CBC: Demand for plant-based ethanol driving food prices up.

A quick link-and-run. Saw this Canadian Broadcasting Corp. article today. Rising corn prices hit grocery shoppers' pocketbooks:

The rising demand for corn as a source of ethanol-blended fuel is largely to blame for increasing food costs around the world, and Canada is not immune, say industry experts.

Food prices rose 10 per cent in 2006, "driven mainly by surging prices of corn, wheat and soybean oil in the second part of the year," the International Monetary Fund said in a report.
...
A study released in May from Iowa State University shows increased prices for ethanol have already led to bigger grocery bills for the average American — an increase of $47 US compared to July 2006.

In the United States, as elsewhere, ethanol is made from corn. But corn is also used to feed chickens, hogs and cattle, which means a rise in prices for meat, eggs and dairy.

In Mexico last year, corn tortillas, a crucial source of calories for 50 million poor people, doubled in price. The increase forced the government to introduce price controls.

Renewable is Not a Synonym for Sustainable

Keep reciting it to yourself... Renewable is not a synonym for sustainable

One of my dad's maxims was "never buy or sell hay." Buying hay might bring in the seeds of weeds we had spent years trying to control; selling hay removed tons of nutrients without replacing it with commensurate manure.Thousands of years of unharvested prairie had built the rich silt loam. The first 75 years of diversified, value-added farming saw mainly livestock and livestock products leave a nearly-level farm, using no commercial fertilizer, yet with ever-increasing yields.

We began raising soybeans during World War II, rotating and covering about one-fifth of the acreage each year. By 1954, soil tests showed a need for phosphate fertilizer. (The southwest Iowa soils were high in potassium and we inoculated the beans for nitrogen fixation.)

A farmer may be able to sell some switchgrass grown from the nutrients in the soil, but over time will have to replace a lot of nitrogen, phosphorus and potassium and eventually some micro-nutrients.

Maintenance rates would cost around $30, at 2007 prices, per ton of dried switchgrass sold. For biofuels to be sustainable, fertilizer sources would have to be limitless and economical.

Some in the biofuels industry say farmers will need a $50-per-ton subsidy to make switchgrass work for them.

Letter to the Editor of the Des Moines Register from Dale Shires of Iowa City.

The Ethanol Bubble -- prices to $4.50 per bushel in February, I think we can begin to call it a Bubble -- is on the rise. Even at the $3.70 or so price of last week, farmers willl sorely tempted to plant every last acre in corn. Never mind the fences or the marginal land, or the "green strips" or the CRP fields.

America and America's farmers seem perfectly willing to sacrifice the last few inches of world-class topsoil in order to extend the Age of Easy Motoring just a couple more years.

Also, check out The Exchange, (MP3 file) from Iowa Public Radio last week as Dennis Keeney, Senior Fellow at Institute for Agriculture and Trade Policy, cautions against irrational exuberance in renewables.

We need a sustainable, future-proof energy policy. Renewables and ethanol (from whatever source) are just a small part of the eventual solution.

How's that $3.00 a gallon gas treating you?

Drive less.

Biodiesel Economics and Clinton Plant

This week the City of Camanche and Clinton County met with officials from Hawkeye Bio Energy to consider a tax increment financing plan to assist in the building of a soybean biodiesel plant. The Hawkeye Bio Diesel plant has been in the works for more than two years now and construction is underway on the plant business and administrative offices on the plant site. Estimated cost of construction is $90m. According the an article in the Clinton Herald,, Hawkeye Bio Energy is requesting $5m in TIF financing for the project.

I have written extensively on this blog about the macroeconomics of ethanol production. But we have paid little attention to soy (and vegetable oil-based)
diesel. A September, 2006 article by the Minneapolis Federal Reserve Bank outlines some of the economic factors. One of the most attractive things about biodiesel is that it can be made from post-consumer waste. A major input in smaller biodiesel plants is recycled grease and frying oil.

Most important for producers of biodiesel, the 2005 Energy Act provides a $1.00 per gallon subsidy for biodiesel produced from virgin oilseed. The Act only provides a 50-cent subsidy for diesel made from recycled product, an effective $ .50 subsidy for oilseed farmers. Although the tax-credit portion for seed producers is scheduled to sunset in 2008 there will certainly be efforts to extend it by farm state members of Congress. In addition to the direct subsidies to biodiesel producers and indirect subsidies to seed stock farmers, one needs to also factor in the additional multimillion dollar annual direct federal subsidies to soy and canola farmers.

Biodiesel or blended diesel (regular petroleum diesel with biodiesel added) is technically and chemically an attractive substitute for petroleum-based diesel. One factor is because of recent regulations that require diesel fuel to include substantially less sulfur, a major ingredient in smog and acid rain. Sulfur is however a key ingredient in diesel fuel that allows it to lubricate engines. So reducing the sulfur content in petroleum-based fuel requires additives. However, adding just 1 or 2 percent biodiesel will restore the lubricity of the fuel.

