Thursday, November 15, 2007

Ethanol's Tangled Web

The article below is one that I recently had published in our local paper. I have posted it on my Common Sense Agriculture, Conservation and Energy blog but not here. Several readers have mentioned to me that they are interested in ethanol and so I am re-posting the article here.

Direct subsidies by the U.S. government to gasoline blenders are $0.51/gallon of ethanol. In 2006, the total of these subsidies was $2.5 billion. Such subsidies are the reason behind the ethanol boom that we are experiencing. In 2006, ethanol production earned our country an approximately 1.5% oil independence. According to the USDA, at the maximum practical production level which is likely to be achieved by 2017, corn ethanol would provide 3.7% oil independence.

Ethanol has been around since the first “moonshiner” discovered how to distill corn into whiskey. It is the same thing as 200 proof whiskey. It was used by Henry Ford to power some of the first Model T’s. Today it is fueling a euphoric corn market that has seen prices soar above $3.50/bushel. It has also sent turmoil through the livestock markets as feeders adjust to the realities of higher commodity prices.

The USDA estimates that ethanol yields about 25% more energy than is required to produce it. Most of the energy gain is in the form of co-products available for feed. If you measure the energy equivalence of the ethanol itself, it takes about as much energy to produce it as it yields. One gallon of ethanol contains about 2/3 of the energy of a gallon of gasoline. This means that if your vehicle achieved 30 mpg with gasoline, it would achieve only 20 mpg burning pure ethanol.

Ethanol co-products make excellent cattle feed for inclusion in feedlot rations. Some studies indicate that Wet Distiller’s Grains contain 100-112% of the value of dry rolled corn. Dry Distiller’s Grains however are only about 88% of the feed value of dry rolled corn. In the larger feedlots that primarily utilize steam-flaked corn, the comparative feed value is much lower. That is why the cost of the co-products will be one of the primary determining factors driving its use as a substitution for feeding corn in livestock rations.

One of the most controversial issues surrounding the production of ethanol from corn revolves around concerns over the impact to food prices. Most of the corn produced in the United States is utilized as animal feed. Rising corn prices have already had a significant impact on the cost of feeding livestock.

Most planting decisions are at least somewhat based on relative commodity prices of various crops that are feasible for planting in a particular area. In areas where corn is a viable alternative, significant crop acreage is being shifted to corn production at the expense of other crops. The effect is to lift commodity prices for all crops that are being replaced by corn production. Again, the primary impact will be on crops that are destined for animal feed, such as soybeans and other grains.

As ethanol production capacity increases, the pressure on substituting ethanol fuel crops for other commodities will increase. The result will certainly be upward pressure on the prices of food crops due to the scarcity impact on supply and demand.

Should we be concerned? The U.S. consumer pays a smaller percentage of his income for food (less than 10%) than consumers in any other part of the world (20 – 50% for middle income countries). In countries that struggle at a subsistence level of farming, there will be pressure to divert land utilization for ethanol fuel production. The impact on such economies will depend on government policies related to land ownership and control of production. In some instances, it could help to lift economies above subsistence level by creating the opportunity for higher revenue crops.

Ethanol is only a tiny piece of the energy puzzle. It is a tiny piece that is creating turmoil across the globe in the agricultural sector. Turmoil generally creates opportunities for some and failure for those who do not adapt to changes in the marketplace. It is hoped that new technologies for producing ethanol from plant fibers rather than highly concentrated energy sources such as corn will transform ethanol production in the near future. In the meantime, we can expect commodity prices to remain high which will hopefully be a boon to our rural economy.

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sandyshares said...

most educating to me thanks sk

ptg said...

As boondoggles go, fuel ethanol is doing better than I expected. Nebraskans see a new alky plant going up in their town as a double benefit; besides the ethanol works, the local coal fired power plant must be expanded or replaced. Its good for the environment somewhere, but not here.