Wall Street Journal Slams Ethanol

ethanolplant.jpgTwo months ago, I never really thought about ethanol. Now, thanks to Progressive Rail’s efforts to get an ethanol plant built in Bridgewater Township, I’m reading everything on the subject that comes my way.

In the weekend edition of the Wall Street Journal, there was an editorial piece called “Very, Very Big Corn”. It started with President Bush’s recent call to reduce gasoline consumption and proposal to invest $2 billion dollars to promote the development of cellulose ethanol.

According to the article, “cellulosic ethanol-which is derived from plants like switch grass-will require a big technological breakthrough to have any impact on the fuel supply. That leaves corn- and sugar-based ethanol, which have been around long enough to understand their significant limitations.”

The piece goes on to say that the recent “stampede” toward ethanol is based on the federal and state subsidies that ran to about $6 billion dollars last year, “equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it-despite the recent high oil prices.”

The subsidy has caused the percentage of the U. S. corn crop devoted to ethanol to rise from 3% to 20% in just five years, for a total of about 8.6 million acres of American farmland. According to the article, “reaching the President’s target of 35 billion gallons of renewable and alternative fuels by 2017 would, at present corn yields, require the entire U. S. corn crop”.

The price of corn rose nearly 80% in 2006 alone. This dramatic increase is driving up the price of burgers and making America’s meat-packing industries less competitive in the world market.

The Journal, hardly a popular subscription among tree-huggers, then raises the environmental issues. “As an oxygenate, ethanol increases the level of nitrous oxides in the atmosphere and thus causes smog”. In terms of global warming, the use of ethanol in gasoline “reduces greenhouse gas emissions by no more than 5%”. Well, I will say that, in my opinion, 5% is better than nothing, but we should be striving for more substantial objectives.

Moving on to the cost benefit analysis, of greatest interest to my personal evaluation process, the piece notes that scientific opinion is “divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol’s net energy output is a marginal improvement of only 1.3 to one.” Not much better than the 1.25 to 1 ratio cited in the University of Minnesota – St. Olaf College report cited by Tracy Davis in a previous Locally Grown blog.

The article concludes that “betting billions of tax dollars and millions of acres of farmland on this hope strikes us as bad policy. If cellulose is going to be an energy miracle-an agricultural cold fusion-far better to let the market figure it out.”

If the Wall Street Journal is correct, and that ethanol doesn’t make economic sense, environmental sense or energy sense, wouldn’t the ethanol plant in Bridgewater Township be created so that a few investors could harvest some sun-setting subsidies?

10 thoughts on “Wall Street Journal Slams Ethanol”

  1. NCGA Rebuttal: Very, Very Big Corn

    Wall Street Journal; January 27, 2007; Page A8

    The recent Wall Street Journal editorial “Very, Very Big Corn” went to new extremes in distorting information to denigrate the ethanol industry and U.S. corn producers. In this rebuttal, NCGA will interject facts to the debate.

    WSJ: President Bush made a big push for alternative fuels in his State of the Union speech Tuesday night, calling on Americans to reduce gasoline consumption by 20% over 10 years.

    NCGA: President George W. Bush’s call for increased production of biofuels is a “bold and vital step” toward U.S. energy security and one that that will strengthen U.S. agriculture.

    WSJ: A bit of sobriety would go a long way in discussing this moonshine of the energy world, however. Cellulosic ethanol — which is derived from plants like switchgrass — will require a big technological breakthrough to have any impact on the fuel supply. That leaves corn- and sugar-based ethanol, which have been around long enough to understand their significant limitations.

    NCGA: The ethanol industry is driven by innovation. New technologies will “squeeze” more ethanol out of a bushel of corn. The average ethanol conversion rate today is 2.8 gallons per bushel, up from 2.5 gallons per bushel just years ago. That conversion rate may soon be 3 gallons per bushel or higher because of the likely adoption of emerging processing technologies, including corn fiber conversion and high fermentable starch corn hybrids.

    WSJ: What we have here is a classic political stampede rooted more in hope and self-interest than science or logic.

    NCGA: The growth of ethanol and increasing efficiencies are a result of seeing a need for domestic energy production, finding a solution for that need through extensive research and continuing to build on this need through the production of ethanol from other feedstocks.