According to the Minneapolis Fed, biodiesel from seed stock will remain price competitive (with or without the Energy Act subsidies) as long as crude oil prices remain in the $50/barrel range. Regardless of subsidies however, the Fed goes on to state:

The National Biodiesel Board estimates that if all the current and proposed projects in the country get built, they would be capable of producing 1 billion gallons of the fuel a year. A federal biodiesel mandate (some members of Congress have proposed requiring U.S. vehicles to burn 2 billion gallons annually by 2015) would certainly stimulate demand for that much biodiesel.

But Tiffany, at the University of Minnesota, believes that a lower production ceiling is more realistic. “If we just had a low-blend strategy for the whole country, maybe we could use about 500 million gallons of biodiesel [annually],” he said. Pushing production beyond that level risks driving up prices for soy and canola, thereby raising production costs and making biodiesel derived from fresh oil less competitive, even if the federal tax credit is renewed two years from now.

It is worth noting here that the increased demand for corn for ethanol production is the driving factor behind the recent run up in corn prices and also in farm land.

If demand for biodiesel takes off, producers are likely to turn to yellow grease [post-consumer and industrial waste] as their preferred feedstock. Most recycled grease goes unused, and prices are lower and more stable. So grease renderers, not farmers, are in a better position to capitalize on any long-term growth in biodiesel usage.

The same economic constraints will likely prevent biodiesel from weaning the country of its dependence on imported oil. Even if nationwide biodiesel production rises to 1 billion gallons annually, that represents only 2 percent of diesel consumption in 2005.

Biodiesel's limited horizons raise the question of whether the fuel is worth subsidizing. Compared with other energy and agricultural subsidies, the cost of the federal biodiesel tax credit is a drop in the bucket, but because it's indexed to consumption, the subsidy will grow with biodiesel output.

All of this is not to say that biodiesel doesn't have a bright future in the district. Fundamentally, biodiesel is an effective, environmentally beneficial motor fuel that many consumers want to use. It provides farmers buffeted by low commodity prices with an additional market for their crops. Equally important, it gives those with an entrepreneurial bent the opportunity to add value to their produce, as in the case of the Minnesota Soybean Processors cooperative in Brewster.

Even if biodiesel won't eventually provide a market for all the soy and canola farmers can grow, or displace regular diesel from the nation's gas tanks, it's likely to continue to grow, with or without subsidies.

Bottom line here is that biodiesel, like ethanol, is no panacea to petroleum dependency. It's role should be understood, like ethanol's, to be a regional one and also one of many alternative fuels that will in combination help lower but not eliminate dependence on petroleum. Only drastically reduced demand for petroleum fuel can truly help accomplish that.

Biodiesel shows a slightly more sustainable market case than ethanol with or without subisied It is attractive for the following reasons; it can be made from post-consumer waste, diesel fuel can give a mileage/performance ratio that is better than gasoline powered vehicles making it attractive as an auto fuel substitute.

Being a bit lower-risk than an ethanol plant the Hawkeye Bio Diesel facility should be in a better position to raise the capital for construction. This then begs the question of whether TIF financing to the tune of 18% of construction costs, in order to produce 50 jobs is a good deal for the taxpayers of the City of Camanche and Clinton County. This in light of the already overextended TIF financing in this region that I have documented here. I’ll take that up in a subsequent post.

Green Business 101

Very busy this week, with a couple of 12 hour days thrown in. Did discover a neat Special Business Section in the NYT though.

The Business of Green.

Ethanol Market Fundamentals

Based on research and footnotes I encountered in doing the last post, I said it was worthwhile to revisit ethanol fundamentals. From the website of Cumberland Advisors, from whom much of the information in the previous post was gleaned, comes additional interesting information on the fundamental economics of the ethanol industry. Little of it will be comforting to ethanol's supporters or investors.

The economics of ethanol from corn can be divided into two categories: 1) the basic math and physics involved in growing corn and brewing it into ethanol as a replacement for part of our oil budget, and 2) the market economics of producing ethanol from corn (as opposed to say, sugar beets) and competitiveness of ethanol as an additive per se.

For background on the first factor, see this summer's posts on Bottom Line Economics On Ethanol and Gas and What Part of $3.50 a Gallon Don't You Understand?.

As for the markets for corn-based ethanol, Cumberland Advisors comments in Ethanol, Gas Prices and Your Pocketbook

Some US politicians deserve to walk not ride. Their ethanol protectionist policies are causing energy prices to be higher than they might otherwise be. Those same policies will harm the lower income folks in the US because they are causing the price of food to rise. Lastly, this policy may contribute to the hunger of millions of folks around the world.

