Friday, March 19, 2010

Corn/Ethanol Paradox

Before I get on with the question of the day...

Here is a photo of some of the new baby goats born on the farm this winter... for some unknown reason they were congregating around a mama goat that was feeling under the weather with hoof problems (after a hoof trim and a soak she is feeling much better thanks). I thought it was just too cute:

OK. Back to business.

The Mad Scientist and I have been knocking this problem around for a couple of months now, without resolution. Maybe one of my brilliant readers will have a better grasp on the issue.

Here it is:

Corn ethanol is both an alternative fuel AND a reformulated gasoline blending component.

AS SUCH... Will demand for ethanol go UP or DOWN if gasoline supplies decline? Think about it... as a blending component dependent on gasoline volumes for its demand... as an alternative fuel independent of gasoline....

Getting this right can make (or break) a career. Why? Because we are currently using 42.5% of the U.S. corn crop to make ethanol. Either we are going to have too little corn or too much corn by a very large margin.

Any math/science inclined folks out there that have something to add, we are all ears. Yes, we already have an opinion, and no, we don't want to share it with you now as it might lead people away from their original thoughts.

In the end we will be very happy to share with you how we intend to play this provided that you understand that this is a big boy's game and we may very well be wrong...


confederate miner said...

as long as they continue the subsidies and raising the blend rate(what is it now E10?) it will go up. But i don't think it will be to long when america learns what the word malinvestment means

Anonymous said...

Well if you think in terms of economics, you can look at Ethanol has a "raw" material that goes into gasoline. If gasoline supplies decline then there will be a surplus of ethanol or corn. If you consider Ethanol as a "substitute" to gasoline (it is an alternative fuel source) then we'll have a shortage of ethanol/corn. I drew simple supply and demand curves for this.

Look at what states mandate blending ethanol into the gasoline supply, I know California is a big one. Are they going to increase the mixture ratio in the future? That could counter balance the decline in gasoline supplies.

If gasoline supplies drop, I'm sure people will look for a quick fix to the problem and ethanol might be that solution until it doesn't work. If the rate of decline for gasoline is slow and gradual over time, this will give people time to adjust to a different fuel source, but if it is a rapid decline then we can experience a squeeze in ethanol supplies since it is a quick alternative that people can switch to in the short run.

~Liberal Arts College Student

Ken said...

It will decline in production, primarily because of the decline in oil, it is very intensive and a hog to grow, without subsidies forget it. Corn is used in a lot, a whole lot of products, only for the things that it must be used for, will it. Ethanol can be produced in many way's so Corn will NOT be in this picture.

Donal Lang said...

I'd say that if the technically acceptable percentage of ethanol in gasoline is limited, and the percentage of vehicles that can use ethanol is limited, then ethanol will broadly track gasoline.

That leads on to say that if the technology changes so that more vehicles can run on higher levels of ethanol, then it will be used in increasing amounts, so long as road transport continues at more-or-less current levels.

Which THEN leads to the comment; if oil goes up in price and ethanol goes up in price to match (all fuels will sell at same price/unit of energy) then there won't be any MARKET preference for ethanol. But gov't issues; unable to pay for imports of oil, political 'fuel security' issues, etc may mean gov't policy will favour ethanol anyway. Plus of course the politics of Big Ag and financial contributions.

The vaious interacting calculations are a job for an economic model using calculus. But I never was much good at calculus, so ......! :-)

Two big 'buts' here:
Food is cheap because of cheap oil. Ethanol is subsidised and uses more oil to produce it than its energy content(E.R.o.E.I.). Neither situation will survive a rising oil price.

Also, I'd guess ethanol production capacity is being created to ensure future military and state supplies. Don't be surprised therefore if suddenly the ethanol production is 'claimed' for national security interests.

BTW, you're likely to see unintended consequences of ethanol production, like increases in corn prices for animal feed will mean increased meat prices which, coupled with recession, will drive Big Mac and Kentucky Fried to the wall. THEN what will Americans eat??? ;-)

indigoboy said...

When sitting down to think about the Corn – Ethanol question I started to mentally list the many variables that you need to factor in to come to any kind of decision. After you’ve listed some of the more obvious variables, you start to try to figure in the less obvious, less predictable and more political aspects that could affect things. And that is before you get to the Black Swans that could randomly send your plans spinning into oblivion, or conversely, riches beyond your wildest dreams.

It becomes clear why you have spent two months on this with no resolution. All I can do is take a step back to try to see a bigger picture.
I assume, your question is trying to get an ‘investment handle’ on corn/ethanol. I can only wish you good luck, although I feel a roulette wheel may be a better route to riches.

When people say ‘the world is awash with Oil’ they may be right in the time frame of a few months or a driving season. But of course we know that Peak Oil is a far more profound threat than mere expensive driving this summer. And of course the Corn to Ethanol question fits squarely into that awash/scarcity debate.

