Thank you for taking the time to meet with me discuss my endless questions regarding ethanol.
I am a large supporter of making agriculture less dependent on government subsidies and am an even larger supporter of ridding our dependence on tyrannical Islamic extremists for our energy needs.
My efforts to understand the energy issue is an effort to develop a working knowledge of a self sustainable, long term energy plan that our country can rally around. It is important to be disinterested in the outcome only in that the energy plan meets the two overriding goals stated above. A third goal is to develop the most environmental friendly energy solution available, with the understanding that all energy will have limitations.
Our country needs a comprehensive energy policy, not a patchwork of policies that are geared at directly subsidizing multiple technologies. It is in this vein that I am gathering information.
The Western world is held hostage by our reliance on an oil-based economy. Indirectly, we fund the very war being waged against us in the form of radical Muslim extremism. In order to break the cycle of energy dependence, it is vital to have an comprehensive energy policy which includes all sources of energy.
We have just experienced the cataclysmic change we need to focus on a comprehensive energy solution with $150 per barrel oil and $4 gasoline. If this were the only portion of our economic crises, we would be well-suited to invest in the multitudinous alternative energies available such as wind, solar, photovoltaics, battery technology, hydrogen as well as technological advances in natural gas, coal, nuclear, and geothermal.
Unfortunately, the next decade will find us in a difficult time to invest in any energy alternative. With the housing bubble of the last decade, we have witnessed a bubble that has effected the entire Western financial and economic system. Over $7.5 trillion of inflated housing prices ($2.5 trillion have been financed with over 12.5 million homeowners upside down on their mortgages) must be absorbed in the economy. Additionally, trillions of dollars of Wall Street unfunded insurance policies, called credit default swaps, are about to bring our economy to our knees. Finally, government spending on the federal, state and local level is at pre bubble values, meaning every form of government is going to be deficit spending for years to come. Unfortunately, state and local governments do not have the ability to run deficits, so it will be the Federal Government that will be responsible for picking up the tab.
All told, our government is bankrupt. This year alone, the Federal Government deficit will exceed $1 trillion. Next year, it will even be worse as the economy slides into a recession, millions of people are laid off, and our tax base takes a serious hit, and we try to spend ourselves out of recession. Every investment the Federal Government takes must show good return on investment as other crisis will need to be addressed such as the impending health care (government pays for half of all medical bills which are rising at 8% per annum in this country in the form of Medicare and Medicaid) and Social Security (the system is bankrupt by 2017) materializes.
The future of ethanol needs more of a long term vision. Ethanol must prove it's ability to be self sustaining to justify additional mandates .
In order to do that, ethanol must overcome several major drawbacks. First, it needs to have a plan to be consumer driven, without requiring a top down approach. Currently, the business model requires the Federal Government to create the demand. The need for central planning is your greatest liability.
It is inherent in your business model that your support come from politicians who believe in central planning. An industry beholden to politicians is not sustainable long term. One need to look no further than the Detroit automakers and the union bargaining to see what top down companies look like after they have run their course. Further, relying on politicians and not consumers, to determine the success of the industry, leads to long term failure. Simply look at the cotton, tobacco, corn, wheat, soybean and sugar subsidies that are so prevalent in the agriculture bill. The ability to reduce subsidies once central planning has gotten involved has addictive political qualities that do not go away. The very reliance on political events is the single largest risk of your industry. As easy as it is for politicians to invest in your industry, they can remove their support.
Secondly, the other major drawback of ethanol is the extensive investment in infrastructure required to operate a national ethanol program without knowing the eventual economic viability of the industry. Diverse standards of each of the states, the cost to implement ethanol blending and distribution facilities, the cost to research next generation technologies, current commodity pricing structures of the major inputs such as natural gas, electricity, corn and water, as well as the current sales structure of relying on commodity pricing for ethanol are all variable costs and significant investments that affect the profitability of the industry. As we have seen with the failure of Vera Sun, misallocation of funds is ripe with fraud, waste or abuse. The government can not protect against bad judgement.
For an industry to be largely reliant on government mandate without knowing the long term viability of the industry, places government in a very difficult position. If a better technology comes along, too much investment will already have been made in ethanol infrastructure, and long term subsidization will occur, similar to subsidizing transportation, finance, insurance, health care and all other businesses our Federal Government most recently have been forced to support.
Finally, the idea of creating a 30 billion gallon demand, then creating an industry should make you very nervous. If your profitability requires exponential growth to survive, I would indicate your business is going to fail. The current growth levels need to be maintained. Businesses losing money is a part of a growth market. The goal of your company should be to invest over the long term, predicting that undercapitalized companies will fail. At this time, it is my belief this is the best way to avoid making larger and larger mistakes. A rush to invest more in technology should be avoided unless you are able to acquire additional investors in that new technology. Currently, there is a wealth of money idle in this economy. Any research in cellulosic ethanolk should tap into these investments as opposed to going after market share or market penetration. There is ample growth in ethanol. To accelerate ethanol growth would only create disastrous negative effects.
