The Ethanol Industry: An Insider's Take 11 comments
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Biofuels: Panacea or Pandora's Box?
Last night, I attended a talk in the Rocky Mountain Institute's "Quest for Solutions" lecture series titled "Biofuels: Panacea or Pandora's Box?"
We were told that a video of the event will soon be up on RMI's website.. Most of us were probably there to hear Amory Lovins speak, and no doubt most of the news coverage of the event will focus on him. Amory is a visionary as well as an engaging speaker, and Tom Foust of the National Renewable Energy Lab helped shed light on the science of biofuels. But for stock market investors, the speaker with the most useful insights was without a doubt Mark Wong, CEO of the private corn based ethanol company, Renewable Agricultural Energyy [RAE].
Here are some of his insights helped refine my perspective on the ethanol industry:
Ethanol Supply
There is currently an oversupply of ethanol on the market. As evidence, Mr. Wong cited the fact that in recent months, ethanol blenders have been able to capture most of the federal government's tax credit, while in the past, most of this subsidy has gone to ethanol producers, a situation which attests to the increased bargaining power of blenders over producers which stems from the current overproduction. He expects the current oversupply to worsen over the next couple years. After the talk I asked him if he felt that his company could make a profit, given the oversupply he cites, and he felt it would be possible if oil says above $70 a barrel. I told him that I wouldn't be surprised to see $90 oil before the end of the year and he agreed.
If we can extrapolate RAE's economics to public ethanol companies, traders should think of ethanol stocks as leveraged bets on the oil price, similar to long term oil futures. They are likely to swing between profit and loss mostly due to oil price movements, but the percentage change in profit or loss will be large compared to the percentage change in the price of oil. Given that I think it is likely the price of oil will rise further (and possibly dramatically) this year, that would certainly be a reason for speculators to buy ethanol stocks, now that they have retreated from the massively inflated levels of one to two years ago.
Competitive Strategies
RAE is currently still in the process of adding ethanol plants. Mr. Wong detailed several factors the company considers when choosing plant locations. He mentioned the local supply of corn, access to rail transport, other uses of corn in the area, access to water, and local demand for distiller's grains, all unsurprising considerations. Interestingly, RAE has chosen to reduce the ethanol yield they get from a bushel of corn in order to provide a better feed (in the form of distiller's grains with a higher percentage of carbohydrate) for livestock. He didn't say it, but I infer that one factor in this decision is the current low profitability of ethanol.
More surprising to me was his emphasis on the yield variability of nearby corn crops. I would not have thought of this, and as such, I believe that it may be a useful too for gaining insight into the riskiness of public ethanol producers. A producer working with a highly variable supply of corn feedstock would be considerably riskier than a producer with an assured supply.
The Future
In the future, RAE plans to use anaerobic digestion on their lower value output streams to produce gas which can be used in the distillation process, which should increase the net energy benefits of their process. Mr. Wong also brought up the idea of using fractination to separate the corn into various components before they process it, which he expects will allow them to improve process efficiency. Prior to this, I had only considered fractionation as an early step in the process of making cellulosic ethanol. This interested me, because one of the pioneers in biomass fractionation technology is PureVision, a private, Fort Lupton based company where I know the management, and this is an existing (as opposed to the nascent cellulosic ethanol) market where they can apply their technology.
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I think $90 dollar oil is going to cause a world wide recession that will reduce the demand to the point that the world will not need as much oil (or ethanol). We may be entering the "plateau" (for oil prices) that the peak oilers are talking about.
Gale
Right now , it seems that a lot of people still don't really care that gasoline or alternatiives are so expensive. The automotive industry seems to have developed into two sectors, ...one market for those "gas guzzeling" pickups, and SUV's and another for commuters who just want to get to work and back cheap. Fortunately, at some point,..as dictated by economics,..people will find alternatives for those high priced fuels and big cars, pickups or SUV's !. At this point in time,.., people simply are not hurting enough to change ! Lee
That being said I don't think we will see $90 barrel anytime soon, at least it will not hold at that level should it briefly reach it. The reason is simple. The benefactors of the bonanza would be shooting themselves in the foot. The enormous profits acquired would not be worth as much as they would be at a lower per barrel figure. Since oil is an ingredient in so many products and directly effects agricultural production, prices of everything must eventually reflect oil's increases. The net result is, the profits earned aren't worth as much as at some lower level of the barrel price of oil. There is a very dampening (stagflation) effect to the economy which works as well since it will change behavior and not just in benefical conservation. The people living in rural areas that must drive long distances are acutely effected and they depend on more expensive forms of heating fuels also. Fuel consumption isn't elastic for many people because they don't really have any choice. There is a price level where it forces people to make very difficult life style changes. I think a stable $90/bbl. figure is beyond the point of balance of these factors. Vic
That being said I don't think we will see $90 barrel anytime soon, at least it will not hold at that level should it briefly reach it. The reason is simple. The benefactors of the bonanza would be shooting themselves in the foot. The enormous profits acquired would not be worth as much as they would be at a lower per barrel figure. Since oil is an ingredient in so many products and directly effects agricultural production, prices of everything must eventually reflect oil's increases. The net result is, the profits earned aren't worth as much as at some lower level of the barrel price of oil. There is a very dampening (stagflation) effect to the economy which works as well since it will change behavior and not just in benefical conservation. The people living in rural areas that must drive long distances are acutely effected and they depend on more expensive forms of heating fuels also. Fuel consumption isn't elastic for many people because they don't really have any choice. There is a price level where it forces people to make very difficult life style changes. I think a stable $90/bbl. figure is beyond the point of balance of these factors. Vic
Relative to consumer choices driving the price of oil, it isn't just the consumption of gasoline in the family sedan or SUV. Plastics and other materials require petroleum as well. Each bottle of water that you consume has a negative impact. In addition, all of the food that you consume, the clothes you wear and the medicines that you take have to be delivered to you via some means.