    WSJ: Ostensibly, the great virtue of ethanol is that it represents a “sustainable,” environmentally friendly source of energy — a source that is literally homegrown rather than imported from such unstable places as Nigeria or Iran.

    NCGA: Yes, ethanol is a sustainable, renewable, environmentally friendly, domestically produced form of energy.

    WSJ: …federal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol.

    NCGA: The 51-cent “subsidy” is an excise tax exemption that does not go to corn growers or ethanol plants; it goes to the blenders of fuels. It is more accurately a “blender’s credit” put in place by Congress to encourage the blenders to use ethanol because the blenders are primarily the oil industry and would not and will not voluntarily use ethanol because it is not their product. The “tariff” mentioned is in fact a secondary, offsetting duty to prevent U.S. taxpayers from providing an incentive to use Brazilian ethanol, heavily subsidized by its government.

    WSJ: That’s also why the percentage of the U.S. corn crop devoted to ethanol has risen to 20% from 3% in just five years, or about 8.6 million acres of farmland. Reaching the President’s target of 35 billion gallons of renewable and alternative fuels by 2017 would, at present corn yields, require the entire U.S. corn harvest.

    NCGA: It was not proposed that the entire 35 billion gallon target come from ethanol or from corn-derived fuel. However, NCGA has suggested that, given projected trend-line advances in corn and ethanol yields, 15 billion gallons of ethanol may be produced by 2015, utilizing approximately 5 billion bushels of a 15 billion bushel crop (33 percent).

    WSJ: …the price of corn rose nearly 80% in 2006 alone. Corn growers and their Congressmen love this, and naturally they are planting as much as they can.

    NCGA: Prior to the recent increase, corn prices have been depressed for the last five years because of rising productivity and production. In 2006, acres planted to corn dropped by nearly 4 million acres reflecting low prices and high inputs. There is a lot of volatility in agriculture. Today’s prices are simply an example of the market place working. However, today’s prices will not likely last. Farmers will respond in 2007 to market signals and prices will moderate. That is the way the market works. Recall that prices in the countryside were well below $2 per bushel less than a year ago.

    WSJ: Yet for those of us who like our corn flakes in the morning, the higher price isn’t such good news.

    NCGA: Retail food prices are almost totally insulated from the price of corn. When corn is $4 a bushel, the value of corn in a box of corn flakes is less than 10 cents. We don’t think that the WSJ editors are going to go hungry because that’s a nickel more than a year ago.

    WSJ: It’s even worse for cattle, poultry and hog farmers trying to adjust to suddenly exorbitant prices for feed corn — to pick just one industry example. The price of corn is making America’s meat-packing industries, which are major exporters, less competitive.
    NCGA: The livestock and poultry industry has its own cycles and price swings. Over the last five years farm-gate corn prices and retail meat prices are decoupled, with literally no correlation between the two. In contrast, the increase in gas and oil prices of the last three years has been much larger and had a much more significant negative impact on consumers and food prices and our economy.

    WSJ: In Mexico, the price of corn tortillas — the dietary staple of the country’s poorest — has risen by about 30% in recent months, leading to widespread protests and price controls. In China, the government has put a halt to ethanol-plant construction for the threat it poses to the country’s food security. Thus is a Beltway fad translated into Third
    World woes.

    NCGA: Given China’s closed, communist system it cannot be accurately stated if ethanol-plant construction has been halted, much less that it has due to food prices. As to Mexico, it is true that our southern neighbor imports significant quantities of corn from the United States. However, tortillas are primarily made from white corn, while the United States primarily exports yellow corn for livestock feed use. Mexico has a tariff-rate quota system and requires licenses for corn imports. It has restricted the import of white corn to keep local prices for their domestic white corn producers high. Yellow corn and white corn are normally kept in separate channels. While it is true that the higher
    prices of yellow corn in the U.S. have had an impact on domestic corn prices in Mexico, most of the current issue can be traced to Mexico’s handling of its domestic subsidies and its corn licensing system. Ironically, it was just last year that the WSJ was taking U.S. corn producers to task over low corn prices in the U.S. putting Mexican farmers out of business. We just can’t seem to win.

    WSJ: As for the environmental impact, well, where do we begin? As an oxygenate, ethanol increases the level of nitrous oxides in the atmosphere and thus causes smog.

    NCGA: As an oxygenate, ethanol actually causes the fuel blend to burn cleaner and more completely.

