Wednesday, March 02, 2005

The ethanol trap

According to the report referenced in this post, the only area of agricultural production not succumbing to increasing consolidation is ethanol, the fuel derived from corn.

Archer Daniels Midland is the largest individual ethanol producer, conjuring up some 1.07 billion gallons of the stuff each year. But the top four producers of ethanol control just 49 percent of the market--not so much, by U.S. standards, and down steadily since the top four controlled 73 percent in 1987 (ethanol king Bob Dole's heyday in the US senate.)

And the report tells us that "Farmer-owned ethanol plants accounted for 1.276 billion gallons per year or 37.3% of total capacity." Surprisingly, facilities owned by farmers as a whole produce more ethanol than ADM!

Farmers throughout the corn belt are investing in cooperatively owned ethanol plants. One farmer told the St. Louis Post-Dispatch (“Midwest Farmers become major investors in ethanol plants,” 2/20/2005, unavailable online) why he was considering plunking down $20,000 to invest in such an operation: essentially, to gain a measure of power in a business controlled by giants.

“We don’t have control. We call up and somebody says, ‘This is the price we’ll give you,’ ” he told the paper.

All over the Midwest, cooperatives are forming to build new plants. One project, Illini Bio-Energy, is enticing farmers with the prospect of 22.8 percent annual return on investment for their $20,000 outlay. A Illini Bio-Energy functionary told the Post-Dispatch that the group hoped to raise $25 million in direct investment from farmers before seeking a bank loan to make up the difference on building a $96 million ethanol production plant.

In an age of vast overproduction and long-term pressure on corn prices (see this post ), farmer-owned ethanol plants are, at first glance, an alluring way to keep farmers in business while wrestling some market control away from the agri-giants.

Yet Bitter Greens Journal cannot hail this trend as a way forward for sustainable farming.

First of all, ethanol owes its existence to government subsidy. As recently as November 2004, the credit-rating agency Standard & Poor’s declared that:

The industry simply cannot survive without the subsidy. The growth in the industry is mainly driven by favorable public policy expectations...a change in governmental policy … could devastate the ethanol industry. (Quote taken from The Oil Daily, Nov. 22, 2004.)


When a product can’t exist without subsidies, that means that it costs more to make than it can fetch on the market.

The U.S. Congress, lured by generous campaign donations from the likes of Archer Daniels Midland, has been subsidizing ethanol production since the 1970s. In October, Congress extended through 2010 the 5.4 cent per gallon exemption ethanol enjoys from the 18.4 cent per gallon federal excise tax on gasoline. That encourages oil refiners to buy more of the stuff.

Bush signed on, which didn’t hurt his push for votes in the rural states. Expressing blustery, make-no-mistake support for ethanol subsidies has long been a rite of passage for presidential candidates, Democrat and Republican alike.

Meanwhile, the energy bill currently before Congress would require refiners to use a minimum 5 billion gallons of ethanol annually. “Farm interests plan efforts in the coming weeks to raise that floor, perhaps to 8 billion gallons,” reports the Post-Dispatch. Moreover, several states, Missouri among them, provide additional support for ethanol.

One source, the admittedly self-interested American Petroleum Institute, puts the total value of government support for ethanol (federal and state programs combined) at about $1 billion per year.

Now, much of this cash ultimately ends up in the coffers of Archer Daniels Midland. Despite the recent deterioration of its market share, ADM’s ethanol arm netted $135.4 million in operating profit for the second half of 2004. That’s not a bad take for a business line that relies on Uncle Sam’s generosity for its existence.

Remember, the company produces a billion gallons of ethanol a year--about a third of all production--and has essentially limitless resources to increase capacity. If ADM wants to put small companies like Illini Bio-Energy out of business, all it has to do is significantly jack up production, which would lower the price of ethanol.

Also, the Gold Rush-style push to build new plants could itself be disastrous for ethanol prices, and the farmers who are investing in cooperatives. The Oil Daily for Nov. 22, 2004 reported that:

If too many producers jump into the market, there could be a "glut" of ethanol, leading to large stocks of unused fuel and reduced profits, Elif Acar and Arthur Simonson, authors of the S&P report, told Oil Daily in an interview. "That's what happened in the power industry and it could happen in ethanol, too," they said.


