Historic Grain Prices Will Fuel Changes in the BioFuel Industry

What a confusing year to work in agriculture. The grain farmers who have crops above water, must feel pretty good about $7.00 corn, at least until the fertilizer and fuel bills come. The elevator manager feels pretty good because he bought the farmers’ corn for $5.00 a few months ago. Now the poor manager can’t sleep because the margin calls keep him up at night. How about the livestock industry? That’s so bad that we dare not even joke about it. Lastly, we have the ethanol industry, standing all by itself and shouldering the blame for everything. Something has to give.

Remember way back (24 months ago) before the commodity markets realized that we could potentially use more corn than we were growing. Until that point, the ethanol industry was just using surplus grain. After all, that’s why the ethanol industry expanded. At that point, corn was a great value to the end user. Now everyone is scrounging for corn. It’s capitalism at its best or worst depending on which side of the market you are standing.

One thing that probably won’t change, at least short-term, is demand for ethanol. Even though it is a small percentage of our country’s total petroleum usage, it is a vital part. It’s not only vital as an oxygenater, its also part of the fragile petroleum supply which can no longer meet our growing demand without ethanol in the equation.

One variable that might change is the feedstock that supports the biofuels industry. The ethanol industry was built on the assumption of $3.00 corn. When expansion was at fever pitch, many ethanol plants were so profitable that some plants would have given away the distillers grain which is a bi-product of the fermentation process. Now, without the sale of distiller’s grain, no corn ethanol plant can operate in the black. Only $4.00 gasoline and considerable investment in infrastructure have kept ethanol plants operating in this period of record corn prices. Suddenly, economics are forcing the biofuels industry to expedite its search for alternative feedstocks.

Ever since the corn ethanol industry began rapid expansion, rumors have circulated that cellulosic alcohol would replace corn alcohol in short order. Admittedly, the idea of using non-crop land to produce a fuel that can transport us down the highway is very attractive to everyone from environmentalists to cattle feeders, but can we do it? The answer is no. Commercial scale cellulosic alcohol production is at least five years away and unfortunately, some industry observers say that it’s been 5 years away for the last 20 years.

That’s not to say that cellulose based fuels have not made progress on the research front. In fact, some of the largest obstacles to cellulosic alcohol production have seen great advancements in recent years, but with the progress comes the realization that no one is equipped to handle that immense quantity of low value product that cellulosic alcohol production would involve. Cellulose will be a viable biofuel feedstock at some point, but it will not compete with corn ethanol in the immediate future.

The one alcohol feedstock that could have an immediate impact is sugar cane.

Even the staunchest critics of ethanol will admit that sugar cane is a sustainable feedstock for ethanol production. In Brazil , ethanol production from sugar cane has supplemented domestic oil production enough to make Brazil self sufficient or at least a zero net importer of petroleum.

The obvious problem with sugar cane production in the US is the limited growing region.

Sugar cane can only be grown in the states bordering the Gulf of Mexico as well as Hawaii . Even though domestic sugar production could be increased substantially, sugar cane could not take the place of corn as the major feedstock for ethanol even if every potential acre were planted.

The reason that sugar cane is preferable to grains for alcohol production is that nature has already done some of the manufacturing process for us. When making corn alcohol, a great deal of energy is required to convert the starch of the grain into sugar before bacteria can convert the sugar into alcohol. The energy saved in this step makes sugar based ethanol much more efficient than grain ethanol in terms of net energy return.

The other major sugar crop in the US is sugar beets which can be raised in many crop growing regions of our country. Historically, beets have been grown in the cool climate of the Great Lakes and Red River Valley regions as well as Colorado and California . Ohio was a sugar producing state until fairly recently when the local processors ceased operations. Like Ohio , many states would be suitable for beet production should the demand increase substantially. The sugar beet industry as a whole is poised for expansion, but at this point, demand for granulated sugar is strong enough to secure the industry. In other words, sugar is too expensive to be a viable feedstock for the ethanol industry.

A 2006 report from the USDA entitled “The Economical Feasibility of Ethanol Production from Sugar in the United States ” concluded that the cost of producing ethanol from sugar crops was about twice the cost of corn ethanol. It is important to note however, that this report was released in July of 2006, just months prior to the unprecedented rise in grain prices. If this report were released in July of 2008, the production cost of ethanol from sugar would be very similar to ethanol from corn.

Two huge obstacles are limiting the production of sugar based ethanol in the US . First, the infrastructure would be quite expensive, even more than the infrastructure of the corn ethanol industry which is already in place.

Secondly, the demand for sugar in this country is strong already. Any increase in demand would undoubtedly increase the price of sugar much as it did in the corn market. The demand shift that is evident in the current corn market, is being tolerated by the ethanol industry only because the plants are already built. At this juncture, the sunk cost on new ethanol plants keeps them producing even with a negative margin. With this in mind, raising money to finance sugar ethanol production could prove to be a difficult task considering the industry could follow a similar pattern.

Corn ethanol has secured its place in history as our country’s first legitimate attempt to produce a biological alternative to petroleum on a commercial scale. Through all of the recent criticism, it will always be the biofuel that cleared the path for the other biofuels to come. Higher corn prices may eventually diminish the use of corn as a fuel source, but for now, corn ethanol remains our nation’s most important biofuel.

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