    WSJ: The scientific literature is also divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol’s net energy output is a marginal improvement of only 1.3 to one. For purposes of comparison, energy outputs from gasoline exceed inputs by an estimated 10 to one.

    NCGA: This is a false argument that the WSJ just won’t seem to let go. The scientific community put this one to bed long ago. Ethanol’s net energy performance is much better than gasoline when measured on the same scale. In fact, the performance just keeps improving as the industry keeps using better process technology and better enzymes.

    Ethanol is net energy positive and by a wide margin and getting better. In 2006, Bruce Dale of the Chemical Engineering Department at Michigan State University published a study with a better measure of ethanol’s impact. His point was that all energy is not created equal and that we are really short of liquid petroleum. Dale’s study showed ethanol has a liquid petroleum replacement ratio of 20:1, or for every unit of liquid petroleum invested in ethanol production 20 units are delivered to user. His analysis showed that the same ratio for gasoline is 0.85.

    WSJ: And because corn-based ethanol is less efficient than ordinary gasoline, using it to fuel cars means you need more gas to drive the same number of miles. This is not exactly a route to “independence” from Mideast, Venezuelan or any other tainted source of oil.

    NCGA: While the BTU content of ethanol is less than gasoline, any reduction in mileage is negligible for a 10 percent ethanol blend, much less than can be attributed to poorly inflated tires or a “lead foot” with fast starts and stops.

    WSJ: Ethanol also cannot be shipped using existing pipelines (being alcohol, it eats the seals), so it must be trucked or sent by barge or train to its thousand-and-one destinations, at least until separate pipelines are built.

    NCGA: Ethanol has been shipped via pipelines in limited, test volumes. The real barrier to widespread use is in fact the water that Big Oil uses to separate different loads of gasoline.

    WSJ: Even some environmentalists cry foul.

    NCGA: Someone will always take the negative side. Other environmental groups, including Environmental Defense and the Natural Resources Defense Council, are supportive of ethanol.

    The environmental portion of this editorial is the area of the editorial that gets really silly with so-called facts.

    WSJ: Steve Sanderson, president of the Wildlife Conservation Society, tells us that intensive, subsidized sugar farming in Brazil — where the use of ethanol is most widespread — has displaced small tenant farmers, many of whom have taken to cutting down and farming land in the Amazon rain forest.

    NCGA: In 2006, U.S. production of ethanol was greater than that of Brazil, so the WSJ didn’t even get that fact right! The United States is not Brazil, so its ethanol experience does not necessarily translate into potential challenges here. That said, one cannot draw causation of supposed rain forest ills to ethanol.

    WSJ: In the U.S., there is now talk of taking the roughly 40 million acres currently tied up in the Agriculture Department’s conservation reserve and security programs and putting them into production for ethanol-related plants. “The land at risk under this ethanol program is land that’s shown by the USDA to have had great results for the restoration of wildlife,” Mr. Sanderson says, pointing especially to the grasslands of eastern Montana and the Dakotas. Hello ethanol, goodbye bison.
    NCGA: We’re not sure who the Wall Street Journal editors talked with, but certainly not NCGA. NCGA is not advocating a wholesale change to the CRP program, and it is not aware of any such proposal by any major group. “Hello ethanol, goodbye bison” is another comment that is unfortunate and only accurate is its intent to mislead and scare. Most of the approximately 35 million acres in CRP has not seen bison for more than 100 years, if ever.

    WSJ: But what about global warming, where ethanol, as a non-fossil fuel, is supposed to make a positive contribution? Actually, it barely makes a dent. Australian researcher Robert Niven finds that the use of ethanol in gasoline — the standard way in which ethanol is currently used — reduces greenhouse gas emissions by no more than 5%. As Messrs. Taylor and Van Doren observe, “employing ethanol to reduce greenhouse gases is fantastically inefficient,” costing as much as 16 times the optimal abatement cost for removing a ton of carbon from the atmosphere.

    NCGA: It is interesting that the WSJ had to go clear to Australia to find someone to make negative comments on ethanol’s contribution to reducing greenhouse gases. Perhaps they should have talked to Argonne Labs, which found that ethanol-blended fuels reduced CO2-equivalent greenhouse gas emissions by more than 7 million tons in 2004, the equivalent of removing the annual greenhouse gas emissions of 1.04 million cars from the road. Or instead of going to Australia, they could have discussed the issue with U.S. environmental groups like the Natural Resource Defense Council or others who are strong supporters of an expanded ethanol industry because of its contribution to reducing greenhouse gases.

