Summary
Food vs fuel proponents argue biofuels replace food crops, therefore causing food shortages
For the following reasons this is a short sighted argument.
1. Most crops used for biofuels production in the US aren't for human consumption, their alternative use is as animal feed
2. A co-product of the ethanol production process is a feed ingredient that replaces much of the nutrient value derived from the corn
3. Biofuels reduce the demand (and price) of oil which encourages further world trade
For the following reasons this is a short sighted argument.
1. Most crops used for biofuels production in the US aren't for human consumption, their alternative use is as animal feed
2. A co-product of the ethanol production process is a feed ingredient that replaces much of the nutrient value derived from the corn
3. Biofuels reduce the demand (and price) of oil which encourages further world trade
Analysis
Are biofuels the apt alternative to petroleum fuels while they are decreasing the supply and increasing the cost of food?
Having reasonable options for solving problems seems to be a better choice than having none. Biofuels, even 1st generation biofuels, provide a reasonable solution for a part of our petroleum based fuel problem. They are not the complete solution but make sense in the evolutionary process of how to solve our petroleum dependence issue.
In summary, let’s look at the food vs. fuel debate. Later on we’ll focus on what drove our initial leap into biofuels and how things have changed since.
The food vs. fuel debate is focused on the following premise: biofuels replace crops for food, therefore causing a shortage in our food supply. This is a short sighted argument. To help frame this point let’s look at some figures from 2008; namely US demand for crude oil and corn and the prices for these commodities.
Commodity US Demand1 2008 Hi-Low Price2 Economic Impact
Crude oil 7.3 billion barrels $111/bbl $810 billion
Corn 12.2 billion bushels $4.80/bus $ 59 billion
1 EIA and USDA
2 estimated difference in the high and low closing price for 2008
As the table highlights, the impact of crude oil price changes dwarf the impact of the corn price changes. For those who argue you can’t eat petroleum take note of two key pieces of information:
- The type of corn used for ethanol production is the type we use for animal feed. It is not a variety directly consumed, like corn on the cob or canned varieties. None of the varieties of corn used for ethanol production find their way directly into our food chain. In addition, distillers grains, a co-product in the production of ethanol, replaces a significant portion of the feed corn consumed in the conversion process.
- The economic impact of high crude oil prices is a significant deterrent to world trade as shipping costs rise above levels that make trade profitable. Keeping a lid on world petroleum prices by rationing demand via alternative sources is more likely to reduce world hunger than biofuels production is to increase it.
Last year a Merrill Lynch analyst credited competition from ethanol for reducing the price of crude oil by 15%, lowering one of the barriers to moving food supplies from surplus to deficit countries.
The net impact ethanol production has on the feed supply and price impact ethanol has on petroleum must be factored into the food vs. fuel debate.
The significant expansion of US biofuels capacity started early in this decade when four areas converged; the economy, the environment, national security and the buy American movement. Economics. In May of 2004 when US gas prices first averaged over $2.00 per gallon we all became receptive to alternatives that would reduce our personal financial hardship. In June of 2007 gas prices surpassed the $3.00 mark. We were in the midst of the ethanol boom and glad for it. It wasn’t long after when the market recognized ethanol was going to significantly impact our demand for corn, leading to higher corn prices. Even though gas prices exceeded $4.00/gallon in the summer of 2008 the corn rally actually depressed ethanol margins. Ag economy, meet the energy economy.
Biofuels, like other businesses in a free market economy, will be driven by financial returns. These returns will be affected by sales values and feedstock costs and to a greater extent than in many other industries, by regulation, mandates, government fees and incentives. Public policy and public perception will have a great deal of influence on the economic viability of the industry.
Environment. Biofuels were thought of as an easy fix to the excessive air emissions caused by petroleum based transportation fuels. The conventional wisdom was using a renewable resource to produce our transportation fuels was obviously better for the environment than pumping oil out of the ground, refining it and burning it. Recent studies in this area have generated conflicting arguments that have added fuel to the debate. Studies that attempt to capture the full impact and compare different fuels and feedstocks are very complicated and controversial.
