It takes more than "gumption"...

Energy independence will require more natural resources and/or conservation that we have.

Let's look at some numbers. Total U.S. petroleum demand is 19.5 million barrels per day.  Total daily crude oil production from U.S. oilfields is a shade below 5 million barrels per day. Once you net out other factors - production of usable natural gas liquids, imports of gasoline and other refined products, and exports - yes, U.S. producers on the hunt for market advantages export some 1.8 million barrels daily in crude oil and refined products - net imports of liquid fuels total 11.1 million barrels per day, according to the U.S. Energy Information Administration (EIA).
By 2035, however, net imports are projected to fall to 10 million barrels daily, according to EIA. Demand is projected to rise to 22 million barrels per day, but that would be offset by higher domestic production - an extra million or so barrels from deepwater oil wells in the Gulf of Mexico and greater use of biofuels, chiefly ethanol. Fuel efficiency standards that are due to take effect in 2016 will save an estimated 2 million barrels per day.
Could the gap between domestic supply and demand be closed further? Let's say the coastal plain of the Arctic National Wildlife Refuge, the most biologically rich habitat in the circumpolar north, is handed over to oil companies. A what-if analysis published in 2008 by the U.S. Energy Information Administration projected, in a best-case scenario, maximum daily production of 1.45 million barrels daily by 2028.
If that projection is accurate, we would still need to find another 8.5 million barrels per day to close the gap by the 2030s. How much could be expected from offshore waters that no longer are under leasing moratoria? EIA's Annual Energy Outlook for 2009 provides a clue. Under business-as-usual, assuming that previously closed areas are open to leasing, EIA projects that offshore production in the lower 48 would total 2.7 million barrels daily by 2030. In a what-if analysis of reinstating the moratoria, production drops to 2.2 million - a difference of only 500,000 barrels.
Why the small difference? EIA explains that lifting of the moratoria is not the magic elixir that the "drill, baby, drill" brigades claim. "Conversion of the newly available (offshore) resources to production will require considerable time, in addition to financial investment," EIA notes.
How about liquefying coal? America's Energy Future figured that coal-to-liquids could produce the equivalent of 3 million barrels per day by the 2030s. To accommodate that production would require a 50 percent increase in U.S. coal production - from about a billion tons to a billion and a half tons every year. The likely air, land, and water impacts boggle the mind.
In addition, liquid fuel from coal results in more than twice as many life-cycle carbon dioxide emissions as gasoline. If carbon sequestration proves impractical, scaling up coal-to-liquids production would put paid to any reasonable prospect of stabilizing the atmosphere's concentration of heat-trapping gases.
Ethanol? America's Energy Future estimates the equivalent of 1.7 million barrels daily might be doable by the 2030s. There are issues, however. Ethanol would need its own pipeline network. Ethanol from cellulosic sources is more expensive than coal-to-liquids. [More]

It is, of course stirring to cry out for the US to take the same technological leap in energy as it did to put a man on the moon.  But in case you haven't noticed it, we haven't been able to even repeat that remarkable feat, and it now stands as the high water mark of our collective and political will as a nation.

But the larger issue outlines well by by the report cited in this post, is those resources are not available in our country, not the means to develop them. I do think a goal of reducing our dependence to the equivalent of western Hemisphere sources might be possible, but due to oil's fungibility, we'll never get to no Saudi Arabia imports, nor is there a commanding reason to do so.

The best analogy I've seen of this is one put forward by Fred Singer from the University of Virginia. He said the global oil market is like a giant bathtub. All the producers dump their oil in the bathtub and all the consumers pump their oil out of the same bathtub. And the level in the bathtub is the price. So yes, we could consume less oil by finding something else—we don't know what yet. But in the meantime, we're still going to be tapping into that same bathtub and paying that same price that the rest of the world's global consumers do. This idea that we can detach from this market is craziness. [More]

If security is at the heart of the issue, using less seems to be a far more effective strategy. However, sacrifice, as we are learning slowly from public budget deficits, seems to only be imposed on us, not taken willingly.

The larger question about energy from a corn grower perspective is the looming financial crunch for government and the continuation of ethanol and biodiesel subsidies.

The U.S. ethanol and biodiesel industries are finding it more difficult to maintain political support for a variety of tax credits. We've heard some rumblings that both industries may be joining forces to push for longer-term extensions of the ethanol blenders credit and the $1 biodiesel tax credit. Though both industries have their share of challenges, the ability to secure long-term extensions of those credits may be the determining factor as to where both industries go from here. Environmental groups and others say it makes no sense for ethanol and biodiesel to have tax credits and federal mandates driving production. When the biodiesel tax credit was allowed to expire at the end of 2009, the industry virtually shut down. It is expected the same likely would take place if ethanol lost the blenders credit. With ethanol, based on the current markets, losing the 45-cent credit would make ethanol production a break-even proposition. [More]

The fact ethanol will apparently never outgrow its need for subsidies may be partly because of  competing subsidies for oil, NG, etc. but it raises another question for corn producers. Given the absolute reliance on mandates and subsidies for viability, we may have created a too-big-to-fail entity, not unlike megabanks.  


Loss of government support would put most ethanol production at great risk, even rapid failure, I suspect. Lobbing 3-4B bushels of unneeded corn back on the market as a consequence would at least temporarily (2-3 years) take agriculture to its knees, and dramatically restructure agriculture as we know it. 


So when farmers cry out to let big investment houses die the deaths of their own making, they are creating a rather dangerous precedent.

The carbon is loose...

Pondering the whole climate-change-remediation question has often led me to a dead end. Like ag trade reform, we eventually run into the emerging economies and their obvious self-interest in not going along.  Just as India really doesn't want to lower barriers that protect its farmers, neither does China want to give up burning really cheap coal.