    WSJ: It’s true that scientific advances will probably improve and perhaps even transform the utility of ethanol. Genetic modification will likely improve corn yields.

    NCGA: Yes, it is true that ethanol and corn yields will continue to advance.

    WSJ: And the President insists we are on the verge of breakthroughs in cellulosic technology, though experts tell us the technical hurdles are still huge. We’d be as happy as anyone if DuPont researchers finally discover the enzyme that can efficiently break down plants into starch, but betting billions of tax dollars and millions of acres of farmland on this hope strikes us as bad policy. If cellulose is going to be an energy miracle — an agricultural cold fusion — far better to let the market figure that out.

    NCGA: All research is speculative, but the broader U.S. goals of energy security and an improved environment make this a challenge worth investing in. The market is not necessarily working on the solution given the virtual monopoly of Big Oil over liquid fuel production and distribution.

    WSJ: Not that any of these facts are likely to make much difference in the current Washington debate.

    NCGA: Because the information cited by the WSJ is not necessarily fact, NCGA is hopeful that they are right on this point – that this WSJ editorial will be ignored as an exercise in ignorance.

    WSJ: The corn and sugar lobbies have their roots deep in both parties, and now they have the mantra of “energy independence” to invoke, however illusory it is. If anything, Congress may add to Mr. Bush’s ethanol mandate requests. So here comes Big Corn. Make that Very, Very Big Corn.

    NCGA: While NCGA, our affiliated states and farmer-members should take some pride with the WSJ’s frequent reference to the power of the “corn lobby,” the simple fact is that they may give us slightly more credit than we deserve. The power behind the growth in the ethanol market is coming from a broad coalition representing hard-working Americans, including farmers, environmental groups, consumer groups, labor unions, the auto industry and a host of others. The ethanol agenda is driven by a desire to work toward energy independence and energy security, instead of waiting for the next crisis or terrorist event. The coalition is also driven by the desire to make a meaningful impact on global warming and the devastating impact of petroleum on our environment. Corn growers are proud to be leading the charge!

    WSJ: Sooner or later, our experience with this huge public gamble may make us yearn for the efficiency, capacity, lower cost and — yes — superior environmental record of “Big Oil.”

    NCGA: Surely, you must be kidding! U.S. corn farmers will continue to help America reduce its dangerous dependence on foreign oil in an efficient and environmentally beneficial manner.

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  3. Robert,
    All the people who blog here share full names and are known in the community, can you clearly state who you are, were you’re from and what you do?

    Perhaps, I can suggest this only out interest: Who have been the major investors in the CORN Ethanol industries in the upper-Midwest? This might be good Part II to the discussion so far.

    PS Mr ‘Roberts’, other western countries (like Australia) have already developed the technology for non corn based ethanol production.

    I clearly understand the point you have made about the “the growth of ethanol….seeing a need for domestic energy production….need through extensive research….AND build(ing) on this need through the production of ethanol from other feedstock’s.

    This is great way of saying lets build a new industry…and all the economies of scale that with it. Thank you Robert for your impute, its been an eye opener, but please watch out for the ethanol bubble, it can make you dizzy.

  4. Thanks, Ross, for your continued interest in the ethanol topic. And to Dr. Jason Hill of U of M, who gave us valuable facts and figures in his talk on biofuels at St. Olaf Jan. 18. The front page coverage in Northfield News was a help in opening up the community to more dialog. There have been more letters to the editor recently.

    From the sound of it, NCGA is not receptive to criticism of corn ethanol at this point and I guess that’s understandable. But we can’t gloss over the downside to corn ethanol indefinitely. Farmers with shares in the older plants are worried about losing money and cautioning against expansion. Coop elevator people are finally coming foward with their concerns about being driven out of business.

    And so, I was surprised Progressive Rail’s Dave Fellon was able to find an area agri-center/elevator person, Doug Gilbertson, willing to join him in saying that corn ethanol is still a win-win situation (“Let’s Talk Ethanol,” KYMN 1080 AM on Saturday morning). Hmm.

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