Wednesday, May 30, 2007

Special Comment

A Comment I received from a Reader basically disagreed with my positon on Corn Ethanol. It was a very intelligent assessment, and I think I finally have it posted to the previous Post Comment section. I am going to repeat it here, and then offer further terms.

Corn farmers could switch to growing grasses for ethanol, but the probability is that they won't -- at least not without yet more subsidies. A recent study from Iowa State University's Center for Agricultural and Rural Development (CARD) modelled future ethanol production and concluded the following:"A key and possibly counterintuitive insight is that there is no ethanol price that makes it worthwhile to grow switchgrass because any ethanol price that allows ethanol plants to pay more for switchgrass also allows them to pay more for corn. So long as farms are responding to net returns in a rational manner and so long as ethanol plants are paying their breakeven price for raw material, farmers will plant corn as an energy crop. Switchgrass in the Corn Belt will make economic sense only if it receives an additional subsidy that is not provided for corn-based ethanol."

Not surprisingly, there is now at least one bill before the U.S. Congress proposing new, additional incentives to encourage farmers to produce feedstock crops other than corn. The bill, co-sponsored by two mid-west Senators, John Thune (R-SD) and Ben Nelson (D-NE), (see Press Release) would pay producers a "cost share" for planting energy-dedicated crops and a per-acre rental payment. Once the biorefinery is operational, the rental payment would end and the producer would receive a matching payment up to $45 for each ton of biomass delivered to the biorefinery for up to two years. That would, presumably, be on top of the $0.51/gallon that the blender would receive for mixing the ethanol with gasoline.
Ronald Steenblik
Research Director
Global Subsidies Initiative
The Comment by Mr. Steenblik contains the resolution to the problem of dedication to Corn in such Production of ethanol. The Thune/Nelson bill would pay for biomass by the ton, not by the current method of by the bushel. The total Cost of Tillage, Fertilizer, harvesting, and Delivery to ethanol plant production cannot be accounted by a Mean Price based upon tonnage of biomass. Turning to a principle of turning the Corn crop into Silage cannot permanently provide higher biomass tonnage rates over Gamma grasses, because of the totally disparite amounts of Fertilizer which must be used on the fields (even at current Fertilizer pricing, approx. some $450 per acre). The gist of my Argument remains unchallenged, though the attempt was extremely well-Thought, as Corn will fail as a biomass for ethanol just as soon as Planting Costs replacement is abandoned.

It truly remains at Issue which biomass source need be used for the most efficient ethanol production. It must be native to North American clime, easily tillable, cheaply maintained, and of worthwhile Price to interest American farmers. Corn fails the criterea in the long-run due to Soil Maintenance Costs. Switchgrass may not be the Answer, but let Us abandon a crippled Crop, and One which is necessary to alternate use in domestic Food Production. lgl

1 comment:

Ron Steenblik said...

Dear Mr. Lux,

Very kind of you to devote a special blog to responding to my comment. I am responding almost two weeks later because I only stumbled upon this post yesterday.

I fear you may have missed my point, which was about the subsidies required to meet some of the targets for biomass-derived fuel production or use, not the technical possibility. Subject to the limits of thermodynamics, almost any result can be obtained if the subsidies are set high enough.

Let's analyze the recent bill (S. 36) sponsored by Senators John Thune (R-SD) and Ben Nelson (D-NE) to increase and extend the Renewable Fuels Standard by boosting the required amount of renewable fuels blended with transport fuels to 36 billion gallons by 2022. (This target is modest in comparison with President Bush's target of 35 billion gallons a year by 2017, other proposals for 60 billion gallons a year by 2030, and former Senator John Edwards' proposal for 65 billion gallons a year by 2025.) Assume, as most analysts do, that the VEETC will be extended beyond its expiry date at the end of 2010. That means that in 2022 the total VEETC subsidies on the volume supplied would be $18.36 billion.

Let us assume further that somehow a limit on corn-based ethanol were to be established at around 15 billion gallons a year (the typical limit given by numerous pundits), either by the market or by a cap on the amount that could qualify for the $0.51/gallon volumetric ethanol excise tax credit (VEETC). The remaining 21 billion gallons a year would have to come from some other source, like switchgrass or woody biomass. If that source were switchgrass, at 100 gallons per ton, that translates to 210 million tons of feedstock per year by 2022. Multiply that number by $45/ton (the maximum "matching payment" allowed under the Thune-Nelson bill), and we're talking up to $9.45 billion a year in addition to the VEETC.

However, the Thune-Nelson bill would limit the number of qualifying acres benefiting from the $45/ton payment to 5,000,000 at any one time. At a generous yield of 11.5 tons per acre for switchgrass, that translates to 57.5 million tons, or 5.75 billion gallons a year. So that brings us down to $2.59 billion a year in per-ton biomass payments. Assuming that the rest of the 15.25 billion gallons a year manages to be produced somehow (a questionable assumption), qualifying only for the VEETC, the total cost to the Treasury in 2022 would still be be $18.36 billion + $2.59 billion = $20.95 billion a year. That figure does not include any additional incentives for the production of "renewable" fuels provided by the States, nor additional expenditure by the federal or state governments to help finance the construction of new biofuel plants.

Is that the best use of taxpayers' money? Are there not other ways to spend $21 billion plus a year — e.g., on improving the efficiency of the nation's transport system — that would yield greater reductions in petroleum fuel use at lower cost?

Ron Steenblik
Research Director
Global Subsidies Initiative