And just how developed countries can compensate enough with stringent carbon-emission measures remains a mystery to me.  I'm not the only one thinking we might need a Plan B as well as Plan A.

Cut to the chase. We rich people can’t stop the world’s 5 billion poor people from burning the couple of trillion tons of cheap carbon that they have within easy reach. We can’t even make any durable dent in global emissions—because emissions from the developing world are growing too fast, because the other 80 percent of humanity desperately needs cheap energy, and because we and they are now part of the same global economy. What we can do, if we’re foolish enough, is let carbon worries send our jobs and industries to their shores, making them grow even faster, and their carbon emissions faster still.

Regardless of the abrasive tone of this screed, the author does illuminate what may be a better reaction.  First, go nuclear as fast and far as possible for electricity generation.



But at the same time, we need to get really, really good at recapturing carbon from the atmosphere.  Huber skips lightly over this, remarkably short on useful hint of just how we can do this.

 If we’re truly worried about carbon, we must instead approach it as if the emissions originated in an annual eruption of Mount Krakatoa. Don’t try to persuade the volcano to sign a treaty promising to stop. Focus instead on what might be done to protect and promote the planet’s carbon sinks—the systems that suck carbon back out of the air and bury it. Green plants currently pump 15 to 20 times as much carbon out of the atmosphere as humanity releases into it—that’s the pump that put all that carbon underground in the first place, millions of years ago. At present, almost all of that plant-captured carbon is released back into the atmosphere within a year or so by animal consumers. North America, however, is currently sinking almost two-thirds of its carbon emissions back into prairies and forests that were originally leveled in the 1800s but are now recovering. For the next 50 years or so, we should focus on promoting better land use and reforestation worldwide. Beyond that, weather and the oceans naturally sink about one-fifth of total fossil-fuel emissions. We should also investigate large-scale options for accelerating the process of ocean sequestration.

Carbon zealots despise carbon-sinking schemes because, they insist, nobody can be sure that the sunk carbon will stay sunk. Yet everything they propose hinges on the assumption that carbon already sunk by nature in what are now hugely valuable deposits of oil and coal can be kept sunk by treaty and imaginary cheaper-than-carbon alternatives. This, yet again, gets things backward. We certainly know how to improve agriculture to protect soil, and how to grow new trees, and how to maintain existing forests, and we can almost certainly learn how to mummify carbon and bury it back in the earth or the depths of the oceans, in ways that neither man nor nature will disturb. It’s keeping nature’s black gold sequestered from humanity that’s impossible.

If we do need to do something serious about carbon, the sequestration of carbon after it’s burned is the one approach that accepts the growth of carbon emissions as an inescapable fact of the twenty-first century. And it’s the one approach that the rest of the world can embrace, too, here and now, because it begins with improving land use, which can lead directly and quickly to greater prosperity. If, on the other hand, we persist in building green bridges to nowhere, we will make things worse, not better. Good intentions aren’t enough. Turned into ineffectual action, they can cost the earth and accelerate its ruin at the same time. [More]

Maybe it's just me, but I think I caught an inference about reshaping agriculture in places to return some land back to permanent grass or forest, just the opposite of what biofuel is doing. In fact, the big issue with ethanol/biodiesel is the land-use repercussions in places where rainforests compete with date palms, for example.

With governments and consumers scrambling for alternatives to fossil fuel, worldwide demand for biofuels has gone through the roof; in Europe, where more than half of all automobiles run on diesel, consumption of biodiesel is set to triple by 2010. US subsidies for biofuels, mostly ethanol, will add up to $92 billion between 2006 and 2012, and producers in developing countries like Indonesia are often eligible for millions of dollars in development money from the World Bank.

But amid the hype, problems have emerged. Biodiesel emits less than one-quarter the carbon of regular diesel once it's burned. But when production—and the destruction of ecosystems in the developing countries where most biofuel crops are grown—is factored in, many biofuels may actually emit more carbon than does petroleum, the journal Science reported last year. Because oil palms don't absorb as much CO₂ as the rainforest or peatlands they replace, palm oil can generate as much as 10 times more carbon than petroleum, according to the advocacy group Food First. Thanks in large part to oil palm plantations, Indonesia is now the world's third-largest emitter of CO₂, trailing only the US and China. [More]

But his overall point is well taken. Ignoring the energy needs of the other 5 billion humans on the planet won't lower the rate of carbon emissions effectively. While the US in particular could be much more energy efficient and should set the example for the future of energy generation, expecting emerging countries to not use dirt cheap fuel to power their rise from poverty is illogical.

The tricky part is the technology of sequestration.

And no, sending US farmers a check will not get that job done. Oddly, one good step is using landfills. [Read more about current sequestration recapture techniques]

Without invoking the space program, I tend to believe more focus on recapture would be a good investment, especially if the technologies were adaptable to power plants in the growing economies.

We may not need as much corn...

Even as I bundle up to watch fields drain off and just begin to dry out prior to the next three-day rain event, my assumption the corn market will get nervous about getting enough corn planted to meet growing demand is on shaky ground, perhaps. Despite enormous efforts to subvert the laws of thermodynamics and economics, the ethanol industry is encountering even stiffer resistance on multiple fronts.

Ethanol producer Aventine Renewable Energy Holdings Inc. filed for Chapter 11 bankruptcy protection on Wednesday, the latest victim in an industry stung by volatile commodity prices and shrinking profit margins.
The Pekin, Ill.-based company warned last month that it may have to file if it could not raise sufficient cash in the near-term.
In its Delaware court filing, Aventine listed assets of $799 million with $491 million in debt. The company listed 30 creditors.
Chief Executive Ron Miller said Aventine is challenged by a difficult market environment, and the filing will allow it to operate without interruption.

