VeraSun Energy and the Ethanol Debate 28 comments
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I am writing this in response some of the debates going on around ethanol at the moment, and to provide some research driven facts regarding my position in the area and particularly in VeraSun (VSE).
The real issue is energy security. The more ethanol from US corn in your tanks, the less dependent the US is on foreign imports. This is a no-brainer - oil will go up as the middle classes in India and China grows (see India/China automotive growth targets for next 5 years here). In addition, it keeps the USD in the US; this is why Brazilian ethanol is not a good solution. Every percent of ethanol from US produced corn in the tank of a US driver means that money is being retained in the US economy and that the country is less reliant on foreign imports. Don’t be surprised if you find E/20 at a station near you in the few years
First, some statistics regarding US corn in 2007:
- 19% of corn was used to produce ethanol;
- 4.1% was used to make high fructose corn syrup;
- Over 50% was used as livestock feed;
- About 10% was exported (based on 19.1 billion BU in 2007 and around 1.9 exported);
- Yield in 2007 was 151 BU/acre; Monsanto (MON) working on strains which will be available in the next 2/3 years, which will push this north of 200 BU/acre.
Take note that corn is not the only food stuff which has increased in cost. Everything from every corner of the world has, from orange juice to rice. This is being driven by energy costs, increased demand and a very poor product make up (would it be better to make less meat and use more corn directly to feed people? Are we eating too much meat?). The facts are being confused deliberately, in my view; it is not as simple as saying "we now make ethanol so corn is more expensive." Rather, we should be asking ourselves whether we are using our resources in the most efficient way. We will experience a redistribution of food based resources going forward to accommodate our new industries, like ethanol, and change being driven by ever higher energy prices. This will not affect the nutritive value available within the food chain, just the make up of the food within it.
Remember that the net cost contribution of corn in a finished product is not as great as the packaging and transport costs. These are the big drivers which are contributing to increased food prices.
When taking all this into account, the US should be able to replace 10% of its gasoline with ethanol in the next 5-10 years. This may sound far fetched, and I can hear you tapping your keyboards with some vitriolic replies, but before you do, consider this. All ethanol projections I have read assume a replacement percentage based on the current level of gasoline usage. This will not be the case. Many factors will contribute to the final make up of US gasoline usage; for example, more efficient cars, energy usage, logistics, finished product packaging, increased BU/acre corn yields, etc. etc. To consider one fact alone when presenting a view misses the fact that many vectors are at work to reduce gasoline usage while increasing ethanol addition.
Other Technologies
Most research companies who are looking into cellulosic are developing either specific enzyme mixes, chemical processes, a combination of both or micro organism based maceration of the cellulose. Note that these companies may develop the technology, but they will also license it. What is important is the infrastructure to distill the mash and then distribute the ethanol. VeraSun is in a great position to benefit from this because it has scale and the infrastructure. In addition, VSE is part of a JV which is working on cellulosic using micro organisms in the medium to long term.
In terms of biodiesel, VSE will have plants online by 2009 and will help reduce the impact of corn prices, giving VSE two revenue streams from one raw material and putting VSE in a stronger position than some of its competitors.
Summary
All food prices have risen; this is not due to plants being used for ethanol, but to rising energy costs. Corn is no exception.
Currently there is sufficient corn to provide food and enough ethanol to replace 5% of US gasoline usage (current value 1.7%). This money is kept in the USA and makes the country more independent.
This, coupled with more efficient cars, transport, reduced packaging and more efficient energy usage, will add up to a potential 10% ethanol replacement in the not-too-distant future.
Ethanol from corn is not the answer alone; it is a first step. Ethanol is not that environmentally friendly, but more so than oil, and that isn’t the point anyway. Energy security is the key issue. Oil prices are never going to come back down to 40 or 50 USD per barrel; they will be driven up even further because demand is increasing, will outstrip production and will continue to do so. In the end, oil production will decrease until it is gone. Some people say this started to happen in 2006, some say it will happen in 2012. I don’t know when, but it will definitely happen.
Look at the company, NOT the corn from ethanol debate, and see if you think VSE is best positioned for the future. Be aware that news articles have a political dimension and will mix facts and figures to support their story and misinform investors and the general public
Sources:
- Agobservatory
- USDA
- USDA
- Morgan Stanley Auto and Auto Parts Global Insights
- Crude oil price increases since 2003 (graph 1994 – 2008 should be the trend setter)
- Petroleum Life Cycle of 42 countries
Disclosure: It is in my interest to pump this company as I own stock, however facts are facts. I am a private individual and not a day trader I am based in Europe and am English.
