Summary
For a number of very good reasons, the author posits that producing ethanol from sugar makes much more sense that making ethanol out of corn. Few can argue that converting sugar to ethanol is more efficient than converting starch to sugar and then to ethanol. However, I think that part of the story that has been missing is the one of unintended consequences: What is the result on food prices by substantially increasing the demand of an agricultural commodity into the fuel supply? We are now seeing the results.
Analysis
The solution to the world's energy demands probably lies in coming up with answer on both the supply and demand side of the equation while evaluating what the unintended consequences of those actions may be. I will just focus on the price side of agricultural goods. These numbers clearly would make one want to buy agricultural commodity futures forever:
Corn: In 2007, approximately 18% of the corn crop was used to produce 6.5 billion gallons of ethanol. According to the EIA/DOE, in January of 2008, USA ethanol was being produced at a rate of 7.8 BG/yr. The renewable fuels standard for 2008 requires 9.0 BG of renewable fuels which many interpret as corn based ethanol, but in fact may include biodiesel, sugar based and cellulosic ethanol as well. Practically speaking, the majority will be corn based. In fact, I estimate that well over 10 BG of ethanol will enter the fuel supply this year and at that level, consume nearly 30% of the corn crop based on the lower acreage being planted. Six dollar per bushel corn may seem cheap.
For biodiesel, the industry operates at a very low capacity. A biodiesel mandate begins in 2009 at 500 million gallons per year and rises to 1 billion gallons in 2012. Total soybean oil production in the USA in 2007 was 16.4 billion pounds per the Census Bureau. If every pound of soyoil was converted to biodiesel we would produce 2.3 billion gallons of biodiesel. If everything else remained the same, that means roughly 43% of the soyoil production would be diverted to biodiesel production. In fact the percentage is closer to 35% because 20% of the biodiesel currently produced in the USA comes from other sources like animal fats and used vegetable oils. That really is a very good thing. So looking ahead, there will be upward price pressure on soybean oil to meet this requirement. In fact soybean oil has also increased 250% from its price two and a half years ago. This amount of biodiesel represnts 3.5% of our distillate consumption.
The author proposes to divert nearly one third of the raw sugar production (50.8 out of 163 million tons per year) into ethanol production. This amount of sugar produces 6.8 billion gallons of ethanol; the 6 million tons of molasses adds another 400 million gallons. Therefore to compensate, the world would need to increase sugar production by an equivalent amount to maintain constant supply. Perhaps this can be done, I just don't know, but I suspect that sugar prices would rise in the meantime.
The good news is that this would replace a significant amount of corn being used in the production of ethanol reducing acreage need for corn and perhaps balance out the requirements for wheat and soybeans. One would expect the prices of these commodities to decline in that case.
But then comes along 2012, and the renewable fuels standard goes to 15 billion gallons.