"We will use the Chapter 11 process to more rapidly restructure our overhead, pursue potential investors, and definitively resolve our debt issues," Mr. Miller said in a statement. [More]

The question of whose hair will be cut is again answered with this action, but the larger question is regardless of the vow to keep operating, are the ethanol margins even positive? Not to mention ethanol prices hovering above gasoline, discouraging all but the minimal blending.

The industry flagship, ADM, is not exactly shrugging off the storm either.  Its stock took a blow when a respected analyst downgraded their stock rating.

After meeting with Archer Daniels Midland ( ADM - news - people ) management, Driscoll said his belief that "fundamental trends are deteriorating across ADM's major businesses" was confirmed. He maintained his earnings-per-share estimate for the 2009 fiscal year ending June 30 at $3.48, and his estimate for 2010 at $2 per share.
Wall Street analysts polled by Thomson Reuters expect the company to earn $3.54 per share this fiscal year and $2.87 per share next year.

While the company said in February its profit rose in its fiscal second quarter, and sales inched up 1 percent to $16.67 billion, Chief Executive Patricia Woertz said then that "the ethanol business is still a challenge," and that global demand - and prices - for the fuel and other commodities had fallen sharply.

"Slowing agricultural demand and overcapacity are negatively impacting volumes and margins" in the company's oilseeds and agricultural services businesses, Driscoll wrote in a research note to investors, and profits are set to slide in those units. [More]

Still these events were hardly shocking, and merely confirm the industry restructuring is roiling the whole biofuel segment.  But other troubling problems may be cropping up as well.

Ethanol's main by-product, which is sold as livestock feed, has raised potential food safety concerns.

Several studies have linked the byproduct, known as distillers grain, to elevated rates of E. coli in cattle. And now, distillers grain is facing further scrutiny because the Food and Drug Administration has found that it often contains antibiotics left over from making ethanol.

Ethanol production relies on enzymes, yeast and sugar to convert corn into fuel. And just as the wrong bacteria in the body can sicken people, it can also cause a variety of ailments in a batch of ethanol.

Mark von Keitz with the University of Minnesota's Biotechnology Institute said in ethanol production, the main enemy is a bacterial bug that makes lactic acid.

"What these organisms do is they also compete with the yeast for the sugar," said von Keitz. "But instead of making alcohol, they make primarily lactic acid."

If enough of the bacteria are present, von Keitz said fermentation can be ruined.

"It gets acidified to the point that the yeast is no longer able to properly produce ethanol, and then you're stuck with a big batch of corn mash," said von Keitz.

If that happens, there's no ethanol and no profit. To prevent the problem, producers rely on medicine. [More]

Given the enormous pressure to reform our food safety regulation system, antibiotics in distiller's grains is about the last thing this industry needs.  The case against for sub-therapeutic use of antibiotics is not all that firm to begin with, and predicated almost entirely on economic arguments: it finishes livestock - especially cattle - faster with higher feed conversion, ostensibly lowering the price for meat.  Or maybe not.

The European Union has already banned non-therapeutic use of antibiotics in farm animals, but each year lobbying by agribusiness in this country dooms legislation that would do the same. On Tuesday, Rep. Louise M. Slaughter (D-N.Y.) introduced a bill that would restrict the use of antibiotics that are important to human health in farming operations. The medications could be used to treat illness, but not as a growth promoter or as a substitute for cleaner living conditions. The bill might have a better chance of passing now, with a stronger Democratic majority in Congress.

The timing is right in other ways as well. In January, the Department of Agriculture -- responsible for promoting the meat industry as well as consumer health -- reported that, except during the nursery stage for young pigs, the costs of using preventive or growth-promoting antibiotics slightly outweighed the economic benefits for farms. That's not counting the added costs to consumers in prescription prices for more exotic antibiotics or the $4 billion a year this country spends to combat resistant infections. Some farms are successfully using better sanitation and tracking of illnesses among their herds instead of preventive antibiotics. [More]

The problem is sharp-penciled business analysis is at risk of seeming cold and way too similar to what was heard from business tycoons before the current financial fiasco.  However true, I think a message of "Cheaper trumps everything else" won't work as well as it has previously.  And the example of EU livestock indsutry provides a too-convenient comparison for concerned consumers.

Consequently, a new food safety regulatory body located outside the USDA could be a real coup de grace for the ethanol industry unless the world economy lifts oil prices much higher than they are. And that could be where we are headed, much to the dismay of the ag lobby.

The report calls for the immediate consolidation of food safety leadership within the Food and Drug Administration (FDA) and ultimately the creation of a separate Food Safety Administration within HHS.  Currently, no FDA official whose full-time job is food safety has line authority over all food safety functions.  A speedy effort by the Obama administration to consolidate leadership within FDA, followed by Congressional action to create a separate Food Safety Administration, would both ensure immediate progress on food safety and create a platform for long-term success in reducing foodborne illness.  [More]

Given the range of problems facing the ethanol industry, it is hard to imagine that legislative efforts alone can solve all the issues.  But right now, that is the only hammer, so look for massive lobbying on every front.

But unless we can start distilling really, really cheap ethanol to compete on price alone, the future does not look promising.  And the fastest way to lower the cost of production for ethanol is to shear the investors such as we are now doing.

Even then, losing much of the value of the byproducts could be a non-recoverable casualty, and also the final straw in the ethanol EROEI debate.

Not great news for ethanol either...

Turning coal into liquid fuel just took a big jump forward.