In the US, the combination of $1.05 ethanol protectionism is still not enough to render corn-based ethanol competitive. See the Simons piece for the math. What happens when protectionism fails? Simply put, the ones who want the special treatment seek even more of it. That is probably coming in the new Congress.

We expect a move to raise this corn-based ethanol subsidy after the new Congress convenes. The corn crowd may also seek greater mandate of corn-based ethanol usage. The Bush Administration tried to repeal the tariff on sugar-based ethanol. On May 9, 2006, five corn state Senate Democrats effectively blocked lifting the tariff. The Senators were Harkin (Iowa) Dorgan (North Dakota) Durbin (Illinois) Johnson (South Dakota) and Obama (Illinois). Cries for energy independence and environmental protection were used to cover the real culprit which is a politically misguided raid on the pocketbooks of our country.

The best outcome would be a total repeal of the 51 cent subsidy and of the 54 cent tariff. That would lower ethanol cost and take the pressure off food source prices in the grain markets. It would also lessen the starvation that will occur in some parts of the world where the marginal cost of grain negatively impacts the hungriest and the very poor.

Cumberland advisors cite the work of Chicago-based Bianco Research in a paper entitled An Impending Ethanol Cost Squeeze that demonstrates how falling margins on ethanol production combined with the rising costs of corn-based ethanol essentially in lockstep with gasoline prices mean that ethanol is far from an effective oil substitute.

More important, the 54¢ per gallon tariff on imported ethanol, distilled primarily in Brazil from sugar, de facto makes U.S. ethanol distillation a corn conversion process.

...the diversion of corn from domestic and export human and livestock feedstock to yeast feedstock inevitably will affect the economics of all industries involved. The distortions to come in agricultural economics will be the largest disruptions since the early 1970s. Global grain, oilseed, livestock and fuel markets will be affected, as will competitors for agricultural land.

The increases in food prices will affect commonly quoted consumer price indices. Core inflation, we are happy to report, will remain unaffected. This inescapably will be a divisive public policy issue from which there will be no escape.

That ethanol prices expand to capture the rent of higher gasoline prices should give pause to anyone operating under the illusion blending ethanol into gasoline can painlessly lower retail prices at the pump. A deterioration of either gasoline or ethanol prices, or as is most likely the case both in tandem, coupled with higher corn prices will turn ethanol production uneconomic in the absence of further subsidization in addition to the 51¢ per gallon exemption from the federal motor fuels excise tax and the aforementioned tariff.

The entire corpus of international economics from the 18th Century forward has been based on the theory of competitive advantage. You do what you are good at doing and import cheaper goods and services as warranted. Brazil and other sugar producers are better at feeding yeast than are American corn farmers. Producers of conventional hydrocarbons are better at fueling internal combustion engines than are American ethanol distillers. The impulse to declare energy independence in a dangerous world is understandable, but should be resisted if it is uneconomic in the absence of subsidization.

That these market analysts are on to something is reflected in the latest ethanol plant news from across the state. A proposed plant in Belmond, Iowa (near my childhood stomping grounds) has been canceled. Whether or not due to construction costs, the finger points to longer payback due to lower margins. The builders were two large ethanol companies and I'm sure they are looking at the fundamentals as hard as the suits in the investment think-tanks.

The long-term solution is to eliminate both the 51-cent a gallon subsidy and the 54-cent a gallon tariff on imported ethanol. Scarcity in the oil market will eventually make corn (or cellulose-based) domestic ethanol production economically viable as a fuel additive, especially in regions located close to the production zones. Or not.

The take-aways for the reader should be: 1) That ethanol is not and will never be a solution to oil scarcity and our dependence on foreign oil and, 2) the U.S. ethanol market resembles more a socialist, centrally planned market circa the Soviet Union of the 1980's than it does what most Americans expect to see in a modern 2006 free market of goods and services.

The long term solution to oil scarcity and dependence on foreign oil remains as simple and as controversial as it ever was: drive less, consume local goods.

Bottom Line Economics on Ethanol and Gas

Boy there sure are a lot of ethanol and biodiesel plants going up around here aren't there? If one listens to a lot of politicians on both sides of the aisle, ethanol is going to allow us to replace our dependence on foreign oil and maintain our current way of life with a few small adjustments to our existing vehicles. Well, that's just a load of crap and here are the numbers.

I'm using statistics provided by Robert Rapier, a Wyoming-based chemical engineer who works in the oil industry. He outlines everything and provides sources in this post at The Oil Drum, a blog that concerns itself with peak oil and sustainability issues. I have verified all the studies and all are from government estimates and the current scholarly consensus as best as I can determine.