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This article has 28 comments:
The same Americans that demand our farmers are now responsible for subsiziding taco prices around the globe (where is Mexico - they have plenty of oil - let see them trade oil for tacos) then demand that all our oil drilling and refineries are located outside our borders -people need to out this group and have them explain how this NIMBY argument is going to hold up with current global demand. What green groups leave out is Americans are 25% of oil consumption (while this is high) we are not going to tell the other 75 % how much they can consume. All current energy sources have some waste component and I have yet to see the detractors fully support any viable energy development which should leave people suspicious.
ethanol might contribute 2-4% to U.S. fuel consumption at best. Want less oil imports? Start saving energy and fuel! Build less fuel-consuming cars. repair the eletricity network where huge amounts of generated electricity get lost every year. You don't need 3 TV sets, five computers, three cars thre fridges and a full-time running air condition. use biomass. make industry more energy efficient
learn from "old" europe.
and get your balance of trade in order. the you will be less dependend on oil imports.
In our community there is Gen-X Energies (www. genxenergies.com) producing biofuels from chicken fat and is now totally "sustainable", because they are able to get methanol from an IC Chip plant as a byproduct that otherwise would have been thrown out and over at PESWiki (www.peswiki.com), we can see a page on Green Power, that is working on a pilot plant to produce "nano-diesel", which is really a dino-juice extractor from pelletized waste that can produce real across-the-board petroleum - not just diesel.
And then there are the continuous process Algae-to-Ethanol producers in the Southwest, such as Valcent (www.valcent.net/).
More can be found at peswiki.com/index.php/...
and
peswiki.com/index.php/...
I'd say, lets first stop eating so much meat and then see how ehtanol affects cornprices.
PRITCHT1. it (as always) depends on where you get your data from. It is now generally accepted that eth. use 0.74 BTU of fossil fuel for every unit delivered while gasoline has a value of 1.23 for every unit. This makes logical sense as you are creating and utilising (producing and shipping) in the same currency (gasoline).
PETERVANKAN. I agree with you, my context was VSE for this article though.
YOU DID NOT MENTION AFTER WE GET ETHANOL FROM CORN, WHAT
IS LEFT IS "WET CAKE." AN EXCELLENT LIVESTOCK FEED. YOU SHOULD
REPORT HOW MANY TONS ARE MADE.
1.5 GALLONS OF OIL, TO MAKE 1 GALLON OF ETHANOL......NOT TRUE.
BIG OIL HAS BRAINWASHED THE AMERICAN PEOPLE INTO BELIEVING THIS.
BRAZILIAN ETHANOL IS NOT THE SOLUTION.....NOT TRUE.
WE NEED ALL THE ETHANOL WE CAN GET.
I WOULD RATHER GIVE OUR MONEY TO BRAZIL, THEN TO YOU KNOW WHO.
WE CAN PAY THE 54 CENTS A GALLON INPORT DUTY, AND IT IS STILL
LESS EXPENSIVE THEN CORN ETHANOL..
FLORIDA DOES NOT HAVE ONE GAS STATION THAT SELLS ETHANOL, THEY CANNOT AFFORD THE TRANSPORTION COST TO GET IT HERE.
BUT WE DO HAVE A PORT IN MIAMI AND FT. LAUDERDALE (MY HOME)
THANK YOU
Contrary to what critics say, Brazilian ethanol only takes up 1% of its farmland and is grown far away from rain forests so it does not cause significant deforestation. So corn ethanol should be abandoned immediately, tariffs should be dropped, until a viable alternative from cellulosic sources are commercialized in scale
The critical national requirement is to replace imported petroleum with a domestic product. It takes only about 1/8 gallon of petroleum product to produce one gallon of ethanol from corn. This is all in transportation and running farm equipment. As more biofuels are used this can be improved even further. The statement that it takes 1.5 gallons of oil to make a gallon of ethanol is completely erroneous.
The total fossil fuel use includes natural gas and the coal equivalent in electricity as well as the petroleum used. That is the source for the still favorable .74 Btu/unit for ethanol and 1.23 Btu/unit for gasoline. As the author points out, however this is not nearly as important as the large amount of petroleum product replaced.
All this is very straightforward from the technical perspective but apparently very confusing to the main steam media.
Brazil is also self sufficient in crude oil and its derivatives and ethanol represents only a small proportion of its overall energy needs.
Conservation and efficiency are important but will not eliminate the need for energy. The U.S. and the rest of the world consume huge quantities of energy and will continue to do so long after all of us are gone.