The process of cooking coal into liquid fuel, on the other hand, has already proven itself on a massive scale. Take coal, add some water, cook it, and you've got a liquid fuel for your car. The hydrogen in the water bonds to the carbon and voila: hydrocarbons, such as octane. It's the very fact that coal-to-liquids could work that make them such a scary idea for people devoted to fighting climate change.
The Nazis used the so-called Fisher-Tropsch process to provide up to half of their transportation fuel needs during World War II. Later, South Africa began a major coal-to-liquids program during the Apartheid era and now maintain the world's largest CTL industry in the world. The country's factories produce 160,000 barrels of fuel a day, a little more than all the residents and businesses in Utah use each day. The traditional process uses carbon monoxide, carbon dioxide, and hydrogen as the ingredients in the molecular soup that gets turned into hydrocarbons. The Science process uses just CO2 and hydrogen. Glasser's new production method allows them to set a lower limit on the amount of energy that would be needed to transform solid coal into fuel.
The very best possible CTL process would require 350 megawatts of input to make 80,000 gallons of fuel; the current process uses more than 1,000 megawatts.
Even with the small efficiency gains, a large, domestic, carbon-intensive source of transportation fuel would throw a wrench into many plans to reduce emissions from vehicles. [More]

Even with high-muscle political backing, biofuels are eventually subject to the same competitive challenges as any other product in the marketplace. We're seeing now how sub-$50 oil clobbers the business model for corn ethanol, imagine if we were making gas from our own coal and couldn't use the national security argument.

Pushback momentum...

Regardless of your position on the food-fuel debate, it would appear that the anti-biofuel forces have got game.  Newer studies are underlining what first glances imply - you can't divert agriculture to fuel without adverse consequences for food.

"Without the increase in biofuels, global wheat and maize stocks would not have declined appreciably and price increases due to other factors would have been moderate," says the report. The basket of food prices examined in the study rose by 140% between 2002 and this February. The report estimates that higher energy and fertiliser prices accounted for an increase of only 15%, while biofuels have been responsible for a 75% jump over that period.

It argues that production of biofuels has distorted food markets in three main ways. First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel. Second, farmers have been encouraged to set land aside for biofuel production. Third, it has sparked financial speculation in grains, driving prices up higher.  [More]

[Update: Tyler Cowen mirrors my response about the 75%-3% swing in effect.  Both are probably wrong.]

As ethanol proponents activate their own expert responses, the ensuing debate carefully sidesteps the issue that is life-or-death for too many global citizens: How can we afford food?

As troubled as I am about our choice to subsidize a dubious substitute energy source,  I am equally heartened to see the vigor with which advocates of a more rational energy policy are entering the fray.  We may yet find a path that allows most people to make decisions to comprise a market that overrides fatuous government policy.

It's not speculators...

Driving the market up. It's demand, voluntary and mandated. In fact, the speculators could be helping the market through this incredible and wrenching transition.

The results suggest that after an initial surge from early 2004 through mid-2005, index fund positions have stabilized as a percent of total open interest. Traditional speculative measures do not show any material changes or shifts over the sample period. In most markets, the increase in long speculative positions was equaled or surpassed by an increase in short hedging. So, even after adjusting speculative indices for index fund positions, values are within the historical ranges reported in prior research. One implication is that long-only index funds may be beneficial in markets traditionally dominated by short hedging. Attempts to curb speculation through regulatory means shoclass of speculators. [More]

Economists all all kinds are lining up behind the same conclusion. But the problem is the old hammer-nail syndrome. Congress only has a hammer and speculators are the only thing faintly resembling a nail. We can't do much about Chinese demand for steel, for example. But it would make good political theater to regulate spec money, many reason.

Some of the best minds in academia, to say nothing of blogging, have been probing the question of the extent to which financial speculation has influenced oil prices. The conversation has been long and detailed, so I'll just suggest that if you're interested, you should read this post, by Mark Thoma, and this one, by Tyler Cowen, and follow every link. I'll also give Mr Cowen the last word, for now:

The bottom line is that when it comes to the key substantive questions about the oil market - why are prices so high -- the correct answer is the Lachmannian one: "expectations." If you push one step further on that, and try to evaluate or "source" those expectations, the correct answer is "we don't know."

The ravaging effects of a soaring prices are starting to be felt keenly on hog farms and in grain-consuming developing countries. So, the blame machine is getting wound up as well.

The target is too easy to find, unfortunately. Index funds certainly fit the stereotype but an even easier-to-attack scapegoat worked too hard to hog the spotlight to hide now.

The human cost of the global biofuel switch was put in stark terms today by international advocacy group Oxfam, which released a report saying biofuels are responsible for pushing 30 million people into poverty (International Herald Tribune, Reuters and BBC coverage). The widely noted report asserts that the increasing use of grains as biofuel feedstocks is responsible for 30 percent of the increase in food prices, and that’s hitting the world’s poorest hard.

The report, written by Oxfam biofuel policy adviser Rob Bailey, urges developed nations to abandon their biofuel mandates and get rid of the subsidies and tariffs on biofuels that are destroying the ability of the market to appropriately adjust biofuel and food supply and demand. These economic hurdles have lead to an all-time low in grain reserves, the report says, and pushed food prices to record highs. [More]

The floods in Iowa have created a perfect visual aid for biofuel opponents. Along with a meat industry meltdown, grain farmer windfall profits, and mediocre E-85 experiences, it would seem like ethanol especially might be in for a rough time.

I don't think so. As long as oil prices hold or advance, it will be livestock and people who cut back, regardless of government action.

This runaway train has too much momentum.

We need a better marketing plan...

The food-fuel debate may be over before corn farmers realize it. With the exception of a few in-house economists, the overwhelming consensus of Big League Economists [plenty more examples] is exactly what common sense is leading many consumers to conclude: ethanol takes corn acres away from food production, and the effect hits the world's poor the hardest, because they consume mostly grain.

Even one of agriculture's oldest stalwarts and Past Master Diplomatic Justifier of Farm Policy, Keith Collins is stating the obvious:

The Agriculture Department’s own longtime chief economist, Keith Collins, who retired in January, said that ethanol was the “foot on the accelerator” of corn demand — an essential feed for animals, as well as a part of many diets — and merited renewed debate. He said Congressional mandates for ethanol would require farmers to grow more corn for conversion to biofuel, at the expense of feed corn and other food crops.

