This morning, the USDA released their August crop report and it is the latest data that completely contradicts the theory of indirect land use change (ILUC). Loosely translated, the theory of ILUC posits that the increased use of corn for ethanol production in the U.S. will displace other domestic crops like soybeans, which means that new acres around the world will have to come into production to make up the shortfall in U.S. crop exports. For a complete recap of ILUC and its shortfalls, see this white paper from Growth Energy.
The problem, as Jim Lane at Biofuels Digest has so conclusively pointed out, is that the theory of ILUC is not supported by data when you back-cast (check the predictions of the model against known outcomes in the past to see if the predictions were accurate). The USDA crop report is the latest example of how the theory of ILUC does not fit real-world data.
The USDA crop report, in case you missed it, showed that there will be a record soybean crop in the U.S. That’s despite the fact that there will be record ethanol production this year as well. According to the theory of ILUC, those two things can’t happen at the same time. A larger amount of corn used for ethanol leads to a smaller soybean crop, not a record. The reason is simple. ILUC is being modeled with a general equilibrium model, of which the shortcomings have been discussed on this blog before. General equilibrium models assume a point of equilibrium, hold everything constant and then shock the model. In the case of ILUC, the shock is adding several billion gallons of U.S. ethanol production to an otherwise static global economic system. If you do that, you will obviously get land use change because there is nowhere else for the crops to be produced. Then the debate is only about where that additional land comes from: rain forest (which is highly unlikely) or formerly abandoned cropland that is brought back into production.
But, as the USDA crop report clearly shows, the system doesn’t stay static. It adapts and evolves with changing market conditions. That’s why in the real world, you CAN have a record soybean crop AND record ethanol production. And it’s being done primarily with increases in crop yields – not acres. The only question is: how much longer can the theory of ILUC last if all the data continues to contradict it?