In that case, all ADM would have to do is sit back and wait for the small fry to fail before regaining its old dominance.

Thus a farmer who bets $20,000 on getting a nice cut of the ethanol action is playing a risky game. The house always wins at blackjack.

Nor is ethanol the “clean-burning fuel” hailed by ADM and its allies on Capitol Hill. The process of transforming corn to fuel requires large inputs of fuel—typically including decidedly dirty-burning coal. If ethanol generates more energy than it requires for production, then it has crossed that threshold only recently. The most optimistic assessment, from the USDA, claims it takes 1 gallon of fossil fuel to generate 1.24 gallons of ethanol.

I’m not sure if that number accounts for all the fertilizers needed to grow corn, or all of the gas burned hauling it to processing plants.

As Richard Manning argues in Against the Grain, you can’t assess the wisdom of growing fuel from the ground without accounting for the steep environmental costs of industrial agriculture. He points to a massive dead zone in the Gulf of Mexico, where all sorts of marine life once flourished, caused by heavy use of fertilizers in the Midwest. The practice ends up washing loads of nitrogen into the Mississippi River, which in turn finds its way into the Gulf, where it causes large algae blooms that squeeze out other forms of life.

What the ethanol subsidies are really about, he argues, is finding an outlet for the officially sanctioned overproduction of corn. (The other main outlet for the corn surplus is high-fructose corn syrup; more on that later.)

Bitter Greens Journal believes that no sane agricultural model can be based on overproduction and mono-cropping. We wish those farmers in the Midwest well, but we also wish they’d use their resources to diversify into other crops, transition away from reliance on chemical inputs and genetically modified seeds, and work toward creating viable local markets for their goods.

23 Comments:

Anonymous Roger Dennison said...

Tom, the thing you don't mention in your blog, which will certainly impact agriculture in a big BIG way, is the inevitable onset of 'Peak Oil'. I must assume you know what I'm talking about. I am so certain about the future fuel supply crisis, that, when it comes, I want to be (A) living in a place that sells ethanol or E85, (or biodiesel) and (B), have a Flex-Fuel vehicle that will run on it. By that point, and it could happen sooner than later, the "glut" of ethanol will suddenly transform into a shortage.

I'm curious to know what you have to say on this matter.

5/02/2005 06:37:00 PM  
Blogger Tom Philpott said...

For my reply, see the following post: http://bittergreensgazette.blogspot.com/2005/05/ethanol-and-peak-oil-aside_02.html.
TP

8/19/2005 10:34:00 AM  
Anonymous Craig Appel said...

Hi Tom,

I found your blog from your article in the grist. I then came upon this ethanol article and I would like ot to share a few comments.

First, regarding subsidies. While it is true that farm subidies are not a sustainable way to keep ethanol going, the subsidies they recieve are nothing compared to the subsidies the oil industry gets in terms of military, diplomatic, and development support from our government. The governemtn certainly has a legitimate interest in maintaining a supply of liquid fuels fo he nation, and subsidy-wise, ethanol is a bargain.

However, most researchers agree corn-based ethanol is not an answer, since it uses more that a gallon of fuel to produce a gallon of corn ethanol. Furhtermore, there is not enough land in production to supply enough corn to meet anywhere near US supply needs. But, there are options. Bio-diesel is a good small scal option for a cleaner-burnering, carbon-neutral fuel. Even more promising is advanced ethanol, from non-corn crops like switchgrass, a perennial grass native to a large part fo the US, that needs much less pesticides that corn. for details on the prospects for this feedstock (and others) see http://www.energycommission.org/research/ and scroll to the bottom.

The challenge will be to ensure it is grown in a sustainable manner (no-GMO, little pesticide use) and that processing remain in the hands of farmer co-ops. A possible utopian vision is that the large agri-businesses focus on farm-based fuel feedstocks (because that is where the subsidies will go), allowing family farmers to get back to the most important job, growing nutricious food for the people and selling it a price both can live with.

BTW, nice article in the grist. Question: Does protection from agicultural land trusts (www.malt.org is the one i am familiar with) help keep land prices down in transition zones and near-urban areas?

Best regards,
Craig Appel

10/12/2005 04:41:00 PM  
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