Incentives for production of flex-fuel vehicles, along with mandates and
incentives for production of feedstocks and blending of biofuels, have helped
set the stage for the current controversy over global food prices. Those who
are spreading hysteria over rising food prices in the U.S. and abroad are all
too happy to lay the blame on biofuels, citing the demand on corn and soybean
crops used to fuel the rapidly increasing global appetite for ethanol and
biodiesel. Yes, mandated increases in biofuel use are putting pressure on crop
supplies and prices. Corn and soybeans grown for ethanol and biodiesel have
contributed to higher prices for those crops over the past few years. But
that's not the whole story.
Prices for all farm products are up sharply, not just for corn and soybeans. Global food and grain prices would still be rising, even without corn "diverted" for ethanol production. Here are some key reasons:
In the case of corn, the U.S. Department of Agriculture says only 3% of the more than 40% hike in world food prices is due to corn for ethanol. Overall, food prices in the U.S. are up about 4%, which is only 1.5% higher than normal inflation. According to the USDA, higher costs for a particular ingredient typically have a small impact on retail food prices - less than 20% of total food cost is the underlying food value (e.g., cost of grain). A 50% hike in corn prices raises the Consumer Price Index less than 1%; higher corn prices have added just two cents to the price of a box of corn flakes, 11 cents to a gallon of milk from corn-fed cows. So where are the food-price increases coming from? As suggested above, higher oil prices are the biggest single factor in food price inflation. Oil affects production costs, fertilizer, transportation and distribution of food products. For the first four months of 2008, fertilizer costs rose 67%, and fuel increased 43%.
Only 10% of U.S. corn is processed directly into human food products (e.g., cereals, corn syrup, starch). Ethanol is derived from feed grains, not food grains. Feed corn mostly goes to livestock. U.S. corn production has risen in response to rising demand and the resulting higher prices - other uses of U.S. corn did not decline, because corn acreage has expanded to meet demand. Additional capacity is being added specifically for ethanol.
In 2007, American farmers produced 13.1 billion bushels of corn on 85 million acres. About 22% of that corn was used to make 7 billion gallons of ethanol. That's a 50% increase from 2006 to 2007 in corn for ethanol, and it will be up a further 33% this year, from 3 billion bushels to 4 billion. But according to the USDA, other corn uses will fall, exports will drop off and feed-corn demand will be down. Even with the increase in corn for ethanol, there still will be enough production to supply the domestic market, increase exports to record levels and stockpile a 10% surplus. So much for ethanol corn squeezing the market!
At this pace, producers will be able to meet the Renewable Fuels Standard (RFS) mandate of 15 billion gallons of corn ethanol by 2015 without reducing the amount of corn for food and feed, and without increasing acres planted. Continuing increases in yields will help.
Everyone is upset about high oil prices and the dramatic impact on the auto industry. But oil prices would be at least 15% higher if not for ethanol currently blended into gasoline - and food prices would be even higher. Biofuel production has cut U.S. and European crude oil consumption by 1 million barrels per day over the last three years. Current ethanol production is equivalent to imports from our fifth-largest foreign oil supplier. Ethanol production does not consume corn entirely - one third of it is converted to distillers grain or gluten feed, a high-value livestock feed.
Under terms of the RFS outlined in the Energy Bill, corn ethanol production will top out at 15 billion gallons in 2015. Mandated ethanol production will continue to rise, reaching 36 billion gallons in 2022. But all of the increase above the 2015 level must come from advanced biofuels - cellulosic and other non-corn feedstocks.
To meet that goal, producers must speed up the transition from corn to non-food crops, especially cellulosic feedstocks. Cellulosic ethanol can reduce greenhouse gas (GHG) emissions by more than 85%, compared to gasoline (corn ethanol cuts GHG by about 20%). At the mandated RFS volumes, cellulosic ethanol could displace 30% of current U.S. petroleum production. The leading cellulosic candidate is switchgrass, and its merits are many. It's a hardy perennial that thrives in adverse conditions and can be grown virtually anywhere, including land not currently farmed. It absorbs carbon from the atmosphere and deposits it in the soil. Experimental strains are being developed for planting on marginal, highly erodible lands similar to those in the USDA Conservation Reserve Program - 35 million acres that farmers are currently paid not to plant. Switchgrass managed as a bioenergy crop can produce ethanol yields per acre similar to corn - 300 gallons per acre vs. 350 for corn. Yields will continue to improve and could double.
