There Are Big Problems With Ethanol, Namely Corn Supply
By Igor Greenwald Published: March 9, 2007
PICTURE AN ALCOHOLIC WHO, by dint of poor planning and bad luck, habitually drinks from airline bottles. One day the liquor-store clerk points out how much cheaper the stuff would be by the case. "How many of these to a case?" our friend asks, palming another 50-milliliter dose.
Today, the part will be played by President Bush when he discusses ethanol with his Brazilian counterpart. Ethanol (or grain alcohol, as collegiate connoisseurs prefer to call it) is the main ingredient in the Bush administration's alternative-energy policy. And just like all of Bluto's midnight schemes, it's one of those dares that seems destined to end with a hangover.
It's easy to see the appeal: Like the flat tax or missile defense, biofuels suggest a simple solution to a complex problem. Like missile defense, they cater to our faith in technological progress. Instead of drilling rigs blighting coastlines, biofuels evoke vistas filled with amber waves of grain. Just like that, dirty, bloody Mideast crude turns out to have a clean homegrown substitute. It's a fairy tale of course, like so many others featuring magically prolific plants.
The reality is that it's costly and incredibly inefficient to unlock energy stored inside plant cells, relative to the effort needed to distill comparable volumes of fuel from crude, even crude as expensive as it is today. The reality is that making biofuels from Brazilian sugar cane is much easier, cheaper and kinder to the environment than using Midwestern grain. The reality is that we care about all those principles so much as to impose a stiff tariff on Brazilian ethanol, lest it displace our homebrew.
The end result is that corn, traditionally America's most abundant natural resource, has turned into the focus of a scarcity scare, with futures prices nearly doubling, in just eight months. So taxpayers end up subsidizing this folly thrice: Once in federal payments to corn producers that totaled almost $9 billion last year, again in a tax credit of 51 cents per gallon for ethanol producers and a third time in the supermarket checkout line.
According to U.S. inflation data, consumer prices for the food consumed at home rose 1.2% in January, more than in the previous 11 months combined. Whether that's a blip or not remains to be seen. But poultry and pork producers are already squealing about the increases in feed costs.
Meanwhile, the U.S. Department of Agriculture expects ethanol's claim on the corn crop to increase by 50% this year, sucking up more than a quarter of the national output. Legislation passed in 2005 requires the use of "renewable fuels" to rise by more than 50% from current levels by 2012.
But that's nothing next to the presidential State of the Union pledge to boost renewable fuel use eightfold from current levels by 2017, by which time Bush will presumably be growing switch grasses and other combustible fodder in Crawford, Texas.
The acreage dedicated to corn cultivation is expected to increase 10% nationwide this year, and farmland prices are up sharply. In fact, land prices in the choicest parts of the U.S. corn belt have risen by as much as 20% in the last six months, according to the New York Times.
Land values are up so much in part because meeting Bush's 10-year renewable fuels target would require more corn annually than has ever been produced in the United States, even assuming that food producers, livestock farmers and overseas customers were willing to forego the stuff.
"It kind of staggers my imagination to see a Republican administration headed by a purported free-marketeer mandate the use of a product the supplies of which don't exist today," says Dave Juday, farm-policy analyst and an eloquent critic of ethanol subsidies.
A former chief agriculture advisor to Dan Quayle, Juday can spell "potato" and spot a boondoggle. The ethanol mandate and the resulting rush to build new plants "is a massive disruptive force right now," he says. "Yeah, sure this year it's a great windfall if you raise corn; if you raise livestock you're in a whole lot of trouble. It's increased land rents out in Iowa: I've heard of land more than doubling per acre. This is a major shockwave hitting the whole farm economy."
To cut our reliance on Saudi crude, the president and Congress have committed us to buy costlier ethanol from Archer Daniels Midland (ADM: 34.50, -0.31, -0.9%) and other domestic producers for the next decade. The tax subsidy technically expires in 2010, but good luck getting rid of it over the objections of the powerful Midwest farm lobby and the vitally interested ethanol distillers.
Meanwhile, the 54-cents-a-gallon tariff on Brazilian ethanol will have to be renewed in 2008, and Juday thinks it may need to come down earlier if only so the politicians can "save face" by showing that their zeal for renewable fuel does not depend on the fuel's point of origin.
Just don't expect Brazilian ethanol to end our reliance on crude: Brazil exports barely 10% of its output and doesn't even fully take advantage of a trade-law loophole that allows for duty-free ethanol imports as long as the stuff is shipped through a port in Central America or the Caribbean.
(Here's another way to profit from our alternative energy fetish: Juday points out that if you buy a "flex-fuel" SUV able to run on higher-content ethanol at some point of the future, the fuel-guzzler won't count against the federally mandated fuel-efficiency standards. Here's more on that loophole.)
Brazilian ethanol was crucial in helping the U.S. through the transition from MBTE to ethanol earlier this year. Now it will have to compete with lots of new domestic supply coming online, though it should be able to do so effectively with corn prices at their current levels.
Grander plans for burning switch grasses on a vast scale will need infrastructure to match the hype. "The real thing to me as an economist, as a market guy, is the commercial side of it," says Juday. "We've been growing corn in the United States for a long time and there's commercial infrastructure that's built up around it. How long is it going to take to replicate that for switch grass? And, if you take the president's latest proposal, to make it twice as big as what corn ethanol is? Who's going to plant the switch grass? What tractor company today sells a switch-grass planter, harvester? Where do you store it? You're talking about eight times the volume of corn kernels that are neatly, compactly put in the back of a trailer. Where are the trucks, the trailers, the railroad cars, elevators? All that commercial stuff will take at least a decade to sort out if the technology breakthrough came tomorrow."
The good news is that now that meat producers' ox is getting gored, the push for ever-bolder renewable fuel standards no longer looks like a runaway train. "If you'd asked me a month ago to handicap whether the renewable fuel standard would get expanded this year in Congress, I would have said the chances are 90%," says Juday. "You ask me today, the chances are 50%. People are waking and smelling the coffee, smelling the $4 corn."
That leaves 50-50 odds of Congress digging us a deeper hole. And in two months, they'll be planting corn on top of it.
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