I made several roadtrips from the Midwest to the East Coast this summer. During my first trip down I-70E back in May, gas stations were dotted with the usual signs for E10 and E85. I was mildly surprised to see these replaced by signs boasting a lack of ethanol blends when I got to Pennsylvania. I had known that ethanol wasn't popular on the coasts but hadn't realized just how unpopular it was. The real surprise, however, came during a detour through Wisconsin on the way back in August, when I saw multiple signs advertising the same lack of ethanol blends at gas stations. Seeing those signs made me realize that the use of corn as biofuel feedstock has become toxic even in the Midwest.
Back in July, I published an article suggesting that BioFuel Energy (BIOF) investors were overreacting to news of an agreement with Gevo (GEVO) to explore conversion of the former's corn ethanol facilities to the latter's corn biobutanol pathway due to the small size of the isobutanol market. One reader (accurately) pointed out that this market size is substantially larger if biobutanol's ability to be used at a greater blend ratio with gasoline than ethanol is accounted for. This comment came to mind after seeing all of those "No ethanol" signs at gas stations across the U.S. Now, it's possible that consumers have just now figured out that ethanol has an inferior energy content relative to gasoline and gas stations are pulling it in response (my own experience suggests that this occurred several years ago). Alternatively, the severe drought and subsequent spike in the price of corn could be giving new life to the old "food versus fuel" debate, in which case history is repeating itself and consumers are once again responding to specious media reports linking U.S. corn ethanol production to hunger in the developing world, much as they did in 2007/08. In which case, it must be asked how corn biobutanol is any different from corn ethanol in this regard, and whether it is vulnerable to the same publicity disaster that has engulfed the corn ethanol industry over the last several years.
This article compares corn ethanol production with Gevo's corn biobutanol pathway through the lens of the "food versus fuel" debate. (Gevo's legal nemesis Butamax is another major biobutanol company but, as a privately-held entity, is outside the scope of this article.) This article makes the important but unproven assumption that the corn biobutanol pathway expands as rapidly as (or more rapidly than) current pathway employers anticipate, which in turn is largely contingent on the accuracy of their current pathway economic estimates.
Comparing ethanol and biobutanol
Corn biobutanol is something of an odd bird in the ranks of biofuels. It is an alcohol-based biofuel but, unlike ethanol, doesn't face as many infrastructure limitations and can be blended with gasoline at greater ratios than ethanol can be. Unlike drop-in biofuels, however, it has a lower energy content than gasoline (albeit one that is greater than ethanol) and still faces some blending restrictions. The revised Renewable Fuel Standard (RFS2), which defines biofuel categories according to lifecycle greenhouse gas (GHG) emission reductions relative to gasoline, explicitly excludes [pdf] corn ethanol from qualifying for the EPA's definition of an "advanced biofuel" (a consequence of the 2007/08 "food versus fuel" and Indirect Land-Use Change (ILUC) controversies). Corn biobutanol is not explicitly barred, although at present the EPA defines it as a mere "renewable fuel" based on its lifecycle GHG emissions. And despite (or perhaps because) of its resistance to easy categorization, it is currently expected to be the single largest 2nd-generation biofuel pathway in the world (by capacity) by 2017.
Corn biobutanol's share of the global advanced biofuels market, 2011-2017. Source: Biofuels Digest.
Corn biobutanol's existence in the gray area between first-generation corn ethanol and advanced drop-in biofuels gives it a number of technical advantages over each. One of ethanol's (either corn- or cellulose-based) biggest hurdles to continued growth in the U.S. is the so-called "blend wall", which limits the blending of ethanol with gasoline to 10-15 vol%. Biobutanol, on the other hand, can employ blends of up to 16-24 vol%. Unlike advanced biofuel pathways (particularly those derived from lignocellulosic biomass), however, corn biobutanol can utilize an established and tested feedstock supply chain. Furthermore, whereas advanced biofuel facilities generally must be constructed from scratch and at very high cost (due to the pathway's untested nature), biobutanol facilities are being converted from existing corn ethanol facilities, thereby reducing the pathway's capital costs. Corn biobutanol capacity is currently expected to grow so rapidly due in large part to these reduced capital costs.
Many of biobutanol's advantages also represent its greatest vulnerabilities, however. To understand why, it's worth taking a brief look back at the experiences of the corn ethanol industry.
Corn ethanol and "food versus fuel"
To paraphrase that hyper-cliche quote from last decade's Spiderman movie, "With a rapid increase in biofuel production comes great controversy." Corn ethanol will go down as one of history's great commercialization success stories; the pathway's rapid rate of growth, particularly during the 21st century, is something to marvel at. Indeed, when the kind of exponential revenue growth experienced by the corn ethanol industry occurs at a tech company, that company generally has a name like Apple (AAPL):
The only aspect of corn ethanol's experience in the U.S. more fascinating than its production growth has been its transformation from national hero to global villain in record time. Less than a decade ago, corn ethanol was presented as the key to America's energy, environmental, and national security problems: an eco-friendly way to diversify U.S. transportation fuel consumption while decreasing the flow of petrodollars to Saudi Arabia and other Middle Eastern countries ("Replacing Middle Eastern oil with Midwestern biofuel" was one common slogan I recall after 9/11). Now corn ethanol is accused of causing disasters ranging from mass famine to large-scale rainforest destruction. What happened? Perhaps the corn ethanol industry grew so used to being portrayed as a national savior (and rewarded as such by the federal and state governments) that it was caught unawares when the negative headlines began. Indeed, from a publicity standpoint, it has never really recovered from the 2007/08 period; the same old tropes about U.S. corn ethanol production causing starvation in Africa and rainforest destruction in Brazil have been trotted out as corn prices have spiked this summer, even as the organizations behind original numbers on "food versus fuel" and ILUC have revised them drastically downward (while corn ethanol production has undoubtedly caused corn prices to rise, rigorous documentation of negative humanitarian and environmental consequences resulting from this trend has proven to be something of a rarity).