For example, various studies conducted on the life cycle energy analysis for biofuels have yielded wide ranging and disputed results. Detractors point out that the fertilizer and fuel required to plant biofuels crops and the indirect impact of deforestation that is occurring make biofuels a greater source of emissions than conventional petroleum based fuels. Conversely, yields of biofuels crops have been increasing while inputs per unit decline, leading many proponents to argue that current acreage can satisfy projected feedstock demand with less intensive farming.
National Security: The 1973 Oil Crisis raised national awareness the US no longer fully controlled its energy destiny. When prices returned to pre crisis values a small but influential group helped keep a focus on ethanol as a replacement for lead as an octane booster. Government supported programs nurtured the industry through the early 80s. The Iraqi wars and general conflict in the Middle East made national security a lightning rod for the ethanol industry. Dependence on foreign oil was viewed in many circles as national security issue.
Buy American movement. In many respects the buy American movement allied some rather strange bedfellows – pro union labor, rural America and the sustainability sector. Unions, for obvious reasons, seek to protect local jobs and production. Rural America is uniquely positioned to benefit from a buy American strategy for transportation fuels. Most of the resources required for 1st generation biofuels production are best cultivated in the rural areas of the United States. The sustainability movement has a special focus on keeping things natural, which by definition results in a preference for local production. This, coupled with the expected environmental benefits of replacing petroleum based fuels with biofuels the green movement created a strong lobby for biofuels.
This convergence resulted in a national biofuels growth strategy, followed by many states, that used public funds and mandates to spawn industry growth.
None of this looks so unreasonable – public policy and public funds are frequently used to further public interest.
What has gone so terribly wrong with biofuels to warrant such malicious responses to our biofuels industry? The answer lies in the 4 areas of convergence.
Economics. The biofuels industry has over the past 18 months been a financial failure. Net margins (easily gauged by the value of the inputs, corn or soy oil, to the value of the outputs, ethanol or biodiesel) have been small to non existent during most of this time. Investors, bankers and suppliers have lost billions in the industry. There will be plenty of public funds lost too. Growth in world consumption of energy and protein lead to a run up in commodity prices that only subsided with the recent economic crisis. We have already seen commodity prices firm ahead of the expected economic recovery. Oil prices are 150% higher than just 11 months ago. This has given the ethanol industry an economic reprieve and helped return the industry to profitability. But a lesson was learned, using an ag feedstock to produce a transportation fuel creates much more risk than was foreseen less than 3 years ago. This margin volatility risk is being reflected in today’s plant values which are generally 50-75% under replacement cost. At a time when spot margins show healthy returns, even at replacement cost.
Environment. Is science catching up with technology when it comes to measuring greenhouse gas emissions and carbon footprints? It seems that each side – pro biofuels or anti biofuels - can get a scientist to vouch for its position. Early in the decade the environmental benefits from biofuels appeared unquestionable. By replacing CO2 previously sequestered in underground oil deposits with recycled CO2 from bio materials, the argument was made we are reducing the impact our energy consumption has on greenhouse gas emissions. Lately some of those benefits have come under question. The argument that greater feedstock demand for biofuels is causing global deforestation has had a significant impact on legislation, investment and the growth of the industry.
National Security/Buy American movement. These two concerns always make logical sense but seem to take a backseat to economics. When oil prices are high national security and buy American are headline topics. When prices are low these concerns are hardly expressed and barely heard. In general tariffs (including our biofuel import tariffs) reduce competition and if desire a smooth operating global economy should be phased out over time. Government incentives to grow the industry are now being viewed as further subsidies to the strong farm lobby not a means to provide energy self sufficiency that grabbed our support earlier in the decade.
1st generation biofuels have helped created the infrastructure to produce, distribute and dispense biofuels throughout the U.S. This is a platform we shouldn't’t ignore. Be skeptical; challenge the parties with vested interests in specific positions; but in the end, accept it for what it is – an alternative transportation fuel that has the potential be economically feasible, environmentally beneficial, in our national interest and self supporting.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
