Ethanol Demand Boosting Corn Prices

A new story today from Yahoo News:

Ethanol demand boosting corn prices

Some excerpts:

INDIANAPOLIS – The ethanol industry’s growing appetite for corn has pushed prices for the grain to their highest levels in a decade amid a surge that agricultural experts say could lead farmers next spring to plant their largest corn crop in 60 years.

Farmers who plant more corn in 2007, however, will be betting that the nation’s burgeoning ethanol industry won’t go bust and oil prices stay high, keeping up demand for the corn used to make ethanol, said Chris Hurt, a Purdue University agricultural economist.

With a growing amount of corn being diverted from food products and livestock feed toward ethanol production, per-bushel prices have increased about $1 since mid-September.

As of Tuesday, the average price of a bushel of corn was $3.45 — far above the $1.50 to $1.80 a bushel corn fetched at the same time last year, Hurt said.

The U.S. Department of Agriculture’s current estimate for 2006’s average farm price of corn is $3 a bushel, Hurt said. His early prediction for next year is an average farm price for a bushel of corn of $3.40, which would eclipse the current record of an average $3.24 price set during the 1995 marketing year.

Gary Schnitkey, a farm financial management specialist at the University of Illinois, also expects American farmers to plant significantly more corn next year, but he cautions that many factors can influence how much acreage is eventually shifted to corn.

“We’ve never been in a position where we’ve seen this much new demand for a commodity,” he said.

So, over $3.00 a bushel. In 2005, it took 1.6 billion bushels (from a total of 11.1 billion bushels) to produce 4.2 billion gallons of ethanol. So, the national average is 2.7 gallons of ethanol per bushel of corn. That means that the corn cost alone has risen to $1.11 per gallon of ethanol.

I wonder if all of the people projecting ethanol costs falling in the future will update their graphs next year, since costs increased in 2006, and look to again in 2007. Vinod Khosla has claimed numerous times that the production cost for ethanol is less than $1.00/gallon. From Vinod Khosla Debunked:

Vinod Khosla: Even in the U.S., and this is a conservative number, ethanol costs – most of the plants I look at – costs are about $0.90 a gallon to produce. [In contrast, slide 5 says gasoline costs $1.60 a gallon to produce.] Compared to any price you can imagine for gasoline, down to about $35 a barrel, ethanol is cheaper.

One thing we know for certain: That claim is not true (and it never has been). $1.11 a gallon means that the corn alone adds $46.67 per barrel of ethanol (and next year it will be even higher). Given that ethanol only has 65% of the energy content of gasoline, this is the same as $72/barrel gasoline, and we are still only talking about the corn costs – which are predicted to rise next year!

Corn ethanol is not the way. It is a jobs program, and a feel-good measure. It is doing next to nothing for us with respect to energy indepedence, and is now driving up food costs.

16 thoughts on “Ethanol Demand Boosting Corn Prices”

  1. Why would byproduct make a big difference? He also didn’t include any of the other costs of producing ethanol. I think the point was that contrary to many pro-ethanol projections, costs are headed up, not down.

  2. Here’s another reason to try converting to an integrated biomass scheme like my suggestion:  the public isn’t going to like fuel prices being bid up to fill SUV’s.

  3. Robert, you seem to be criticizing the rhetoric of ethanol, that it is some sort of alternative fuel, rather than the reality of its current usage, it is a replacement for MTBE. As long as we’re going to insist on oxygenated gasoline (a dubious idea in my opinion) ethanol is the best choice for environmental reasons. And by best choice I mean best choice of all possible oxygenates, not just MTBE.

  4. Actually the oxygenate requirements have been waived. California lobbied to have them lifted. The problem is that RFG is still required, and it is tough to make RFG without an oxygenate. The irony is that ethanol actually increases the vapor pressure of gasoline, leading to more smog.

    Furthermore, the current ethanol supply is adequate to replace MTBE. So what is going on right now is in excess of MTBE replacement.

  5. Excuse me, I meant to say “the public isn’t going to like FOOD prices being bid up to fuel SUV’s.”

    Eliminating the competition between food and fuel was one major motivation for my analysis.  I think we are going to have people pushing for this, and it really does make sense to put all that rice straw, corn stover, etc. to good use.