• Gross U.S. Corn Production (2005): 10.35 bushels - 1.95 billion bushels sold abroad = 8.4 billion bushels


• Gallons of ethanol produced per bushel of corn: 2.7


• Gallons of ethanol produced per year from entire US corn supply: 22.68 billion

My bottom-line figures differ from his a bit because I make the irrational assumption that we might still want to keep a couple of billion bushels of corn to exchange for hard currency; or even God forbid, food production. But high fructose corn syrup is going to get a whole lot more expensive. Wonder what the soft drink companies will have to say about this? Never mind, on to the rest of the numbers...

• BTU equivalent of a gallon of ethanol to a gallon of gasoline: 67%


• Gasoline equivalent of annual ethanol production from entire US corn supply: 15.19 billion gallons


• Annual US domestic gasoline demand (2005): 140 billion gallons




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• Total percentage of US gasoline demand displaced by converting entire domestic corn crop to ethanol: 10.8%

Conclusion: Converting the entire domestically used US corn crop and converting it to ethanol and adding it to gasoline to produce E85 fuel would only cover about two thirds of the current US demand for gas.

And we haven't even gotten into the thorny details of all the petroleum-based inputs that go into producing corn. From shipping seedd to farm, planting, fertilizing (and fetilizer) to harvest, transport to ethanol plant, production and distribution of ethanol products everything is driven by gas, diesel and petroleum products. In other words, with the current energy economy we only get about break even or perhaps 30% more net energy out of a gallon of ethanol than we put into making it. This is called the energy return on energy investment or EROEI ratio. EROEI ratio for oil? Depending on how hard it is to get out of the ground, how far away etc. it is between 20 and 100.

As Rapier says in a different post:

There are even some places in the U.S. where ethanol could provide a (mildly) sustainable solution even as it is produced today. Take Iowa, for instance. Iowa has good corn yields and doesn't require irrigation. If the ethanol is produced from local corn, and is used locally (not shipped halfway across the country), the renewable portion of ethanol is increased. This may provide marginal mitigation for peak oil in certain local areas (though it is still not a highly efficient way to produce fuel). But get into areas outside the Midwest, where you have to ship corn a long way, ship ethanol a long way, and/or irrigate the corn, and ethanol rapidly becomes just a recycled fossil fuel.

Peak Oil Rant: XVII

As of this writing, Light Sweet Crude is at $74.47, up about a dollar from Friday, with some settlements above $75. From Jim Kunstler, the author of the phrase and book, The Long Emergency comes this missive from his blog:

Actually, we are negotiating, or bargaining, as Elizabeth Kubler-Ross once put it in describing the sequence of emotional reactions of humans facing certain death:

denial > bargaining > depression > acceptance

The main thread in this bargaining stage is the desperate wish to keep our motoring fiesta going by other means than oil. This fantasy exerts its power across the whole political spectrum, and evinces a fascinating poverty of imagination in the public and its leaders in every field: politics, business, science and the media. The right wing still pretends we can still drill our way out of this, if only the nature freaks would allow them to. The "green" folks thinks that we can devote crops to the production of gasoline substitutes, even though a scarcity of fossil fuel-based fertilizers will sharply cut crop yields for human food. Nobody, it seems, can imagine an American life not centered on cars.

This is perhaps understandable when you consider the monumental previous investment in the infrastructures and equipment for motoring, which includes the nation's car-dependent suburban housing stock -- which in turn represents the average adult's main repository of personal wealth. If motoring becomes unaffordable, then what will be the value of my house twenty-eight miles upwind of Dallas (Atlanta, Minneapolis, Denver, Chicago, et cetera)? The anxiety is understandable.

Can we bust out of this narrow tunnel of fantasy? Can we imagine living differently? Can we turn more fruitful imaginings into action before the American scene becomes a much more disorderly place? It would be nice to see President Bush really lead by taking a well-publicized ride on the Washington Metro, or dropping in to visit an organic farm, or signing a bill to increase incentives for small-scale hydro-electricity, or turning loose some federal prosecutors on WalMart's human resources department. It would be nice to see the Democrats put aside their preoccupations with gender confusion and racial grievance and start campaigning to restore the US railroad system. It would help to see the science and technology sector return from outer space. Corporate America and its leaders are probably hopeless, but so is the current scale and scope of their operations, and circumstances will decide what they get to do.

Jim Kunstler's vision of the post-peak oil world is grim and dark. But one has to admit that he's just taking the numbers and applying what most people know about human nature and human history and plotting the curve into the future. His vision of the future is the default future. If we do nothing we will get his Long Emergency.

Our task is to begin to imagine a different future. A future of small, local, and diverse power generation; more compact cities with tram lines (ask your grandparents); more locally grown produce and meat and more local jobs.