Can Americans stand to reduce gasoline consumption? Yes, but ethanol is not the answer neither is just focusing on automobiles.
On a side note, we had a potential ethanol producer come into our town - in the middle of the corn belt - looking to add more capacity. They indicated that it cost more to produce a gallon of ethanol than a gallon of gasoline and in fact suggested that the addition of ethanol in fuel blends - as mandated by our state government - was partially to blame for higher short-term (summer) gasoline prices. If this is the case, then the oversupply of ethanol and the higher prices are the result of government subsidies. So not only are we paying state and federal taxes on each gallon that are used to subsidize ethanol production but also serve to drive up the price per gallon.
There will be an "oversupply" of ethanol if you look at traditional ethanol markets, but there are a lot of smart folks finding non-traditional markets, like E85, which is growing rapidly in the midwest. We need to support our automakers in developing not only more flex fuel engines, but also the better fuel efficient engines they are already installing in many new models. An example is GM - they have the most fuel efficient fleet of all automakers currently and are making some great cars. Also Ford is replacing the 3.0L engine in the 500 (soon to be Taurus) with a 3.5L that has more HP and 5-9 more mpg than the old engine, due to dispacement on demand and other new technologies. Plus Ford recently was ranked higher than Toyota and Honda in overall new car quality, they are making some great vehicles.
There is a lot of very inaccurate information out there about the cost and energy balance of ethanol production. In the best plants it requires one sixth the fossil fuel input that is in a gallon of ethanol. It can be produced in an efficient plant at about $1 per gallon, and in a less efficient plant at around $1.30. There is a good margin for profitability if gas prices are above $2 / gallon. They will come down in late winter, rise in spring, etc. but ethanol production costs remain stable.
Oil companies / fuel blenders are already taking advantage of ethanol's higher octane by cutting lower octane fractions at the refinery and blending in ethanol as an octane enhancer and clean air oxygenate. So if gas costs $3 at the pump, and the price of ethanol is currently in the low $2 range, I would argue that ethanol is decreasing the cost at the pump. However I respect the quoted expert's opnion. There are some additional storage and blending costs involved.
New technology innovations are already in place that continue to use less energy, less water, and provide higher value feed products from a bushel of corn. 51% of all yellow No. 2 corn went to animal feed last year, so if one could make a case of "food vs fuel", you would have to look at the beef industry first, and with the high cost of transportation, gasoline fuels a close second. Using the high protein byproducts (DDGS and HPD distiller grains) can actually decrease the overall amount of feed cost per animal if a good ration program is implemented, and there are lots of livestock producers who are doing this. When you look at the bigger picture, feeding whole corn to animals is the most wasteful use of a bushel of corn - especially when you can make 2.8 gallons of fuel from the same bushel and still produce 16-20 lbs of high quality animal feed.
Plus, many communities are benefitting from the ethanol plants - there are new revenues begin generated, new local corn markets, good local jobs, and an ethanol plant has lower emmissions than a beverage alchohol or even soda pop plant. There are some exceptions, especially with older plants, but ethanol plants are generally regarded as good corporate citizens with a small environmental footprint. If we are using 10% ethanol in our fuel blends, that is 10% of 140bbg/yr we no longer need to import. That's a good thing.
PK
Tom McClintock’s Citizens for the California Republic, 06-18-2007
The public policy farce that the “Green Governor” unleashed with AB 32 (the so-called “greenhouse gas” law) continues. Using their newly granted power to slash carbon dioxide emissions, the California Air Resources Board (all Schwarzenegger appointees) has mandated that every gallon of gasoline sold in California must contain at least 10 percent ethanol by 2010.