For ethanol production, the whole switchgrass plant is used rather than just the grain (as with corn). Switchgrass does double duty - it's processed into ethanol but also burned to power the processing plant. A University of Nebraska switchgrass study involving large fields on farms in three states shows that switchgrass grown for biofuel produces 540% more energy than is needed to grow, harvest and process it into ethanol. Cellulosic ethanol production using existing technology is estimated to cost $2.25 per gallon, making it competitive with gasoline (assuming $120/barrel oil). Coskata, one of the leading developers of cellulosic ethanol processes, is targeting a production cost of $1 to $1.50 per gallon. That would be below the cost of corn-derived ethanol. The key to cellulosic success will be combining what is now a two-step process into one, known as consolidated bioprocessing. Cellulosic process-developer Mascoma says a one-step process will reduce raw materials and capital requirements, and cut overall processing costs in half - the difference between profit and loss.
We've seen General Motors invest in Coskata and Mascoma with the stated purpose of demonstrating the viability of sustainable non-grain-based ethanol. Of course, GM and other automakers hope to see enough ethanol available to supply the flexfuel vehicles they produce, and for which they earn a CAFE credit of 1.2 MPG per unit. The U.S. Department of Energy estimates cellulosic ethanol could be cost-competitive in six years. The new Farm Bill, approved in May 2008 via a congressional override of President Bush's veto, allocates $1 billion for bioenergy research and incentives.
NAFTA & CAFTA Canada is working to establish an E5 standard by 2010. The province of Ontario mandated E5 in 2007. Canada produces ethanol from wheat, corn, barley and potatoes. Legislation for an E10 standard is pending in Mexico. National oil company PEMEX, a producer of MTBE (methyl tertiary butyl ether), opposes the use of ethanol as an additive. Preferred feedstocks for ethanol are sugar cane, corn and sorghum. Costa Rica, El Salvador, Guatemala and Nicaragua are in various stages of E10 planning, but no firm policies are in place. All would rely on sugar cane as their feedstock.
Brazil is the poster child for ethanol in South America with a long history of ethanol use back to the 1970s. The current minimum blend is E23 from sugar cane, which provides an energy yield from ethanol eight times higher than the energy used to produce it. Nearly all stations sell ethanol. Although ethanol production is not subsidized, consumers receive tax credits for buying flex-fuel vehicles, which now make up 90% of the market. Elsewhere in South America, ethanol mandates are scheduled or in place in Argentina (E5), Peru (E8), Columbia (E10), Bolivia (E10) and Paraguay (E18). Ecuador and Venezuela are in the process of establishing ethanol standards. Sugar cane is the preferred feedstock.
The EU is the world's largest biodiesel producer and has mandated 10% biofuels by 2020. Rapeseed oil is the main feedstock for European biodiesel, but the EU cannot produce enough to meet its 10% goal. It will have to import either rapeseed or finished biodiesel; Russia and Ukraine are increasing rapeseed production to help meet demand.
All new cars sold in Japan must be E10 capable by 2010. Ethanol production from sugar cane is in early stages of development, and availability is limited. China has set a biofuel goal of 15% of gasoline and diesel by 2020. After a long history of producing cornbased ethanol, China has banned the use of food crops for biofuels and is shifting to cassava (a tropical plant), sorghum, oilseed and Jatropha trees for biofuel feedstocks. China's corn production is being reserved for food and feed in the face of rising domestic demand for meat. E5 from sugar cane has been mandatory in India since 2006. Most cars are E10 compatible.
South Asia is moving toward ethanol and biodiesel blends. Thailand leads the way with an E20 minimum by 2011, B5 nationwide by 2010 and total renewable energy production targets of 8% in 2011 and 22% by 2022. Ethanol fuel is just now appearing on the market in the Philippines, where E5 is mandated as the minimum blend starting in January 2009, increasing to E10 in 2011. The country has no domestic ethanol production capacity and is currently importing sugar cane ethanol from Brazil. Several domestic sugar cane ethanol plants are expected to go into production by early 2009. Malaysia and Indonesia have biodiesel targets but none for ethanol.
Automakers face a patchwork of regulations and mandates across the world for alternative fuels, and the vehicles to burn them efficiently. The good news is that the technology required to accommodate the various biofuel types and blends is available and affordable, and the outlook for biofuel growth is bright. One study says crop yields could increase up to 55% by 2030. That would enable biofuels to satisfy as much as 40% of global fuel demand, easing the pressure on oil (and oil prices) and substantially curbing CO2 emissions - all of which would be great for OEMs and suppliers.
Eric Fedewa may be reached via email at ericfedewa@csmauto.com.
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