Ethanol: In the Tank 10 comments
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By Richard Stuebi
The news seems everywhere these days that ethanol is dead as a doornail:
October 21, Financial Times: "Investors Suffer As U.S. Ethanol Boom Dries Up"
November 5, Bloomberg: "VeraSun Doomed; Goldman Stops Ethanol Stock Coverage"
It's easy to pin the tough times for ethanol on the left-right combination of precipitous declines in oil /gasoline prices and the global credit crunch. True, ethanol plants are capital-intensive, and a reduction in product price is never a good thing for any producer.
But I believe the issue is less about fuel prices and capital markets than about corn.
Many have long been skeptical about corn-based ethanol purely from an economic perspective. Of course, as has been amply documented, corn ethanol has been the beneficiary of some pretty substantial subsidies, without which much less ethanol would have made it to market. But earlier this year, even when oil was nearing $150 / barrel and gasoline was over $4.00 / gallon, a number of U.S. ethanol producers were having financial difficulties.
Why? Because corn prices were rising even faster than fuel prices. Remember: these refineries make money as a function of the spread between feedstock and product price, not of the product price itself. If the feedstock price is rising faster than the product price, then even if the product price is at historical highs, producers can be squeezed.
Until ethanol demand surged in recent years (propelled by increasing government mandates), the linkages between corn and fuel prices were weak. However, as a recent article by columnist Doug Saunders of The Globe and Mail in Toronto points out, "food is no longer just food". In Saunders' terms, "there has been a "bushels-to-barrels-to-Btus convergence". After all, both oil and bread have calorific content, and technologies now are allowing one to be swapped for the other, depending upon which is more economic in a particular market.
This then leads to the other "black mark" against (corn-based) ethanol: the so-called "food vs. fuel" debate. To many observers, it is unethical to be using products fundamental to human food consumption as a substitute for petroleum-based fuels, as this added demand for foodstuffs bids up prices and makes eating more expensive -- especially problematic for the world's poor (see 2007 article on this topic by C. Ford Runge and Benjamin Senauer in Foreign Affairs). This has led Jean Zigler of the United Nations to recently declare that biofuels are a "crime against humanity".
A strongly argued counterpoint is offered by Robert Zubrin and Gal Luft. With pretty significant substantiation, they claim that increases in the price of corn have not been driven by any push to produce ethanol. Instead, they find that all of the increase in corn prices has been due to the combined factors of increased natural gas prices (thereby raising the price of fertilizer), increased transportation and processing costs (due to higher gasoline/diesel prices), and increased demand for corn in massive rapidly-growing developing economies (e.g., China). In short, according to Zubrin and Luft, ethanol is not to blame for woes facing corn consumer.
That may or may not be so. But, it seems unarguable that corn is to blame for the woes facing ethanol.
President-elect Obama may be a "supporter" of ethanol, but unless and until cellulosic ethanol technologies become viable, ethanol will have a hard time becoming -- and staying -- a major player in the transportation fuel game.
This is especially the case when factoring in the massive investment required to convert the U.S. infrastructure of distribution, retailing and vehicle tanks from gasoline to ethanol-capable. And, this is even more so the case considering that biofuels innovators are actively working on technologies that enable biogasoline -- gasoline from bio-feedstocks.
With all these strikes against ethanol, it's no wonder all the obituaries are being written.
Disclosure: None
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This article has 10 comments:
www.globalsubsidies.or...
www.globalsubsidies.or...
Also, a more quantitative and up-to-date study on the food vs. fuel debate is the study prepared by Donald Mitchell of the World Bank in July 2008:
www-wds.worldbank.org/...
Mitchell acknowledges that fuel costs have contributed to the rising cost of producing grains and oilseeds. But they accounted for much less of the rise in the prices of food commodities (as distinct from the retail prices of processed foods) than the combination of biofuels and panicky government responses to rising prices.
By the way, almost all the studies that find minimal effects on the prices of foods base their analyses on changes in the USDA's food price index. Some 45% of that index is weighted by expenditure on meals eaten outside the home (e.g., in restaurants and cafeterias). Any 10-year-old knows that changes in the prices of restaurant meals bear little relation to changes in the prices of basic commodities, like corn and wheat. But changes in the prices of these commodities sure make a difference for people who in the poorest countries of the world who DO buy unprocessed or sem-processed staple grains.
