[Ed Dantes]

From today's Wall Street Journal

Very, Very Big Corn
Ethanol and its consequences.

Saturday, January 27, 2007 12:01 a.m.

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. And as soon as the sun rose on Wednesday, he set out to tour a DuPont facility in Delaware to tout the virtues of "cellulosic ethanol" and propose $2 billion in loans to promote the stuff. For a man who famously hasn't taken a drink for 20 years, that's a considerable intake of alcohol.

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

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.

That's one reason why, as Jerry Taylor and Peter Van Doren note in the Milken Institute Review, 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. Without those subsidies, hardly anyone would make the stuff, much less buy it--despite recent high oil prices.

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.

No wonder, then, that the price of corn rose nearly 80% in 2006 alone. (See the chart nearby.) Corn growers and their Congressmen love this, and naturally they are planting as much as they can. Look for a cornfield in your neighborhood soon. Yet for those of us who like our corn flakes in the morning, the higher price isn't such good news. 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.

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.

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. 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.

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. 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.

Even some environmentalists cry foul. 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.

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.

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.

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

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

[kel varson]

Can someone recommend some good corn stocks?

Sounds like ethanol isn't yet the magic bullet Washington is looking for. A "political stampede" not unlike the embryonic stem cell debate. All the money in the world going to embryonic stem cell research when as yet science has shown little to no benefit. Great article.

[PeterParker]

There is buzz about coal gasification now that oil is projected to hover around $50 a barrel for the foreseeable future which makes this process which has been projected to cost $35/barrel a more attractive alternative: (Analyst are starting to pick up on this company's story, Motley Fool is bullish on this stock...GreatPoint Energy, it will be interesting to see how the story plays out.)

A snippit: http://www.entrepreneur.com/article/pri ... 65720.html

Alternative Energy Burns Brightly...
Andrew Perlman has succeeded with startups in telecommunications, semiconductors and biotechnology. But the 31-year-old Cambridge, Massachusetts, entrepreneur may see his greatest opportunity in alter-native energy. Greatpoint Energy, the 25-person company he founded in January 2005, uses a proprietary process to inexpensively convert coal into clean-burning methane gas.

"From an entrepreneurial standpoint, there's huge potential," Perlman says, noting that the United States has more coal than any country, and that coal is about one-thirtieth the price of oil. Coal gasification is one of many opportunities in alternative energy, which includes solar, fuel cells, geothermal, wind, waves, tides, biofuels and energy management systems. (Apparently, the US is the Saudi Arabia of Coal.)

Venture capitalists put $173.9 million into alternative energy in 2005, according to PricewaterhouseCoopers, up from $103 million in 2004 and $36.4 million in 2003. Alternative energy also boasted the world's biggest offering of 2005: the $400 million IPO of China-based Suntech Power Holdings Co. Ltd. That kind of money excites both investors and entrepreneurs.

"Everything in energy has really boomed," says Craig Cuddeback, senior vice president of Cleantech Capital Group, a member organization in Brighton, Michigan. "There's enough money going into it to make it worthwhile."

[Sly Fox]

I know far more on this subject than I am allowed to say (due to confidentiality agreements). But both corn & coal bring up both positives & negatives.

[PAmedic]

I know far more on this subject than I am allowed to say (due to confidentiality agreements). ...

one of your more cryptic posts.

"SLY" Fox, indeed

[kel varson]

I know far more on this subject than I am allowed to say (due to confidentiality agreements). But both corn & coal bring up both positives & negatives.

Please elaborate...

[Sly Fox]

I do consultant work for a strategic communications firm that works primarily with energy companies.

[PAmedic]

Bond.

James, Bond.

[Ed Dantes]

From the Washington Post:

A Culinary and Cultural Staple in Crisis
Mexico Grapples With Soaring Prices for Corn -- and Tortillas

By Manuel Roig-Franzia
Washington Post Foreign Service
Saturday, January 27, 2007; A01

NEZAHUALCOYOTL, Mexico -- Thick, doughy tortillas roll hot off the conveyor belt all day at Aurora Rosales's little shop in this congested city built on a dry lake bed east of Mexico City.

Using cooking techniques that date to the Mayan empire, Rosales has never altered her recipe. Nor did her father, grandfather or great-grandfather.

On good days, the neighbors line up for her tortillas.

But these are not good days, and sometimes hours pass without any customers.