“You’re building in tremendous increase in demand,” said Mr. Collins, who emphasized that he was not necessarily against ethanol. “It’s an increase that is going to feed into food prices.”

The United Nations report, the global agriculture outlook through 2017, said prices for farm crops will remain substantially higher over the next decade because of fundamental changes in demand, though they will gradually decline from current highs.

Because the recent spike in crop and food prices has been caused in part by temporary factors like drought, the report predicted that prices should decrease as weather conditions return to normal and crop yields improve.

“At least we hope they are temporary,” said Angel Gurria, secretary-general of the O.E.C.D., alluding to the potential impact of lasting climate change on agricultural production.

In addition to reviewing ethanol policies, the report said governments should reconsider trade policies like export bans that do not allow farmers to take advantage of higher global prices for agriculture commodities. [More]

I think we are just starting to see the effects of $6 corn on food prices here due to the longer response time from the meat industry - especially beef. In high-grain-consuming countries, the results are in your face right now. One clue will be to watch the tenor of the debate at the World Pork Expo this week. It is crucial to remember that the lion's share of the economic good ethanol does for farmers is restricted to grain farmers (and more especially, grain farmowners) - not all farmers.

The debate will also be roiled, oddly enough, by growing consumer experience with higher blends of ethanol. Consider this e-mail I received last week responding to our Roundtable on US Farm Report.

I am a central IL farm wife who talked her husband into buying a 2008
Chevy Impala which is a flex fuel car. Our first few tanks of gas we got

28 mpg. we then tried 2 tanks of ethanol which dropped our mileage to 17

mpg. That was about 15000 miles ago and the best we have done with
regular gas since the ethanol is 23 mpg. I have tried working with the
dealer who tells me that unless the computer on the car shows an error
message there is nothing they can do. I then contacted GM and was told
the same thing. I am a farm wife who would really like to support
ethanol but frankly for us it has not worked out well at all. Could you
tell me how I can contact Beth Lowry? I am at my wits end with this car
and at this point don't have much good to say about ethanol or GM. I am
constantly being told that no one has seen a mileage drop like we have
experienced. Our last two cars have been Impala's but the next one won't

be and if we can't find someway to improve the mileage on this gas hog
we won't consider ethanol again.

It has been a mistake, IMHO for the biofuel industry to downplay the reduced mileage of E-85, and highlight those few outlier examples of nearly equivalent, or physics-defying better mileage of higher ethanol blends. The stuff on has 70% of the energy of gasoline, fer cryin' out loud. When consumers like the lady above run into reality, telling them, "Who ya gonna believe - me or your own eyes?" seriously undermines any shred of credibility the ethanol industry has left. Pushing to install E-85 pumps will only replicate such experiences, I suspect. In the end, those pumps will serve mostly those who buy the stuff for non-economic reasons, like reducing Mideast oil imports (snicker).

But the real detonation could be caused by this springs wet weather which prompts the loss of a few million corn acres and a couple of bu/A in yield to produce a little too little corn for all our current customers.

That's when things will get moving. And if Hillary is playing the I-told-you-so game in preparation for 2012, and McCain steps into the White House, the current administration's precedent of unilateral executive action could allow the old subsidy foe the opportunity to change the rules of this rigged market.

All that could be avoided. Let go of the tariff and blender credit, and shift the blame to the market, which will sort out winners and losers more fairly than any legislator. The risk is low and the defense gains for the corn industry immense.

Maybe it's a grown-up response, after all...

Greg Vincent drolly compares the Indian response to the food crisis as a sandbox fight between children. To be fair, he enlarges on the simile in the original article in the NYT. However, I would offer a different perspective, trying to see the issue from closer to the point of view of 1.1 billion Indian citizens.

First, as I noted below in the comments, for some bizarre reason, biofuel proponents have seized on the emerging consensus view that diversion of land from food/feed crops to fuel is only ONE of the the reasons for skyrocketing food prices to absolve all blame. Bluntly put, they translate "not the only reason" to read "not a reason at all".

Compounding the confusion, most statements I have read simply stop smugly at that conclusion, implying that multiple causes means we cannot and should not do anything about any of them. I suspect ethanol defenders will even demand equal treatment for causes, in itself reminiscent of childhood: "if you can't lower oil prices, you shouldn't stop shifting acres to biofuels".

And [since the links to the original NYT article don't work] you couldn't read this curious coincidence further down which I found important:

Some economists argue that blaming India’s growth is not only unfair, but makes little sense.

Food prices have not been rising continually as developing nations grew, said Ramgopal Agarwala, a former World Bank economist and senior adviser at RIS, a research institute in New Delhi. “They were static until 2006, then in 2007 and 2008 there was a sudden spark,” he said. But India has been growing for the last decade. This is “not last year’s phenomena,” he said. [More]

Hmmm. What new supply/demand factor could have exploded in 2007-8?

I have watched as a farm community 300+ times larger than ours struggles with their farm bill while we were loading up ours. The big issue: farm debt relief for millions of producers and whether to cap them for big farmers. It sound familiar until you realize the cap is 5 acres and the amount around $130.

India is working as diligently as its famously bloated and inefficient bureaucracy can to narrow the widening gap between educated workers benefiting from globalization and wretchedly poor farmers laboring to make the transition to modern agriculture. While this occurs, and due to our traditional indifference to this particular part of the world, it is easy to characterize Indian voices as the language of a childhood quarrel.

Except that for those of us with Indian doctors, who depend on Indian graduate students to power our biotech research, and or who have done the math on the the economic power of this emerging giant, the child metaphor falls flat.

Not do I think the CEO of one of our largest HFCS customers would find it amusing. Nor the CEO of the largest US bank. Or even one of ethanol's biggest investors.