Corn biobutanol and "food versus food"
Many of biobutanol's strengths as a transportation fuel could become public relations weaknesses in the relatively near future. One of the ironies of the food versus fuel debate with regard to corn ethanol is that the U.S. transportation fuel infrastructure has absorbed about as much ethanol as it can handle without a major overhaul. U.S. gasoline consumption is projected to be in the early stages of a long-term decline, so the amount of corn used as ethanol feedstock can be expected to also decline so long as automakers and consumers continue to oppose the implementation of E15.
Corn biobutanol changes this equation because of its ability to be blended with gasoline at a higher ratio than ethanol. The Biofuels Digest estimates that if corn biobutanol were to completely replace corn ethanol, twice as much corn could be processed before hitting biobutanol's 16 vol% "blend wall." (While a converted corn ethanol facility will produce an equal amount of total biofuel by energy content, this results in a lower volume per bushel of feedstock due to biobutanol's greater energy content per gallon.) Widespread consumption of corn biobutanol could postpone the blend wall and thereby allow for more corn-based biofuel to be substituted for gasoline, but at the cost of a doubling in the amount of corn devoted to biofuel production.
I've already mentioned that recent data suggests that fears of mass famine resulting from corn ethanol production in 2007/08 were greatly exaggerated, which should cause empiricists to question media attempts to revive this debate. That said, the inability of the media and public to see these controversies through to their anticlimactic conclusions is exactly why Gevo needs to involve itself in the food versus fuel debate now, rather than after its expected expansion plans have commenced in earnest. By starting the discussion now, Gevo can frame the issue of its own accord by presenting its technology with its own (hopefully accurate) data on the caloric value of its animal feed co-products and fuel efficiency per pound of corn starch. Otherwise it risks losing the publicity battle, much as the corn ethanol industry has, with all of the inherent political and market consequences.
Finally, the food versus fuel debate is permanently linked to the ILUC debate (the former argues that higher corn prices resulting from corn ethanol production cause famine; the latter argues that they cause rainforest destruction) and Gevo must consider this as well. In addition to the negative publicity that results from being linked to rainforest destruction, the RFS2 accounts for GHG emissions resulting from ILUC when determining whether a biofuel qualifies for a particular RIN category. Corn ethanol was initially excluded by the EPA from the RFS2 due to its calculated ILUC emissions before sqeaking in the following year under a revised lifecycle analysis. It is feasible that renewed attention resulting from sustained high corn prices could cause the EPA to again revise the ILUC emission calculations and present a scenario in which both corn ethanol and biobutanol fall below the threshold and thereby disqualified from participating in the RFS2.
What about cellulosic biobutanol?
This analysis covers corn biobutanol production, but it should be mentioned that, as with ethanol, lignocellulosic biomass is being examined as a potential biobutanol feedstock. The fundamental principles of cellulosic ethanol and cellulosic biobutanol are the same: convert cellulose and hemicellulose into fermentable sugars. The difficulty is in completing this task cheaply and effectively; this has been such a challenge that, at present, there are no commercial-scale cellulosic alcohol projects in operation (although several are slated to finish construction next year). While technically feasible, the economics of cellulosic biobutanol will be far less attractive than those of corn biobutanol, at least initially; feedstock supply chains for lignocellulose are virtually non-existent at present, and the cellulosic biobutanol facilities will be new rather than based on existing ethanol facilities, resulting in much higher capital costs. While cellulosic biobutanol will not encounter the food versus fuel debate, it is not expected to have anywhere close to the level of impact as corn biobutanol in the near future.
Gevo investors should be aware of the public relations hurdles that arise from using corn as a major biofuel feedstock. The response to the 2007/08 Global Food Panic demonstrates how public pressure can in turn prompt the implementation of new political and regulatory hurdles even when robust empirical evidence of a causal effect is lacking. While U.S. biobutanol production is currently projected by Biofuels Digest to reach only 1,500 million gallons per year by 2017 on an ethanol-equivalent basis, corn ethanol's experience suggests that this growth could be substantially greater if the economics prove attractive enough. Such a scenario would likely spur a significant backlash from humanitarian and environmental groups so long as biobutanol's commercialization efforts depend on the conversion of corn ethanol facilities rather than the construction of new lignocellulosic biobutanol facilities.
Commodity investors should also be aware of corn biobutanol's potential ability to affect corn prices. A recent analysis estimates that current corn prices would average $2.67/bu without corn ethanol production. By substantially increasing the U.S. transportation fuel infrastructure's capacity for corn-based fuels, a rapid increase in commercial-scale corn biobutanol production will have a pronounced effect on corn prices, in which case buying shares of the Teucrium Corn ETF (CORN) could be a sensible investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.