Waiting for MPR to get it right: corn ethanol represents food AND fuel

(MPR News featured an investments feature on renewable fuels by Tony D’Altorio)

Biofuel certainly seems like an up and coming global growth industry. The International Energy Agency sees worldwide consumption increasing from an annual 55 million tons of oil equivalent to 750 million in 2050. Right now, biofuel makes up a mere two percent of the transportation fuel market. But analysts expect it to increase to 27 percent in four decades. Here in the U.S., however, the issue is controversial. Rising corn prices have renewed debate over ethanol, a corn-based fuel for vehicles. The argument comes down to a matter of food vs. fuel. After all, the U.S. uses 40 percent of its corn crop to create ethanol every year. That demand is one of the factors driving up corn prices around the world. Fortunately, there is a viable alternative in cellulosic ethanol. Cellulosic ethanol, a second-generation ethanol, is derived from agricultural waste.

Our Take:
It must have something to do with MPR’s sense of journalistic integrity that they either never bother to talk to, or don’t believe grain ethanol producers when they tell the world that they make food as well as fuel. We will keep patiently repeating this in the hopes that someday, it will be understood.

When ethanol plants utilize corn, they utilize the starch that makes up about a third of the volume of the kernel of corn. After processing that kernel to get the starch, what is left are the protein and oil components of the kernel. This material is refined into a high quality animal feed–the original sole use of about 99 percent of all field corn. This product, called distillers grains, amounts to a third of the original volume of the corn kernel. But the fact that it is now protein and oil without starch makes distillers grains superior in some aspects to raw corn. It produces more mass per pound of feed when fed to beef cattle and causes less incidence of acidosis (upset stomach). Factoring in these aspects, experts say distillers grains represent fully half of the original feed value of raw corn. It is like putting a cow on a low-carb, high protein diet.

So it might be more accurate to say that ethanol takes 20 percent of the potential feed value of the US corn crop. But this way of looking at the corn market doesn’t capture another essential point of information. Market analysts have fully incorporated ethanol demand into calculations for expected consumption (called “disappearance” in the USDA commodity reports). That’s why all the analysis of the 2008 commodity price spikes found that biofuels played a limited role, perhaps ten percent of the overall increase in agricultural commodity prices. Far more significant was the role that oil plays in setting floor for the price of all commodities. 

We agree with the MPR finance reporter saying that cellulose ethanol represents an interesting investment opportunity, because of what many analysts foresee–cellulose ethanol will be a fast growing segment of the energy market in the next 40 years, but we’ll stop short of making a positive recommendation, one way or another.

However, this is not an either/or proposition. Grain-based ethanol is here to stay and should provide 10 percent or more of America’s transportation energy needs. Cellulose, if it achieves the hoped for (and expected) breakthroughs in technology and commercial viability, could potentially supply an even greater portion of the energy needed to power our vehicles. Clean sources of electricity may eventually allow plug-in vehicle technology to meet another portion of transportation energy without spewing the greenhouse gases associated with coal-fired electric generation, or, frankly, the troubling aspects of nuclear power generation. The point is, selecting one type of fuel to replace the all-or-nothing hold oil has had over our transportation energy needs is to continue to employ a flawed approach to energy. We need a spectrum of renewable energy choices, based on what can be produced that makes our country energy-self-reliant. And it’s a bonus if we are the first out of the gate, developing these technologies in ways that can be exported to other nations, for the profit of American companies and American workers.

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