The cheapest shot was the trivialization of the food crisis as "kink". It may be a kink where wheat is simply AN ingredient, but I bet it looks a whole lot more serious than a kink when wheat is THE ingredient in your diet.

The first would akin to 19th century Ireland, with poor people primarily eating wheat, and we can get odd effects. We could get such behaviour today with the really poor. In 1985, I happened to be an honoured guest at a hamlet in Western Maharashtra. The lunch they served me was: flat bread made of coarse grain. That's it. There was nothing else, just powdered red chili for flavour. [More from a superb article I linked earlier]

A good friend of mine has a son who served in the Peace Corps in a desperately poor country. When he returned home, his son never got over the transition to food in abundance here, and it angered him deeply. My friend tried to understand the enduring resentment his son felt. Most of us simply cannot being to comprehend the effect of profound hunger on lives, and we'd better try to learn.

But my objection does not arise solely from a wishy-washy humanitarian sympathy, although that should suffice. Just as we ignored and condescended to China for decades only to face a future where the Chinese influence touches us often and powerfully, I think India will have a similar effect - and agriculture in the US will not be immune.

Here's a solid example of a reverse "kink" courtesy of those hungry farmers in India: potash prices.

Exports to China by Canpotex and Belarusian Potash will resume in June after a three-month stoppage due to price negotiations. India signed a contract with the two trading companies, which market more than half the world's potash, last month at a record $625 a ton, including freight costs. [More]

And if you think gas prices are high now, wait until Tata's $2500 car hits the streets in India.

Kink that.

If we had a few hundred million citizens who face hunger daily, a farmer suicide problem, and one of the fastest growing populations, we might also be upset when global wheat supplies shrink due to corn displacing wheat acres - regardless of the economic reasoning. And if our traditional supplier told us, "It's your own fault for economic progress," I think I would remember that response for a long time. Even if our biofuel argument were sound (which I dispute), respect for the plight of Indian citizens and refraining from unhelpful metaphors cost us little, even when attacked unjustly (in our opinion).

People are power. I am more convinced of this every day. So despite any economic and social prejudices, I suggest discretion in our language - something we superpower citizens may have to brush up on.

A chance to end an argument...

With oil prices climbing relentlessly - much to the dismay of analysts who thought demand would tail off above $100 or so - most of the clamor is understandably unhappy. And the forecast is even more alarming.

But in her inaugural post at Biofuels Update, TP editor Jeanne Bernick shares some new perspective from one of my favorite ag economic myth-busters, Bruce Babcock, who told legislators:

" ...that changes in federal biofuels policies now will not have a dramatic effect on food prices in the short term. And in the longer run, corn and food prices will be determined largely by the price of crude oil."

Biofuels proponents will undoubtedly seize on this opinion as a reason not to touch the the government training wheels for the ethanol industry, since it wouldn't help food prices much.

I think that would be reading it backwards. Here's the key conclusion for me:

Second, in the long run, if gasoline prices rise even higher and signal that we need alternative fuels, the corn ethanol industry will expand well beyond current projected levels even without government subsidies, unless production is somehow capped. [More]

What we are staring in the face is a gold-plated (or oil-smeared) opportunity to bullet-proof the ethanol industry from the whims of legislation and popular belief. We could lose the subsidies and never look back.

Best of all we can start working at our real profession - growing things people want to buy - instead of trying to manipulate government officials and consumers with spin and pathos.

Just think about it. Critics can write or say anything they want, and we won't even have to listen. We'll just answer to the market.

Now we're getting somewhere...

In the frantic push to find something other than biofuels to blame for food shortages, I think we have winner: golf.

Reuters reports that surging Asian economies, rising living standards, and a younger generation that prefers less labor-intensive resort and golf course employment have hurt Asian rice production.

The Filipino government has ordered a halt to the conversion of farmland — which developers recently challenged — and Beijing added golf courses to its list of banned land usages. [More]

Interestingly, the golf industry is not thriving here in the land of exorbitant greens fees. Along with most leisure pursuits requiring exertion, numbers are down. Still, since I don't play, I can happily blame those guys for the food crisis.

A special kind of math...

The corn growers' favorite hired data cruncher points out yet again what a good deal ethanol mandates are in states like Missouri:

The use of a 10 percent ethanol blend saved Missouri drivers 7.7 cents per gallon at the retail pump in 2007 for a total savings of $158.2 million, or $40 for each of Missouri’s 3.9 million licensed drivers. Reflecting current gasoline and ethanol price movements the savings are expected to average 9.8 cents per gallon or $72.80 per driver this year as 10 percent ethanol is used statewide in 2008.
Increased use of ethanol will continue to save money for Missouri drivers over the next decade although the size of the savings will depend on pattern of gasoline and ethanol prices. Using price projections for motor gasoline and wholesale ethanol through 2017, we estimate that the use of E-10 will save Missouri drivers an average of 7.2 cents per gallon at retail over the next decade. This amounts to annual savings of $214 million or $54 per driver. The details of this projection are shown in Table 1. [More]

If you take the time to read the analysis, you'll note he includes in the 51-cent blender's subsidy in the ethanol price. So the taxpayer spends 51 cents to save the consumer 8 cents, according to my cyphering. Sorta like crop insurance. And with $4 gas, it looks like a whopping 2% off.

This is a federal income redistribution system, not a fuel strategy.

For another view, the AAA has numbers of its own.

