, and commodity costs 
are 19 percent of the retail food dollar. So, when commodity prices are 
rising at half again to more than twice the rate of oil, how can ERS 
continue to argue that it is energy--and not biofuels policy--that is 
driving food inflation?
    Questions 4 & 5. How has increased ethanol and biodiesel 
consumption affected gasoline and diesel prices? What price levels for 
gasoline and diesel would be expected if biofuels were removed from the 
market, both in the short-and long-term?
    Answer. Hawaii, Minnesota, Missouri, and Oregon currently mandate 
ethanol in gasoline. Minnesota currently mandates biodiesel in diesel 
fuel and the state legislature recently required that the level of 
biodiesel in diesel fuels be increased. States that require biofuels 
with future effective dates are Florida, Montana, New Mexico, and 
Washington. About 65% of gasoline supplies produced in the U.S. contain 
ethanol today. Biodiesel is still a very, very small market (only about 
1%) compared to petroleum diesel fuel. Several factors make price 
comparisons of the fuel supply with or without ethanol or biodiesel 
very difficult, such as:

   The very small size of the biodiesel market
   The extensive use of ethanol in gasoline
   Current state biofuel mandates
   Current subsidies and excise tax credits/reductions for 
        biofuels
   The tariff on imported ethanol
   The lower energy content of ethanol and biodiesel relative 
        to gasoline and diesel
   Higher wholesale infrastructure costs associated with 
        ethanol use
   The large new federal renewable fuel standard for 2008

    All of these factors combined make conclusions on price comparisons 
extremely questionable--particularly since many of these initiatives 
represent real costs to consumers that are not always clearly apparent. 
For example, lost tax revenue to the Highway Trust Fund from the 
ethanol excise tax credit is made up through direct payments from the 
General Treasury. These revenues are general taxpayer money and an 
expense to consumers. In addition, since ethanol can't be shipped via 
pipeline, it has to be trucked barged or railed. As discussed later, 
this method of shipment is more than three times as expensive a 
shipping gasoline via pipeline.
    Ethanol prices are available at the following sites:

    http://www.energy.ca.gov/gasoline/graphs/ethanol--10-year.html

    http://www.energy.ca.gov/gasoline/graphs/ethanol 18-month.html

    http://www.mda.state.mn.us/news/publications/renewable/ethanol/
marketnewsreport.pdf