Mexico is in the grip of the worst tortilla crisis in its modern history. Dramatically rising international corn prices, spurred by demand for the grain-based fuel ethanol, have led to expensive tortillas. That, in turn, has led to lower sales for vendors such as Rosales and angry protests by consumers.

The uproar is exposing this country's outsize dependence on tortillas in its diet -- especially among the poor -- and testing the acumen of the new president, Felipe Calderón. It is also raising questions about the powerful businesses that dominate the Mexican corn market and are suspected by some lawmakers and regulators of unfair speculation and monopoly practices.

Tortilla prices have tripled or quadrupled in some parts of Mexico since last summer. On Jan. 18, Calderón announced an agreement with business leaders capping tortilla prices at 78 cents per kilogram, or 2.2 pounds, less than half the highest reported prices. The president's move was a throwback to a previous era when Mexico controlled prices -- the government subsidized tortillas until 1999, at which point cheap corn imports were rising under the NAFTA trade agreement. It was also a surprise given his carefully crafted image as an avowed supporter of free trade.

"There are certainly some contradictions in Calderón's positions here," said Arturo Puente, an economist at the National Institute for Forestry, Agriculture and Livestock Research in Mexico City.

Calderón's administration portrayed the cap as a get-tough measure that, coupled with his earlier approval of new corn imports from the United States and other countries, would stem the crisis. In an interview two days before the price-cap announcement, Calderón's undersecretary of industry and commerce, Rocio Ruíz Chávez, boasted that Mexico's tortilla problems would stabilize in "one to two weeks."

But Calderón's price cap does not carry the force of law. It is "a gentleman's agreement," said Laura Tamayo, a spokeswoman for the Mexico division of Cargill, a Minneapolis-based company that signed the pact and is a major player in the Mexican corn market.

A study this week by the lower house of Mexico's National Congress showed that many tortilla makers are ignoring Calderón's edict. The average price of tortillas is 6 cents higher than the cap, and some shops are charging between 59 cents and $1.04 above the government threshold.

"Going ahead, it looks very good for high corn prices," said William Edwards, an agricultural economist at Iowa State University.

In another place, a rise in the cost of a single food product might not set off a tidal wave of discontent. But Mexico is different.

"When you talk about Mexico, when you talk about culture and societal roots, when you talk about the economy, you talk about the tortilla," said Lorenzo Mejía, president of a tortilla makers trade group. "Everything revolves around the tortilla."

The ancient Mayans believed they were created by gods who mixed their blood with ground corn. They called themselves "Children of the Corn," a phrase Mexicans still sometimes use to describe themselves.

Poor Mexicans get more than 40 percent of their protein from tortillas, according to Amanda Gálvez, a nutrition expert at the National Autonomous University of Mexico. Modern-day tortilla makers such as Rosales use "an ancient and absolutely wise" Mayan process called "nixtamalizacion," Gálvez said.

The process is straightforward. Large kernels of white corn are mixed with powdered calcium and boiled, then ground into a dough with wheels made of volcanic rock.

The resulting tortillas are more pliable and more durable than those typically found in U.S. stores. Mexicans say tortillas are their "spoons" because they use them to scoop up beans, and can serve also as their "plates" because they're sturdy enough to hold a pile of braised meat and vegetables.

The tortilla-making process, Gálvez said, releases antioxidants and niacin, which allows them to be absorbed by the body, and the membranes on each corn kernel provide important dietary fiber. As a result of eating tortillas, Mexican children have a very low incidence of rickets, a bone disease caused by calcium deficiency that is common in developing countries.

"It is absolutely crucial for our population to keep eating tortillas," Gálvez said.

Gálvez said she believes the price increase is already steering Mexicans toward less nutritious foods. The typical Mexican family of four consumes about one kilo -- 2.2 pounds -- of tortillas each day. In some areas of Mexico, the price per kilo has risen from 63 cents a year ago to between $1.36 and $1.81 earlier this month.

With a minimum wage of $4.60 a day, Mexican families with one wage earner have been faced in recent months with the choice of having to spend as much as a third of their income on tortillas -- or eating less or switching to cheaper alternatives.

Many poor Mexicans, Gálvez said, have been substituting cheap instant noodles, which often sell for as little as 27 cents a cup and are loaded with less nutritious starch and sodium.

"In the short term, the people who can buy food are going to get fatter," she said. "For the poor, the effect is going to be hunger."