  6. what gets lost in all of the complexity is a very simple concept. If you want to get 1 BTU of usable energy out, in the case of ethanol you put in .7 BTUs (or more) to grow and process corn; in the case of gasoline/diesel, you put in .25 BTUs (or less) to dig for oil and refine it. which is better? the answer is obvious. Further, how do we know this to be true? The oil companies, no matter how many bad names you call them, are at their heart for-profit enterprises and they dont own much farmland in the midwest the last time I checked. Like you have said before Robert, if you can sell a gallon of ethanol for more than you can a gallon of gas (you can) and you can make ethanol for less than you can a gallon of gas, what fool at what oil company would not be making ethanol? Its a really easy way to get a big(ger) bonus from the board if you are the CEO (and we know well that oil companies are good to their CEOs when it comes bonus time). Obviously Vinod Khosla has been extraordinarily successful and has made a huge personal fortune. But his polemics are condescending in nature and underestimate the intelligence of the public to which he speaks. Oh, and his track record as an oracle leaves something to be desired. My first career, like his, was in and around the telecommunications industry. He was, like he now is in energy, extremely vocal about wildly optimistic visions of the future. What is not often said is that as a GP at Kleiner he had a tremendous amount to gain from being well perceived as a visionary who could predict the future. The formula was simple. He would invest heavily in a particular area – no matter how poor the underlying economics – and then use his own investment and his visibility with the press as a “very smart and visionary guy” as proof to someone else – the greater fool – to invest behind him. The public and private capital markets were both the victims here while Kleiner and Vinod, with their low cost basis on the investment, made a fortune regardless of the eventual success of the business. There is an analagous powerpoint to his biofuels/ethanol powerpoint that he made during the telecom boom of the late 90s. If I can find it in my files, ill post it or the link (a quick google did not easily surface it). While he was largely wrong about the way things would play out and over what timeframe, he made a fortune. Many others – those who invested behind him – were not quite as lucky as we know. I would go further out on a limb and state that his hype machine – along with many others certainly – contributed heavily to an irrational environment that took an entire industry out of control and cost tens of thousands of people their life savings when the telecom industry bubble burst.

    If his point is that we need another fuel source – and we do – then he should simply say that. The drama and the obfuscation of the measuring metrics (on which the arguments hinge) are ultimately a disservice to everyone and an insult to thinking people.

    The reality of the matter is very simple, if you cared about nothing other than profit, the spread made in a gallon of gas is materially larger than the spread made in a gallon of ethanol. Thats a simple truth and eveyone can understand it. If we think that we should do something to incent a behavior that is not naturally incented by those fundamental economics, then lets decide to do so. But smart people in a position of power (in a position to be heard) like Vinod have a responsibility to society to clarify and simplify to help others reach a conclusion, not to obfuscate in order to dupe people in to reaching a particular conclusion. We’ve got plenty of politicians who will handle the spin and ideology driven arguments for us, we dont need Vinod added on top of that. if the arguments for finding an alternative fuel source are strong – and to me they are abundantly strong – then it should not take more than simple arguments to convince all but the most ideologically opposed. I think that among other things, this was evidenced rather nicely in CA for prop 87. People like to be spoken to honestly – particularly if the one doing the speaking is as intelligent as Vinod is.

    When I watched Vinod’s presentation to Google (Google video) I was truly shocked by how flippant he was with the facts and how he mixes up so many different metrics, units, and other things which serve to confuse the lay audience. I had to rewind the video many times to try and understand what he was saying. As you pointed out in your excellent dissection of the video, he rapidly marches through incredibly aggressive statements in a way that serves to state them as if they are “obvious” when in fact they are at the core of his thesis and should be explained with great care. That they are wrong makes it even worse. That they are not needed in order to make the ultimate argument that Vinod is saying he is trying to make – that we need a domestically created fuel source – is shameful and in my opinion a disservice to the ability to make progress on this critical issue that society is facing. That he is in effect becoming something of a judge and jury for the direction science may take to solve the problem we have on our hands is the most worrisome part of all of this.

  7. If you want to get 1 BTU of usable energy out, in the case of ethanol you put in .7 BTUs (or more) to grow and process corn; in the case of gasoline/diesel…

    Exactly the point I tried to emphasize in my most recent essay. We talk about 4 billion gallons of ethanol, but the net is only 1 billion gallons and less than 0.5% of our gasoline usage displaced. How much does this cost us? Many billions of dollars.

    But smart people in a position of power (in a position to be heard) like Vinod have a responsibility to society to clarify and simplify to help others reach a conclusion, not to obfuscate in order to dupe people in to reaching a particular conclusion.

    Absolutely great comment! I agree 100% with your sentiments. I think these tactics really back-fired on Khosla during the Prop 87 campaign, because people starting taking him to task over some of these statements he has made.

  8. Robert said, “The ethanol industry’s growing appetite for corn has pushed prices for the grain to their highest levels in a decade amid a surge that agricultural experts say could lead farmers next spring to plant their largest corn crop in 60 years.”

    Absolutely right Robert. And what happened the last time farmers and agribusiness fell for a similar scheme when they plowed up and plant every available acre in wheat: The Dust Bowl of the late 1920’s and 1930’s.

    Sidebar: Robert, you and I read many of the same books. However, one I didn’t see on your list was The Worst Hard Time: The untold story of those who survived the Great American Dust Bowl by Timothy Egan. I read it about ten months ago and once I started, I couldn’t stop. I had previoulsy had no idea how much of the Dust Bowl was man-made — a result of greedy agribusiness and poor farming practice.

    Now it seems corn farmers are about to repeat what wheat farmers did in the 20’s and 30’s. It will be especially bad in Nebraska, Kansas, and South Dakota where they rely on the Ogallala Aquifer for their water. (Just as we drain hydrocarbons made and stored over millions of years when we pump oil, those draining the Ogallala are also using water stored over millions of years. Just as there is a Peak Oil issue for hydrocarbons, there is also Peak Water for the Ogallala, but there is no doubt we’ve already passed the peak.)