    These sources document that ethanol prices are volatile and ethanol 
is not uniformly a very low-cost gasoline additive.
    The ``Ethanol Market News,'' prepared by the Minnesota Department 
of Agriculture, (http://www.mda.state.mn.us/news/publ ications/
renewable/ethanol/marketnewsreport.pdf) shows a relationship between 
ethanol and gasoline prices. It is not evident from this chart that 
gasoline prices would be higher without ethanol because gasoline and 
ethanol prices are often close and ethanol prices are not always less 
expensive than gasoline prices. This is particularly important in light 
of the fact that a gallon of ethanol carries substantially less energy 
than a gallon of gasoline.
    Finally, this analysis was conducted before the flooding in the 
Midwest, which wiped out a substantial portion of the corn crop. This 
disaster highlights yet another problem with the RFS. This event 
naturally limits the supply of corn for the rest of the year and could 
make compliance with this year's 9 billion gallon mandate difficult. 
Such a situation could create scarcity in the ethanol market, driving 
up not only corn prices, but the cost of RFS credits. If such a 
scenario comes to fruition, it could possibly lead to even higher fuel 
prices for American consumers.
    Question 6. What effects are biofuels expected to have on gasoline 
and diesel markets as consumption increases to meet the targets laid 
out in EISA?
    The U.S. will progress rapidly to the use of ethanol in nearly all 
gasoline. There will also be interest in expanding the E85 market and 
EPA's future decision on whether or not mid-level ethanol-gasoline 
blends meet the Agency's ``substantially similar'' definition of 
gasoline.\4\
---------------------------------------------------------------------------
    \4\ For more information on ``substantially similar:'' http://
www.epa.gov/otaq/additive.htm For more information on the EPA process 
to review mid-level ethanol-gasoline blends: http://www.ethanol.org/
pdf/contentmgmt/Dave_Kortum_EPA.pdf
---------------------------------------------------------------------------
    As previously mentioned, a gallon of ethanol has a lower energy 
content than a gallon of gasoline. According to the Department of 
Energy's Office of Energy Efficiency and Renewable Energy, flex fuel 
vehicles (FFVs)--cars that can run on either gasoline or a mixture of 
85 percent ethanol and 15 percent gasoline (known as E85)--get ``about 
20-30% fewer miles per gallon when fueled with E85.''\5\ Similarly, a 
gallon of biodiesel has a lower energy content than a gallon of diesel 
fuel.\6\ Therefore, increased use of E85 and biodiesel is a RFS 
compliance strategy, but will displace only a fraction of demand for 
gasoline and diesel fuel because of energy content and fuel economy 
differences. This difference in energy content highlights the facts 
that as ethanol use increases dramatically because of the RFS, 
consumers will be using a larger volume of transportation fuels and 
paying more. An example highlighting this phenomenon lies in the fact 
that the American Automobile Association (AAA) releases an ``E85 MPG/
BTU Adjusted Price'' in its daily fuel gauge report. It has not been 
uncommon for this report to show an E85 adjusted price that exceeds the 
price of a gallon of gasoline by as much as 80 cents per gallon.\7\
---------------------------------------------------------------------------
    \5\ U.S. Department of Energy, Office of Energy Efficiency and 
Renewable Energy, Fueleconomy.gov: http://www.fueleconomy.gov/feg/
flextech.shtml.
    \6\ EPA, ``A Comprehensive Analysis of Biodiesel Impacts on Exhaust 
Emissions, Draft Technical Report,'' EPA420-P-02-001, October 2002: 
http://www.epa.gov/otaq/models/analysis/biodsl/p02001.pdf
    \7\ For daily price information from AAA, see http://
www.fuelgaugereport.com/.
---------------------------------------------------------------------------
    A June 2007 GAO report also highlighted the higher costs associated 
with biofuels. Among several findings, the report noted: ``According to 
NREL (National Renewable Energy Laboratory), the overall cost of 
transporting ethanol from production plants to fueling stations is 
estimated to range from 13 cents per gallon to 18 cents per gallon, 
depending on the distance traveled and the mode of transportation. In 
contrast, the overall cost of transporting petroleum fuels from 
refineries to fueling stations is estimated on a nationwide basis to be 
about 3 to 5 cents per gallon.''\8\ The dramatic increase in the 
biofuels mandate under the new law will increase strain on our already 
congested transportation infrastructure, which could very likely drive 
the costs of shipping ethanol up even further. In addition to these 
costs being passed on to consumers, strained transportation avenues 
could create fuel supply problems.
---------------------------------------------------------------------------
    \8\ U.S. Government Accountability Office, ``Biofuels: DOE Lacks a 
Strategic Approach to Coordinate Increasing Production with 
Infrastructure Development and Vehicle Needs,'' GAO-07-713, June 2007, 
p. 23.
---------------------------------------------------------------------------
    In order to achieve the enormous increase in ethanol consumption 
required under EI SA, there will need to be significant increases in 
Flex Fuel Vehicles (FFVs). These vehicles are the only ones capable of 
running on blends greater than E10, which will be the nationwide 
standard given the new RFS possibly as soon as 2010. The National 
Ethanol Vehicle Coalition estimates there are about 6 million FFV s on 
the road--a small fraction of the 240 million plus vehicles Americans 
are driving today.\9\ While automakers have announced plans to make 
more of these vehicles, they plan on producing gasoline-only vehicles 
at substantially greater quantities. This situation means today's 
legacy fleet (e.g. the gasoline-only vehicles currently in the 
marketplace) and a large portion of the approximately 16 million 
automobiles that will be produced annually over the next several years, 
cannot or will not be able to run on blends greater than E-10. The 
corrosive nature of ethanol eats away at automotive pipes and creates 
engine problems in these vehicles. In order for blends between E-10 and 
E-85 (i .e. blended gasoline that contains somewhere between 10 and 85 
percent ethanol, called ``mid-level ethanol blends'') to be viable in 
the fuel supply, automakers will have to certify that cars can run on 
these blends and warrantee those vehicles. Engine and fuel pump makers 
will not provide warranties for equipment if blends greater than E-10 
are used with those products.
---------------------------------------------------------------------------
    \9\ National Ethanol Vehicle Coalition website: http://
www.e85fuel.com/e85101/faqs/number_ffvs.php
---------------------------------------------------------------------------
    Ethanol blends greater than E10 are already starting to create 
disruptions in the fuel market. One boat owner in California recently 
initiated a lawsuit against gasoline producers for problems ethanol 
blended gasoline created in his boat engine--even though ethanol is 
mandated to be used in the fuel supply.\10\
---------------------------------------------------------------------------
    \10\ Douglas, Elizabeth, ``Boater sues over ethanol laces 
gasoline's effect on fiberglass tank,'' Los Angeles Times, April 15, 
2008.
---------------------------------------------------------------------------
    In addition to challenges relating to vehicle fleets, the new 
mandate will require greater use of E85 generally, which has economic 
challenges related to refueling infrastructure. Because of the 
corrosiveness of ethanol, an E85 retail pump is different than a 
gasoline retail pump and, therefore, all gasoline stations do not have 
equipment compatible with E85. Equipment concerns include the 
underground storage tank, gauges, piping system, fittings, pumps, 
nozzles, and hoses. A member of the National Association of Convenience 
Stores (NACS) and the Society of Independent Gasoline Marketers of 
America (SIGMA) testified on June 7, 2007 before the Subcommittee on 
Energy and Air Quality of the House Committee on Energy and Commerce:

          For all of these conversions, including tank cleaning, we 
        estimated the cost to be between $6,000 and $7,000. However, 
        this does not include the dispenser itself. The two dispenser 
        manufacturers each charge an additional fee for a new E-85 
        compatible dispenser--$8,000 for Dresser-Wayne and $7,300 for 
        Gilbarco. Thus, a typical E-85 dispenser can cost upwards of 
        $17,000 per unit. And this cost is for equipment that has not 
        yet been certified compatible with E-85 by Underwriters 
        Laboratories. . . . We have spoken with several retailers who 
        lament their decision to install E-85 equipment because they 
        have been unable to generate sufficient sales from these 
        fueling positions to support their overall business model.\11\
---------------------------------------------------------------------------
    \11\ http://energycommerce.house.gov/cmte_mtgs/110-eaq-
hrg.060707.Hubbard-testimony.pdf

    Thank you again for the opportunity to provide comments for the 
record. We look forward to working with you regarding implementation of 
the RFS and other energy related issues before the Committee.
            Sincerely,
                                         Charles T. Drevna,
                                                         President.
                                 ______
                                 
                     National Cattlemen's Beef Association,
                                     Washington, DC, June 12, 2008.
Hon. Jeff Bingaman,
Chairman, Energy & Natural Resources Committee, U.S. Senate, 304 
        Dirksen Senate Office Building, Washington, DC.
Hon. Pete Domenici,
Ranking Member, Energy & Natural Resources Committee, U.S. Senate,304 
        Dirksen Senate Office Building, Washington, DC.
    Dear Chairman Bingaman and Ranking Member Domenici: The National 
Cattlemen's Beef Association (NCBA) appreciates the opportunity to 
present our thoughts with regard to your hearing on ``Renewable Fuels 
and Food Prices.'' Producer-directed and consumer-focused, NCBA is the 
largest and oldest organization representing America's cattle industry, 
and it is dedicated to preserving the beef industry's heritage and 
future profitability through leadership in education, marketing and 
public policy.
    Cattle operations are an important contributor to small towns and 
rural economies across the United States. Taken in aggregate, cattle 
production plays a significant role in our nation with $50 billion in 
farm-gate receipts, which represents 20 percent of all U.S. on-farm 
income. However, the U.S. cattle industry is currently experiencing 
significant and unsustainable losses.
    Many cattle feeders are currently losing about $150 per animal. 
With 525,000 head of steers and heifers going to market each week, that 
amounts to an average weekly industry loss of approximately $79 
million. Cattle feeders are margin operators and these losses will be 
passed on to the foundation of our industry, the cow/calf producer. For 
every $1 per bushel increase in the price of corn a cattle feeder must 
pay $22 per hundred-weight less for a 550 lb. feeder steer in order to 
have a chance at maintaining the same income.
    Ethanol production and support mechanisms, namely the RFS, the 
ethanol blender's tax credit and the ethanol import tariff, are not 
solely to blame for this precarious situation. Other factors including 
the value of the dollar, elevated energy prices, increased 
international demand for grain and meat products, and the weather 
certainly play a role in determining food and feed costs. But, the 
demand pressure created by the RFS and ethanol tax incentives is also a 
contributor, and it is the only factor that Congress can control.
    As a Committee of jurisdiction over this issue, NCBA strongly urges 
you to reevaluate the mandate schedule established in the Energy 
Independence & Security Act of 2007 (EISA) in light of the commodity 
supply and price issues we are now facing.