Regarding subsidies, corn was subsidized long before it was used for ethanol production. Corn was initially selected for ethanol becuase we had lots of it. They are separate.
Whenever I hear the food vs. fuel discussion I am always amazed at how the conclusions are drawn and then applied to the U.S. According to the USDA 70% of our corn production is used for feedstock (cattle, pork). Forget for a moment that just a small fraction of our agricultural land is used for corn. This connection is at best weak.
It might also be helpful to review the correlation between oil and other commodities. Is it new (this time it's different) that oil and corn (just to pick one other commodity) are dropping in price at the same time?
Not withstanding the fact that we have no (not yet at least) energy policy, the best source I have found for ethanol information is:
alcoholcanbeagas.com.
You are no doubt right that ADM and the corn lobby are too powerful to write off yet, but the rest of your arguments are weak.
First, your figure on the share of corn production used for feed is out of date. This year, ethanol will account for one-third (33%) of corn production, and domestic feed use less than 50%. Exports will account for most of the rest. But what's your point? What do you think the feed corn is feeding ... pets? Most cows, pigs and chicken I know end up as food.
You assert that "just a small fraction of our agricultural land is used for corn". What do you consider a small fraction? In recent years, between 80 million and 92 million acres have been planted to corn -- an area that is sure to grow as ethanol mandates increase.
www.extension.iastate....
But let's take 86 million acres as a mid-point. According to the USDA's National Resources Inventory, America's cultivated cropland was 310 million acres in 2003:
www.nrcs.usda.gov/tech...
It has been declining each year, however, so a reasonable estimate is that there are now around 300 million arable acres being farmed. That means that corn is planted on 29% of the nation's cultivated cropland. I would hardly call that "a small fraction". Moreover, the crop occupies a substantial portion of the nation's smaller area of what the USDA calls "prime cropland" (cropland that is reasonably flat, fertile and large enough to allow broad-acre cultivation), which is located mainly in the corn-growing areas of the Midwest:
www.unl.edu/nac/atlas/...
In 1992, the USDA estimated that there were only 225 million acres of prime cropland in the United States.
www.ers.usda.gov/publi...
That number has probably since shrunk to below 200 million acres. So, a rough estimate is that corn production takes up takes up close to 40% of the nation's prime cropland. Yet your "best source ... for ethanol information" (alcoholcanbeagas.com) says, I quote, "The land used for corn takes up only 16.6% of our prime cropland". That is only one of many errors and misleading statements that I have found on David Blume's "Busting the Ethanol Myths" website.
Thanks for the comments and more importantly the links!
I agree the corn subsidy should be abolished and maybe this would force farmers using corn for ethanol to switch to higher yielding crops.
Regarding the fuel for food argument, it is obviously intuitive but I've seen nothing empirical. Have a link?
Thanks again.
Dan
It grows well in the Midwest USA, cincinnatilocavore.blo...... .
<<Sorghum cane is well-suited to growing in the lower Midwest (Indiana, Ohio, Illinois, Kentucky, and Missouri are historically the major producers) and in Appalachia, and today it is produced in only a few states. It looks a bit like very tall corn >>
www.new-agri.co.uk/06-...
cincinnatilocavore.blo...
You're welcome.
I'm not sure that abolishing the "corn subsidy ... would force farmers using corn for ethanol to switch to higher yielding crops". Since 2006, the main subsidy to corn production has been the direct payment, which is based on historical yields. Farmers would also get payments for growing soybeans or other programme crops. But neither are as generous as the price-linked subsidies that farmers got before corn prices rose above the target price in the autumn of 2006.
Whether abolishing the ETHANOL tax credit "would force farmers using corn for ethanol to switch to higher yielding crops" is a more interesting question. As several commentators have pointed out in other blogs, corn ethanol remains cheaper than ethanol made from cellulosic sources, sugar beets and (because of all the investment in corn planting and harvesting machinery) sweet sorghum. What it is not cheaper than is gasoline, or ethanol imported from Brazil.
Regarding the food vs. fuel debate, I included a link in my comment above to the study by Donald Mitchell of the World Bank (from July 2008). Here's another link to the same paper.
papers.ssrn.com/sol3/p...
What I like about the Mitchell analysis is that he constructs a counterfactual. That is to say, he asks how much the prices of food commodities (not the retail price of food) would have risen in the absence of biofuels, and then takes the residual increase as the result of biofuels and related speculation and panicky policy responses (like export restrictions in India, Syria and several other developing countries).