    Over subscription of the Nation’s corn supply

    Another point worth mentioning is the over subscription of our Nation’s corn crop by ethanol producers. As I’ve mentioned before, in Iowa there are now more ethanol plants in operation, under construction, or in planning that will require more corn than Iowa’s corn farmers can grow corn for. The same is true in Nebraska, and soon will be true in Illinois and Minnesota.

    Now what’s funny is that those building the ethanol plants in Iowa recognize that fact, and say they plan to make up for it by importing corn from the adjoining states. Good luck trying to get that corn for the Iowa plants from Nebraska, Minnesota, or Illinois, because guess what? The business plans of the ethanol plants in those states say they plan to import corn from Iowa.

    And just this week I saw that several ethanol plants are now being planned for Maryland (which grows some corn, but not much.) A plant planned on the site of the old Sparrows Point steel works is Baltimore is expecting to get their feedstock corn from the Midwest. Not only will the transportation costs make their ethanol non-competitive, but there would also be no excess Midwest corn to export.

    The impending shakeout in the ethanol industry is going to bloody, and a lot of investors will get hurt.

    And all because of the interlocking matrix of subsidies, tax credits, mandates, and protective tariffs backed by Corn Belt politics, agribusiness, and lobbyists. If corn ethanol had to make its way in a free market without the benefit of that matrix, the only people making corn ethanol would be the distilleries in Kentucky and Tennessee making bourbon and Tennessee sippin’ whiskey.

    Regards,

    Gary Dikkers

  9. Post deleted from a cowardly anonymous poster who had riddled his comments with ad homs and profanity. Next time I will post you IP address.

    Dear gutless, If you want to dialogue, please don’t drink and post. Please try to make coherent points. I shall address them. I will not allow the kind of profanity you displayed. My kids read this blog.

    Sincerely,

    Robert

  10. In summary, the net feedstock cost is significantly lower than the gross cost, thanks to the value of the by-products, and total production costs can be below a Dollar a gallon.

    According to the NCGA “DDGS prices will continue to decline as expanding ethanol production expands available supplies.”

    Also, according to that quote you provided from Randall Parker: “The value of byproduct credits declined from 30 cents per gallon in 2003 and 2004 to about 22 cents per gallon in 2005.”

    In other words, downward pressure is being placed on DDGS prices as more and more hits the market. This is happening at the same time that corn prices are hitting a record. So no, even if we assume that DDGS prices maintained the value in 2005, total production costs still wouldn’t be close to being below a dollar. Again, we are talking about just the feedstock costs, and even with the credit it is still around a dollar a gallon.

    Cheers, RR

  11. I’ve been quite bad in providing back-up for my statement that “the efficiency of conversion of wood to liquid fuels is about 40% for either gasification/Fischer-Tropsch or for cellulosic ethanol”.

    While I stand by that assessment for the moment, it seems surprisingly little has been published specifically on that point.

    What are your estimates based on your background? Do you know anybody who’s looked into this in detail? Or who might be motivated to start a research project on it, or to collaborate on one?

    I am particularly interested in the trade-off between capital cost and efficiency, carbon dioxide emissions and the scope for improvement.

  12. I’ve been quite bad in providing back-up for my statement that “the efficiency of conversion of wood to liquid fuels is about 40% for either gasification/Fischer-Tropsch or for cellulosic ethanol”.

    I did the calculations once for coal to liquids, and I believe I came up with something like 60%. I still maintain that cellulosic is going to be worse because you are adding water to the process that is going to take a lot of energy to get back out. That’s not the case with gasification.

    Cheers, Robert

  13. Aston work together with ECN and FZK in an EU sponsored network (NoE Bioenergy). ECN assume 55% efficiency from wood to liquid fuels, 97% for pre-treatment, 80% for gasification and 71% for Fischer-Tropsch, which all seems a bit optimistic to me. Somebody from FZK suggested 40% as a more realistic number to me, with his agreement I wouldn’t give the name though, and on top of that, that was a conversation over lunch, where I may have misunderstood him.

    As for cellulosic ethanol, you must have come across lifecycle studies claiming 85%+ greenhouse gas reductions. I’ve tried to understand their assumptions and sources in detail, and didn’t find the presentation of the studies very helpful in that regard, but still, if you burn the lignin to provide the heat for distillation, you can’t take much more than 30-40% of the biomass for that purpose, because that’s (on an energy basis) how much of the biomass is lignin.

    I know that gasification + Fischer-Tropsch doesn’t involve distillation, but it does involve very high temperatures (1200 C +, in order to crack tars) and a significant loss in the FT step, as the FT reaction is strongly exothermic and apparently, I believe to minimise the methane product, needs to be performed at a low temperature.

    By contrast, the main reaction in fermentation (sugar to ethanol + CO2) occurs at low temperatures and the reactants and products have virtually the same chemical energy content.

    But this is all pretty back of the envelope, it would be nice to get some firmer numbers.

Comments are closed.