              ETHANOL INDUSTRY DEVELOPMENT AND PRODUCTION

    While elimination of the oxygenate methyl tertiary butyl ether 
(MTBE) along with high crude oil and gasoline prices have played a role 
in the development of ethanol production, a number of government 
policies have rapidly accelerated the investment, including: the 
Volumetric Ethanol Excise Tax Credit (VEETC) of $0.51/gallon provided 
to blenders of ethanol, a $0.54/gallon tariff on imported ethanol, and 
the RFS which was amended and dramatically increased as part of EISA to 
mandate the production and use of 9 billion gallons of feed-grain based 
ethanol this year and 15 billion gallons by 2015.
    As of June 9th the Renewable Fuels Association (RFA), the national 
trade association for the U.S. ethanol industry, reported that the 
United States has 154 operational ethanol plants with the capacity to 
produce 8.8 billion gallons of ethanol per year. Additionally, RFA 
reported 49 new plants under construction, bringing total expected 
ethanol production capacity to nearly 13.7 billion gallons of ethanol 
per year.
    Once operational, these 203 ethanol facilities will require over 5 
billion bushels of corn. This is not an inconsequential amount. Based 
upon current expectations for corn plantings and yield, that will be 
over 40 percent of the domestic corn supply in 2008--compared to the 13 
percent of domestic corn supply that was devoted to fuel ethanol 
production in 2005.
    Overall growth in the corn ethanol industry has been impressive, 
but it is important to recognize that it comes at a cost to livestock 
producers. Corn is the primary feed stock utilized to feed cattle for 
market, accounting for approximately 85 of every 100 pounds of cattle 
feed. In total, of the nearly six billion bushels of corn fed to 
livestock this year, roughly two billion will be fed to cattle. With 
the Omaha cash corn price last week at $6.18/bushel compared to $3.79/
bushel one year earlier--an increase of over 60 percent from the 
previous year and 280 percent from the year before that--the impacts of 
corn-based ethanol development are being felt throughout the beef 
production chain.
    It is important to recognize that this is not a cost that the 
cattle producer can readily pass along to the consumer. Although U.S. 
beef producers have successfully worked to build demand, and maintained 
it through increased retail beef prices over the past several years, 
there is only so much that a consumer is willing to pay before they 
begin to choose other protein sources. Therefore, in the short run, the 
majority of these higher feed costs are borne by cattle feeders, and in 
the long run, they will result in a contraction of the U.S. cow herd.
    With the cost of their biggest feed input skyrocketing, and the 
overall profitability of their business threatened, it is 
understandable that many cattle producers have become skeptical of 
government intervention in the ethanol market. Cattle producers simply 
want to compete with the ethanol industry on a level playing field for 
each bushel of corn.

                   COMMODITY SUPPLIES AND PRODUCTION

    U.S. cattle producers are committed to continuing to provide the 
safest, most affordable beef in the world, but given current 
expectations regarding crop production, they have a growing anxiety 
about the impact of renewable fuels policy on the prices of feed grains 
and livestock. In 2007, USDA reported that 25 percent of the U.S. corn 
crop was processed to produce ethanol. Compared to previous years this 
is a dramatic increase in the amount of corn diverted to ethanol 
production.
    Even with strong corn prices in the marketplace USDA's most recent 
Prospective Plantings report indicated that U.S. corn acreage was 
expected to decline 8 percent from last year as some producers shifted 
production to other crops whose prices have been driven higher. The 
troubling news continued to accumulate with USDA's monthly Crop Report 
released on June 10, 2008. USDA cut the corn yield estimate by a 
whopping 5 bushels, down to 148.9 bushels/acre. This reduction projects 
a corn crop that is 10 percent smaller than last year. Furthermore, in 
order to maintain even ``pipeline'' supplies for corn, USDA was forced 
to cut its estimates for feed and residual use by 150 million bushels. 
This is a clear indication that USDA expects more corn to be directed 
away from cattle producers.
    Meanwhile, the percentage of corn acres rated good and excellent by 
USDA fell by 3 percent during the first week of June, down to just 60 
percent. Corn crop progress in the year 2002 was the worst in nearly 
two decades, and this year's good-excellent percentage is just 6 
percent ahead of the 2002 figure. This is especially concerning given 
the major flooding and severe weather events that have continued to 
plague key corn growing regions. USDA's next estimate for total corn 
acreage will be released in the June 30 Acreage report; nevertheless, 
as of June 8 only 89 percent of the corn crop had emerged, which still 
leaves 2008 as the slowest year on record for corn emergence, lagging 
the 99 percent emergence at this time last year and the 5-year average 
of 95 percent.
    NCBA recognizes that corn growers responded to increased demand 
last year by producing a record harvest; however, cattle producers do 
not operate in the past. Both the marketplace and Mother Nature have 
created a drastically different scenario this year. Lower acreage and 
below trend line yields can only mean one thing: less corn. This 
decline in corn production will coincide with continued increases in 
the siphoning off of corn to produce ethanol; a diversion driven by 
both high oil prices and government policy.