There currently is no other viable alternative vehicle fuel. It is that simple. It will be years if not decades before cellulosic fuel can be produced in economic quantities. And, as stated, the ethanol infrastructure will be needed to make that a reality. The better companies like VSE get at making ethanol, the better they will be able to transition to other feed materials.
E20 (20% ethanol, 80% gas) has been shown by several university studies to run well in modern cars and actually improves fuel mileage for many models. If this country could get to an E20 usage, bad guys like Hugo Chavez would be busted back to Sargeant.
Finally, VSE is an excellent, well run company. It will stay profitable and will be a home run to those buying the stock at these prices. I am!
Good article and not biased as so many are. I would rather pay $6.00 a gallon for an alternative fuel and know the money is staying in the USA than $3.00 a gallon to countries that are trying to destroy us.
Corn based ethanol is a disaster. It's the surest way to prevent ethanol from becoming a viable source of energy.
Let's sum this up. Corn is a beast to soil. It needs specific conditions to grow. But let's disregard that. Open up Google Earth. Draw a big box around the midwest and assume that every square mile of that land were to be used for corn for ethanol production. Next, multiply the yield of corn for ethanol, by the acreage, and also factor in that corn has a growing season. Now, multiply the ethanol produced by the BTU rating, and compare that to the DAILY consumption of gasoline BTUs in the US.
SURPRISE! You've just been snookered by the the corn lobby! And remember, that's assuming that a full 1/3 of the US is arable land and is used for nothing but corn based ethanol. And while you're at it, you've also caused an agricultural disaster in the process.
But wait! There's more! You've also starved a good portion of the population since now a box of cornflakes costs $50 and just about every food product in the US contains some corn by-product.
When world-wide food demand is going up the last thing you want to do is CANNIBALIZE YOUR FOOD FOR ENERGY. Even sugar shouldn't be used for ethanol production despite it's much better yield.
The ideal candidate for ethanol production would be something that can grow just about anywhere, requires little supplementation or care, is easily harvestable, has a high yield, and grows fairly quickly and throughout most of the year. Corn is none of these.
However, switchgrass fits the bill rather nicely, along with several other weeds. But you don't here much about them because there isn't a multi-billion dollar switchgrass lobby spewing half-truths and shoddy science to congress.
If you want sustainable energy from biofuels, corn is not the way. It's not even a step in the right direction. All corn will do is jack the price of both fuel and food, which will kill ethanol before it gets out of the gate. Cellulosic ethanol from swicthgrass, biodeisel from algae, and even butanol from hemp are all much better and far more sustainable alternatives.
~X~
Granted Diesel is a big part of Brazil's oil consumption, and its soy biodiesel program is every bit a mistake that the US Corn Ethanol is. The push to use grain biofuels overall is a gigantic mistake that the entire world is paying for.
The midwestern United States has been growing corn for 150 years. They do it with increased efficiency and yields every year. Acreage in corn now is less than in the early 20th century. 80 million acres of corn will still be grown even if another feedstock becomes feasible for ethanol. Switchgrass, algae and hemp are not viable crops for American farmers. It would cost them $billions in equipment to make a switch.
BTW: My grandfather had a license to grow hemp in WWII (before and since it is very illegal). My mother still has the license.
But corn is the worst candidate for ethanol production - it takes high-quality cropland, it takes large amounts of fertilizers and pesticides (both made from fossil fuels), often has large irrigation needs - it is not environmentally friendly. Import sugarcane ethanol, nothing wrong with sharing the wealth with S. Am. neighbors (or Florida farmers).
The ethanol plants themselves use large amounts of water that is not recovered and many counties are starting to refuse permits for building ethanol plants for fear of damage to their aquifers. All this for a very arguable increase in net energy?
It is okay to justify some corn ethanol as a substitute for MTBE, but not for energy independence. For that we need real answers - conservation, usable public transportation & bike lanes, and of course, cellulosic ethanol. Biodiesel, butanol, electric vehicles - we'll need some of all these answers, and hopefully in the marketplace in a few years. As pointed out, peak oil production is happening now, or close enough to now that the real date is academic. Oil production will continue indefinitely, but at ever increasing costs.
Next: corn production: In 1980 the average yield (Iowa figures) was 100 bushels per acre. Now it is about 180 bushels and some are predicting 300 bushels per acre by 2030. These are averages. Many farmers with non irrigated fields are already approaching 300 bushels and some irrigated farms are producing close to 400 bushels.
Remember, America's corn farmers are the best farmers in the world and they are closely tied to ethanol production. I would not bet against them.