The anger over high gasoline prices was the main impetus behind the 2005 and 2007 energy bills and their successively higher ethanol mandates. The public may have mistakenly assumed that ethanol is cheaper than gasoline, but reality is beginning to hit home. When everything is taken into account, including the lower fuel economy from ethanol-blended fuel, the mandate is adding to the cost of driving—which is precisely why ethanol had to be mandated in the first place. The AAA calculates that ethanol has recently cost 20 to 30 cents per gallon more than regular gasoline.[1] And that does not take into account the heavy taxpayer subsidies, including a 51-cent-per-gallon tax credit, without which ethanol would be even costlier. [More]

I'm not sure the "savings" numbers will guide public sentiment for very long. As oil prices and corn prices climb, the debatable economics of ethanol become harder to demonstrate, and the crowd of grumblers is growing. And some of the grumblers are other biofuel producers.

Just as farmers for years had linked food price to commodity price, consumers are choosing the obvious connection as well. A few more months of household budgets dominated by food and energy costs could throw a real wild card into the politics of biofuels.

A crisis of conscience - for now...

Most farmers in red states are decidedly red. The key issues: guns, gays, God, war, torture, and the firm conviction they are right about all of them make them the Republican party's most loyal (albeit sparse) votes. Sen. McCain will test that linkage as never before, and he told farmers this in Ames, IA last November, by hitting them where it hurts.

Many Iowans have heard that I oppose federal subsidies for ethanol production. Some of you will have heard that I oppose a protective tariff against sugar-based ethanol imports from places like Brazil. Some of my opponents will describe my positions as opposition to American ethanol producers or, for some inexplicable reason, a personal dislike of Iowa. Neither is true, of course, and I appreciate the opportunity to set the record straight. But I have always believed before you can win someone's vote, you have to earn their respect. And I intend to earn your respect by being honest with you.

Yes, I oppose subsidies. Not just ethanol subsidies. Subsidies. And not just in Iowa either. I oppose them in my own state of Arizona. I am a proud of the conservative tradition that the government can sometimes best serve the interests of the American people by knowing when to stay out of their way. And I've always been reluctant to grow the size of government to do the business of the American people for them or to favor one industry over another or because one sector of our economy has better lobbyists than another. I want the government to do its job, not your job, to do it better and to do it with less of your money. I want our economy to grow, not the size of government. And I don't want government to divert resources from the growing industries that hold the key to America's continued economic success. Excessive and intrusive regulation undermines the flexibility needed for business success.

There is no economic force on this globe that is stronger than free people. Entrepreneurs lie at the heart of innovation, growth, and advancing prosperity. Entrepreneurs should not be shackled by excessive regulation that raises the cost of business. Entrepreneurs should not be disadvantaged by earmarking and pork-barrel spending that favors politically connected competitors.

I trust Americans, I trust markets and I oppose subsidies. As President, I'll propose a national energy strategy that will amount to a declaration of independence from the risk bred by our reliance on petro-dictators and our vulnerability to the troubled politics of the lands they rule. That strategy won't be another grab bag of handouts to this or that industry and a full employment act for lobbyists.

Yes, that means no ethanol subsidies. But it also means no rifle-shot tax breaks for big oil. It means no line items for hydrogen, no mandates for other renewable fuels, and no big-government debacles like the Dakotas Synfuels plant. It means ethanol entrepreneurs get a level playing field to make their case -- and earn their profits. [More]

Yikes! But consider that the current front-runner for the GOP VP slot is Gov. Tim Pawlenty from Minnesota (Land of 10,000 Mandates). This strikes me as more than curious.

Should Sen. McCain choose Pawlenty, I think the above quote will fade into empty rhetoric. Despite his efforts to portray himself as a fiscal hawk, he is far more interested in lowering taxes than controlling spending. This urge arises from the now debunked myth that tax cuts "pay for themselves".

The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve. Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion). ... [More]

Yo, Senator - we've heard this refrain from other so-called "fiscal conservatives". So, how's about cutting spending first, and then cut taxes.

Farmers can relax, IMHO and vote on issues that really matter, like "elitism", secure in the knowledge that a well-trained Congress will curb the War Hero's rational economic instincts.

Unless, of course, we fail to push through another "Corn-first" Farm Bill.

Then it will get really interesting.

Is the EU on better track?...

Consider this informed comment from a loyal reader:

Hey check out this PDF on the new BMW Diesel. I found out about it from
a science show I watch and went to the website and did some further
research. I find this kind of development very encouraging as it will
serve to change the opinions about diesels which in general are far more
fuel efficient than a Gasoline engine of similar output.

I know we will see this country continue down the "too long and too the
slow road" adoption of Diesel unless someone at the government level
forces migration by some forms of motivations in the form of tax credits
or subsides to make the distribution networks change over. In contract
the European community has been moving this way for quite some time and
currently companies such as BMW see 70-80% of their new cars sold in
Europe use Diesel instead or gasoline.

One a side note for those wondering about Diesel it is actually easier
to refine than gasoline, and produces more energy per gallon thus more
efficient. It should also be noted that it would not take much effort to
distribute it (unlike Hydrogen which Rick Wagoner of GM says is at least
10 years away) since most stations have several different grades of
gasoline that are simply marketing tricks and make very little
difference to most cars.

I myself have owned cars in the past that did require a higher octane
than 87 RON and understand we need a 91 RON slot on the pump, but do we
really need all the other grades besides 87 RON (minimal RON required by
most engines) and anything else other than 91 RON (the minimal required
by most higher performance sport cars) this is to say do we really need
5 grades of gas as is the case on my local 7-11 pump. Could we replace
one of the mid grades with with E85 and the other with Diesel or
BIO-Diesel. +++ BTW E85 is about 105 RON +++.

The market dynamics argument is simply another form of the famous
"Chicken and Egg" argument ; as why would people buy a Diesel or Ethanol
burning vehicles if they simply can't find fuel. This limits the market
from the very beginning, and makes the "Market Dynamics" statement
inappropriate. If we want to give generous tax credits like "W" has to
the Oil Industry it should be for something they actually did that was a
positive thing , like building a more easily available distribution
network for Alternative Fuels of which unfortunately in the USA Diesel
apparently is considered.