There is almost universal consensus in Mexico that higher demand for ethanol is at the root of price increases for corn and tortillas.

Ethanol, which has become more popular as an alternative fuel in the United States and elsewhere because of high oil prices, is generally made with yellow corn. But the price of white corn, which is used to make tortillas, is indexed in Mexico to the international price of yellow corn, said Puente, the Mexico City economist.

A combination of tortilla-maker organizations, farming groups and members of the Mexican Congress are clamoring for an investigation into alleged monopolies, commodity speculation and price fixing.

"It is probable that monopolistic practices played a role in the problem," Eduardo Pérez Mota, head of Mexico's federal competition commission, which investigates anti-trust cases, said in an interview. "In the recent past we have detected collusion on prices by corn buyers and by some tortilla makers."

Some tortilla makers claim Cargill is among those unfairly raising prices, an allegation that Tamayo, the company's spokeswoman, calls "absolutely false."

Mexico's corn behemoth is Grupo Gruma, owner of the Maseca tortilla brand and the world's largest tortilla maker. Mota said the company may control as much as 80 percent of the Mexican tortilla flour market. The company has already drawn his ire by allegedly buying a competitor without the competition commission's approval.

Mexico, which counts corn as one of its major agricultural products, now faces a shortage. As part of Calderón's plan to combat high tortilla costs, he gave emergency approval -- as suggested by large corn brokers -- to import more than 800,000 tons of corn from the United States and other countries.

But just the year before, Mexico was exporting corn. The administration of Calderón's predecessor, Vicente Fox, allowed brokers to export 137,000 tons of corn, which farming groups say should have been warehoused for future use.

Rafael Rodríguez, finance director of a farming trade group, said the contradictory decisions by the two presidents are proof of government favors to big corn companies.

"Instead of sanctioning them," Rodríguez said, "the government sat down with them and made deals."

No one knows for sure how many tortilla makers are in Mexico. Estimates range from 65,000 to 200,000.

Long a fixture of the Mexican street scene, tortilla makers in the past few months were suddenly being accused by their customers of being the villains in the tortilla crisis.

As his prices rose, Salvador León, owner of the venerable El Mexicano tortilla shop in Nezahualcoyotl, watched his sales plummet.

"The customers just got mad at me," León said. "I tried to give an explanation, but they just went on in ignorance."

A few miles away, Rosales surveyed her shop, perplexed about how to cut costs.

She pointed at a stooped man struggling with a big ball of tortilla dough.

"He's a senior citizen, and those women over there," she said, nodding toward the counter, "they're single mothers. How can I fire any of them?"

While she talked, a 73-year-old woman named María Neri approached the counter. Neri has no pension and no savings, but she gets a few pesos each month from a nephew and a daughter.

She lives just around the corner from Rosales's tortilla shop and has been buying two kilos a week for years. On this day, even with the Mexican government's new price control, she could afford only one.

[El Scorcho]

I enjoy tortillas. This is not good news.

[LUconn]

I fear for what this will do to limit my Taco Bell intake


I read an article a while back about the ethonal made from sugar cane. Brazil imports very very little foreign oil because they produce so much sugar. I can't remember any of the exact numbers but fuel there is so ridiculously cheap because of their ability to basically grow it all for themself. Seemed very appealing for the US to do the same with their corn, but it hadn't even occured to me that there's only so much corn to go around and it's needed for other things. Sugar is a luxury while corn is a staple. Do we not have the climate to grow sugar anywhere in the country?

[mrmacphisto]

Ethanol is great ecologically, not-so-great economically. Right now, at least, ethanol is more expensive than gasoline and yields less MPG.

Why would anyone want to switch?

[El Scorcho]

Brazil imports very very little foreign oil because they produce so much sugar.

Brazil also uses far less fuel than the U.S. We couldn't come close to being self-sufficient from any crop-based fuel. At least not any time soon.

I'm more interested in the technologies that are turning hog waste into crude oil. We've got more hog waste than we know what to do with. Just ask Easter North Carolina.

[Ed Dantes]

Ethanol is great ecologically, not-so-great economically. Right now, at least, ethanol is more expensive than gasoline and yields less MPG.

Why would anyone want to switch?

I think ethanol also creates far more smog.



I think we should see if we can use tobacco for ethanol. It would certainly make sitting in traffic and inhaling exhaust all that more pleasant.

I mean deadly and terrible, uh, yeah.