            ETHANOL CO-PRODUCT OPPORTUNITIES AND CHALLENGES

    Cattle producers have not stood idle on the sidelines as these 
market developments have occurred. As corn is being diverted to supply 
the increasing demand of renewable fuels they are doing their best to 
adapt by utilizing alternative feedstuffs, such as co-products of the 
ethanol process like distillers grains, in rations. Distillers grains 
can be used in their wet (35 % dry matter), modified wet (50%), or 
dried (90%) form. Each bushel of corn used for ethanol production 
returns about 18 pounds of dried distiller grains, and as ethanol 
production continues to climb it will be increasingly important for our 
industry to utilize this product.
    When a feedlot can obtain them, some producers are attempting to 
incorporate ethanol co-products at rates of up to 40 percent in the 
feed ration. However, these co-products cannot entirely replace corn in 
the ration, and there are other concerns with including them at high 
levels. First, there are concerns about diminished cattle performance 
due to increased sulphur content in the ration. Sulphur, which tends to 
suppress appetite and tie up micronutrients that are essential to 
cattle health, is often found at higher levels in distillers grains.
    Producers are also concerned about the variability of the co-
products from ethanol production. It has proven difficult to get a 
consistent product which, in turn, makes it hard to formulate a 
balanced ration. Furthermore, we're keeping a close eye on any impact 
that distillers grains might have on the quality of our end product. 
The beef industry has worked hard for many years to improve beef 
quality, and any changes to that quality could jeopardize a consumer's 
willingness to purchase beef. Finally, because distiller's grains are 
often priced at their energy equivalent to corn, they are not 
necessarily a ``cheap'' replacement for corn.

                                SUMMARY

    Cattle producers are very concerned about the increasingly tight 
supply of key commodities. With U.S. wheat stocks at 60 year lows, 
soybean stocks at their lowest levels since 2003, and corn ending 
stocks, even with last year's record crop, well below the established 
25 year average, the RFS is creating unnecessary pressure on feed and 
food prices. With current and forecast oil prices well above $100 per 
barrel, and with annual ethanol production capacity now at 13.7 billion 
gallons, it is clear that the corn ethanol industry no longer a 
`fledgling industry' in need of government assistance.
    NCBA does not believe that freezing the RFS will immediately 
reverse commodity price escalation, nor do cattle producers claim that 
it will single handedly address the difficult marketing environment 
that currently exists for our industry. But, the RFS is one factor 
contributing to higher feed prices and Congress should revisit this 
policy in order to bring about some relief for beef producers and 
consumers.
    It should be made clear that NCBA supports the nation's commitment 
to reducing dependence on foreign energy by developing forms of 
renewable energy like ethanol. Our interest in encouraging a 
reevaluation of the RFS is not intended to undermine this objective; 
rather it is meant to ensure that our nation's energy policy is 
sustainable and consistent with the dynamics of today's marketplace. 
Cattle producers recognize that federal support of the ethanol industry 
helped to encourage the development of basic production technology, but 
they also believe in a market-based economy.
    Government driven demand for corn via an RFS and tax credits 
unnecessarily intervenes in the market, decreasing the ability of 
supply and demand to appropriately signal market participants. Cattle 
producers have always depended on the free market to drive their 
business, and as long as cattle producers have the ability to compete 
on a level playing field with the ethanol industry for each bushel of 
corn, the U.S. beef industry can and will remain competitive.
    In a time of sharply escalating food and energy costs NCBA 
appreciates the Energy and Natural Resources Committee holding a 
hearing regarding ``Renewable Fuels and Food Prices.'' Cattle 
producer's share a desire to diversify our energy supply, and feel 
strongly that we must work together to meet this goal in a manner that 
will not pit our food, feed and fuel needs against each other.
    In light of the current food and commodity price issues we are 
facing, NCBA urges you to reevaluate the RFS enacted as part of EISA. 
Further, cattle producers believe that Congress should also allow other 
ethanol support mechanisms, such as the blender's tax credit, to expire 
as scheduled. NCBA feels that it is time to level the playing field and 
allow market forces rather than government intervention to guide the 
production and use of ethanol.
            Sincerely,
                                              Andy Groseta,
                                                         President.