I could go diesel in a heartbeat myself. But it's important to remember we are a corn nation, not an oilseed continent like Europe. Rapeseed works well in their climate and for biodiesel. But one larger problem for diesel fans is that it is the second, even if better idea, and the guys that got to the filling station first are selling ethanol. They won't cede territory easily, making the "shelf space" issue significant for fuel retailers.

Still, the inherent efficiencies of the machines (diesels) themselves will have impact, especially on the larger engine market sector. as noted in some other posts, fuel prices are roiling the whole transportation industry, and forcing big changes.

[Thanks, Butch]

Stick with it for the last two minutes...

I'm a big Colbert Report fan, and this interview with Craig Venter show why. Notice the comment about bacteria that can generate "gasoline from sugars".



As the bugs get better and better, the yield for bioenergy rises, and many of my criticisms of efficiencies become less valid. This whole science arena is made possible by high energy consumption and expensive energy supplies. While we are concentrating on supplying the feedstock, guys like Venter will make gazillions creating the life-forms that transform those calories into fuel.

Capitalism is a beautiful thing, man.

Any minute now...

A breathless announcement of a cellulosic ethanol breakthrough.

At a Brazilian ethanol conference June 4-5, Brazilian government-funded researchers said they have perfected a method of producing cellulosic ethanol that drastically reduces the cost of processing. At this point, the assertion -- and many other similarly optimistic claims made at the conference -- is unconfirmed. But should it prove true, the world could well be peeking over the horizon at a massive geopolitical, not to mention economic, shift. [More]

As many of you know, I consider cellulosic ethanol the cold fusion of agriculture - mostly because the energy density of the feedstock is so low, and transporting that much stuff negates the energy yield.

More tricky is the problem of the ethanol production itself. Cellulosic biomass is bulky and materially complex, unfit for the same methods of ethanol extraction used with corn. In order to even get the stuff into manageable form, processors must soak it in a pre-treatment bath, followed by an acidic or enzymatic digestion that splits it into simple sugars. [More]

Perhaps cellulosic ethanol will become a major part of energy plans. But think about the ramifications if we can sell crop residue.

The ethanol boom will look like a cheap date.

[via Andrew Sullivan]

Go figure...

The livestock industry asked some economists to estimate the effects of letting ethanol tax credits and tariffs expire in 2008. They seem to think it would be a good idea. So, equations were concatenated, models lovingly constructed, and serious hard-core economicking was done.

In the end, the cattle and pig folks perhaps didn't get the answer they anticipated.

An excellent summary is here at Farmgate. But lightly skipped over in the report and the study paper itself was this little gem.

Livestock producers pay lower feed costs, but their inclination to raise output in response leads to falling output prices as quantities move along an inelastic demand. [Full report]

Run that around in your mind for a while.

First lesson: it's your own fault. You silly producers and your "inclinations".

Second lesson: Lower feed costs are actually bad for livestock producers, because when feed costs go down, producers put more cattle on feed and farrow more pigs. With demand inelasticity, livestock income then drops as more meat lowers the price.

Say what??

Reading this backwards, can we assume the new higher prices for corn are raising profits in the livestock sector? Those cowboys and hog producers should be rolling in the profits when corn hits $6!

I will be looking forward to some cattle economist reaction to this strange conclusion. My instinctive response is meat production expansion is more a function of higher sales prices rather than lower input prices. After all we had $1.80 corn and expansion livestock numbers did not explode.

[Update: As I was driving to South Bend (3 hrs 9 min best time) I had one of those "poster-regret" moments. The report shows "livestock receipts" which I believe to be gross sales - not gross profits as I had alluded to above. Hence lower feed costs should provide larger margins. However, looking at net farm income numbers lower down the table, it's hard to separate out the livestock/crop differences. It seems to show both sectors are net losers to me. My questions still stand.]

Science - it's stranger than truth.

One other assumption that caught my eye is that the mandate (RFS) stays where it is. I think it is reasonable (politically) to suggest that number is going to rise. I made this case previously. In which case, the loss of tax credits and tariffs mean much less, I would think.

Reading carefully, I also note that the world very likely will not end without biofuel subsidies. (Well, they can't be absolutely certain of course)

The rest of the conclusions are pretty predictable. Ethanol production slips, ethanol expansion slows, and farmers lose about $3B in gross receipts.

Oh yeah, taxpayers save about $6B. As if we care.

Still, it kinda makes you wonder where the other $3B goes each year, doesn't it?

[The report does not note what the income implications for economic research organizations are if the tax and tariff weren't around to study.]

Everybody loves a subsidy...

ConocoPhillips and Tyson's announced plans to make biodiesel from animal fats. Sounds great, right?

Oil major ConocoPhillips and Tyson Foods Inc., the world's largest meat producer, said Monday they're teaming up to produce and market diesel fuel for U.S. vehicles using beef, pork and poultry fat.

The companies said they have collaborated over the past year on ways to combine Tyson's expertise in protein chemistry and production with ConocoPhillips' processing and marketing knowledge to introduce a renewable diesel fuel with lower carbon emissions than petroleum-based fuels. [More]

But wait, it's not just about patriotic energy independence-stuff. It's about tax breaks.

The decision to expand the break, which Blunt opposed, may be worth hundreds of millions of dollars to ConocoPhillips and other refiners, while increasing demand for products from Tyson, the nation's largest meat packer and second-largest poultry processor.

The tax credit was ``hijacked,'' said Brian Appel, chief executive officer of West Hempstead, New York-based Changing World Technologies, the privately held company that owns the plant in Carthage, Missouri, that Blunt was attempting to help when he inserted the provision into an energy bill in 2005. [More]

So when farmers complain about Big Oil getting tax breaks, they need to remember it is really hard to keep a subsidy to yourself.

Especially with this administration.