First, a few basic facts. Californians use about 15 billion gallons of gasoline a year, meaning that the new ten percent CARB edict will require about 1.5 billion gallons of ethanol. Corn is the most common ethanol-producing crop in the country, yielding about 350 gallons of ethanol fuel per acre. That means converting about 4.3 million acres of farmland to ethanol production, just to meet the California requirement. But according to the USDA, California currently has only 11 million acres devoted to growing crops of all kinds. Get the picture?
The entire purpose of this exercise is to reduce the carbon dioxide emissions from California automobiles (although Californians already have the 8th lowest per capita gasoline consumption in the country). And that’s where the public policy discussion becomes farce.
As more acres are brought into agricultural production, the demand for nitrogen fertilizer will grow accordingly, which is itself produced through the use of fossil fuels. And the most likely source of new agricultural land will be converting rain forests to agriculture, although deforestation is already the second biggest man-made contributor of carbon dioxide emissions, ranking just behind internal combustion. And here’s the clincher: ethanol is produced through fermentation, by which glucose is broken down into equal parts of ethanol and – you guessed it – carbon dioxide.
Obviously, this edict will hit gasoline consumers hard: ethanol is less efficient than gasoline and it’s more expensive – meaning you’ll have to buy more gallons at the pump and pay more per gallon.
The bigger impact, though, will be at the grocery store. By radically and artificially increasing the demand for ethanol, the cost pressure on all agricultural products (including meat and dairy products that rely on grain feed) will be devastating. Earlier this year, spiraling corn prices forced up by artificially increased demand for ethanol produced riots throughout Mexico.
The CARB regulations will undoubtedly hit Californians hard – but they will hit starving third world populations even harder. Basic foodstuffs are a small portion of the family incomes in affluent nations, but they consume more than half of family earnings in third world countries.
So when the global warming alarmists predict worldwide starvation, they’re right. They’re creating it.
www.carepublic.com/blo...;blog_id=136&c...
"So when the global warming alarmists predict worldwide starvation, they’re right. They’re creating it. "
As a former grains specialist I couldn't agree with you less. I agree that there will always be poor people unable to feed themselves - many parts of Africa were starving 30 years ago and are still starving - but the world has a whole has improved its diet, and the consumption of ethanol is just a short term problem with the system. In the 1970's the world went through a similar cycle. The USSR blew into the grain markets in the early 1970's ("the great grain robbery"), there was a corn blight and a few droughts, culminating in an explosion of prices. There were numerous alarmists around 1980 writing about how the world was going to run out of food. In the late 1980's and early 1990's when corn prices halved (and much cheaper in real terms), they weren't saying a word. They were wrong then and they will be wrong now.
The one thing most people forget is that crop production and animal feeding is not static. Crop yields for corn especially have almost doubled in the last 30 years as genetic engineering, increased fertilizer and other practices have been put to use. And the rise will continue.
My problem with corn based ethanol is that it isn't cost effective. The American public is paying through the nose via taxes, inferior energy creation and higher food prices. But never doubt the worlds ability to feed itself.
Oh, and $3/gallon is cheap. Very cheap. I expect that one day you'll realise that too, but that day is still probably years away.
Amory Lovins was once quoted as saying that using electricity for heat was like using a chain saw to cut butter. I like it, conservation has the highest potential for energy recovery. Wise efficent use of resources often depends on the metrics recovered from the diversity inherant in resources under wise utilization. "Wise Use" sometimes requires a diverse perspective. The Rocky Mountain Institute has always been a great resource for creative solutions, and discourse and I appreciate the info from Tow Konrad and will look forward to other comments about alternative energy. Tom , did RMI every do a program on biodiesel? Is it video recorded as well?
I can't believe you wrote that polyanna junk about ethanol and GM. The guys at GM have been fighting efficiency standards tooth and nail. They spend millions on lobbying congress to make sure that they don't change the law to require higher efficiency. GM's cars are junk, they always have been and they always will be. Years ago the CEO at GM said "we don't make cars, we make money". In 1945 GM bought up all the trolly car companies in the US and put them out of business. They continue to build and advertise SUV's and Hummers, the "most dangerous cars in the world". I predict that GM is going to chapter 11 and I will celebrate with some champagne.
Ethonal is another stupid joke. It takes 7 gal. of gasoline to make 10 gal. of ethonal but the ethonal dosen't have as much energy as the gasoline that was used to produce it. Do you really think the oil lobby would allow any serious alternative to crude oil. You are living in a dream world. You should read Kunstlers' book "The Long Emergency". Very soon the price of crude is going to sky rocket due to peak oil. When gasoline is $10 a gal. you can plant flowers in your impala and dream about the good old days.
Gale