Your analysis of continually increasing corn yields is untenable. Regardless of the prognostications, there is no clear way to know what part of the growth curve we are on for additional yields. The increases in technology required to produce greater and greater yields assumes greater yields without very difficult drought years such as those experienced in the late 1970's, the ability of technology to outpace pestilence and resistance hybrid seed corn.
The idea that gas production is more energy dependent than ethanol production should be dropped. This is a ludicrous argument and should be dropped for one simple reason. Oil can exist in a closed loop. Ethanol can not exist in a closed loop--meaning carbon energy needs to be used to create ethanol. So it really doesn't matter how much oil it takes to produce gasoline.
In summary, massive amounts of infrastructure will need to be added in order to change our energy usage. If electricity is to be used to power automobiles in the next several years, trillions of dollars of investments will need to be made in the electricity generation and delivery mechanisms. Regardless of General Motors belief in ethanol, they are betting their company on the Chevrolet Volt-such a drastic change that it will have it's own revolutionary effects. First, their are no working parts such as transmission, drive train, etc. This will effect the way people look at servicing vehicles and will have an effect on gas stations, repair facilities, and parts suppliers. A massive shift of energy will be transferred to the grid, requiring trillions of dollars of additional infrastructure.
All in all, before we go too far down the road of any new technology, we need to be able to removed from the success of any one particular technology--including ethanol. The government has done enough, and maybe even too much, to encourage rapid growth in an unproven technology.
But I keep my eyes affixed to the great opportunity ethanol holds.
The collapse of the US economy and a prolonged depression will result in drastically higher spending from the Federal Government. Every industry receiving federal money and subsidies need to prove their worthiness.
Alternative energy initiatives are going to run in the trillions of dollars over the next five years. Ethanol must, once again, prove it's worth.
Direct payments of $.28 per bushel.
6.7 billion gallons of ethanol produced in 2007
2.5 billion bushels of corn
$750 million of direct subsidy per year
Marketing credits
Counter cyclical payments
Blending credits of $.51/gallon or $3.41 billion.
Crop Insurance/Disaster payments
State tax incentives and producer incentives equivalent of $500 million/year.
What is the total value of subsidies for ethanal/corn production?
With the market volatility of corn prices, how can the industry be profitable for the long term?
How much does it cost to produce a gallon of ethanol?
Variable Costs?
Price of corn, transportation costs
Fixed Costs?
Operations, Marketing
2. Ethanol needs to produce more than a 1:1 ratio to be sustainable. If that would be the return, it would be better to not have an ethanol industry. What is the maximum energy return on ethanol?
What is the greatest energy return on energy input for row crops such as corn? Has any ethanol plant conducted any of these studies? How much energy return is attributable to DDG, WDGor other side product sales?
How much does an ethanol plant effect the cost of natural gas, electricity, water costs and food prices in the surrounding area it serves?
In the most effective plant..
1. How many bushels of corn used
2. How much ethanol is produced
3. How much energy is used?
Natural Gas
Diesel
Gasoline
What is the break even point on the number of bushels per acre?
Facts...
One bushel of corn generates 2.7 gallons of ethanol
One gallon of ethanol = .67 gallons of gasolineOne bushel of corn generates (2.7 *.67) = 1.8 gallons of gasoline (equiv)
If gas is $2.50 per gallon, one bushel of processed corn would produce $4.50 worth of gasoline (equiv).
My first question is what price does a bushel of corn need to cost in order to make ethanol cost effective on the open market without subsidies (ethanol is not taxed at the same rate as petroleum to the consumer and large corporations are paid to blend ethanol.)
It may be cost effective to produce ethanol in Iowa where they average 180 bushels per acre, but is it worthwhile to produce ethanol in South Dakota?
South Dakota averages 104 bushels per acre
One acre of corn in South Dakota can produce 280 gallons of ethanol
One acre of corn in South Dakota can produce 187 gallons of gas equivalent
One acre of corn can make $672 of ethanol (as of today ethanol trades for $2.44/gallon)
One acre of corn sells on the open market (as of today corn trades for $5.84/bushel--down from a high of $7.25) for $607/acre as an unprocessed commodity.
Iowa averages 160 bushels per acre
One acre of corn in Iowa can produce 427 gallons of ethanol
One acre of corn in Iowa can produce 286 gallons of gas equivalent
One acre of corn can make $640 of ethanol (as of today ethanol trades for $1.50/gallon)
One acre of corn sells on the market (as of today corn trades for $3.05 per bushel) for $488 for the unprocessed commodity.
How much does it cost to make 427 gallons of ethanol?
How are ethanol companies making money???
How much does it cost to transport, produce and ship ethanol??
Is it less than $65 for every acre of corn or 280 gallons of ethanol?
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