My observation is this. When you pull it back to basics you identify one crucial fact. “We need captured sunlight, in whatever useful medium we can get our hands on”

And corn is a good medium, as a store of sunlight. In the short term you can clearly make some good or bad decisions. But over time as oil becomes more scarce, and the ability to make and transport cheap fertilizer becomes more obvious, it will bode well for anyone who can produce any form of useful stored sunlight.

Other advantages:

*Corn can be used as food as well as fuel and plastics. We can’t eat oil (obviously!!).

*Anything beyond an 8% blend with petroleum would probably dissolve the seals inside a standard Internal Combustion Engine. Even so, people in desperation will put any old liquidized chicken shit in the tank, if it keeps them on the road for a few extra years. So I wouldn’t worry about the limits of a blend ratio. If it can be made to run a standard truck, it will do.

*The BTU of ethanol is less than petroleum. I think it is about 65% as powerful as normal gasoline. So as the % blend gets higher, the miles per gallon are falling. And so whilst the arithmetic may not be perfect, it sort of follows that for every 2 gallons of gasoline lost to the transport industry, we would need 3 gallons ethanol to fill the miles gap.

*The EROEI of corn to ethanol is poor. But the fact that it can be utilized as a combustible liquid will give it a highly useful future, even if only for the next transitional 15 to 20 years whilst the world gets its head around the idea of a less carbon future.

*The use of corn/ethanol should provide some counterweight to the supply problem that the Export Land Model is imposing on the West. This by definition means that you will probably export less corn over time using the ELM principle.

*Getting our hands on stored sunlight in the Middle East is costing the lives of many American and British young lives. By growing more stored sunlight at home would give them more opportunity to stay home safe with their families.

I’m afraid this post is longer than I expected, but it is a very complex subject for debate. If your investment time frame is 5-10 months, good luck with that. But I cannot see how the ability to grow a source of food and at the same time a useful liquid fuel, can be anything other than a good investment in the next 10 years.

I hope I’ve added something to the debate.


My one piece of advice - Simplify your life before it gets simplified for you.

Greg T. Jeffers said...

Dear "Lib Arts Student":

"Well if you think in terms of economics, you can look at Ethanol has a "raw" material that goes into gasoline. If gasoline supplies decline then there will be a surplus of ethanol or corn. If you consider Ethanol as a "substitute" to gasoline (it is an alternative fuel source) then we'll have a shortage of ethanol/corn. I drew simple supply and demand curves for this"

That was the question, although perhaps after a long day on the farm I was too tired to frame it as clearly...

I was hoping for more in the answer department...
my bet is since you were clever enough to understand what I was getting at in my sleep deprived state you might have more to add if you give this some thought.

I look forward to hearing from you.

bureaucrat said...

Ahhhh, my bread and butter at work!! Been driving govt. vehicles designed to run on ethanol for 18 years, operating on E85 (85%ethanol, 15% gasoline -- they add gasoline to ethanol in E85 to poison it to get the lower fuel tax rate -- otherwise you'd have to "higher tax" the ethanol as an alcoholic beverage and not a fuel -- and to help with hard winter starting) for 18 years!

1) Surprisingly, all E85 vehicles I've driven work fine. No ongoing mechanical issues. No power issues. They don't stall and almost always start (even in frigid Chicago). GM, Ford, Dodge, doesn't matter. So no operational issues after 18 years.

2) Ethanol is NOT made from sweet corn (sweet corn is immature corn -- it's the cans of Jolly Green Giant corn) which humans can eat directly. Ethanol is made from FIELD corn (99% of American corn grown), and humans CANNOT eat this stuff directly. But field corn can be made into animal feed, corn sweetener/oil/syrup/oil AND ethanol, sometimes at the same time. Producing ethanol does NOT interfere with humans eating Jolly-Green-Giant-type corn. They are two different corns. Now, field corn is fed to the animals we eat .. there MAY be a problem with that in terms of food supply. It's not "fuel or food," but "fuel or fowl."

3) I have been driving my unaltered 1992 Buick LeSabre on E85 for 4 years now. I can't recommend it for newer cars at this time, but the older cars seem to work ok on it. I've had almost no car parts replaced because of the ethanol (ethanol is alcohol -- it eats aluminum and rubber). It just starts hard out of the garage.

4) Ethanol has fewer BTUs per gallon than gasoline -- about 20% fewer. You will need more ethanol to go the same distance as with gasoline, but there is no noticeable power dropoff. You just hit the gas a little more.

5) If you run the numbers (try it -- it's fun), and you took every kernel of corn in America, and made it into ethanol, you could only displace/replace, at best, 15% of all the gasoline and diesel burned in this country (24 quadrillion BTUs), BTU-for-BTU, and that's not accounting for: no oil for plastics, jet fuel, heating oil, trucks running on ethanol instead of diesel, etc. Ethanol can move vehicles, but it will never move as many vehicles as we do now. We can never grow enough corn here, and we can't grow anywhere near as much sugarcane for sugar-produced ethanol like in Brazil. We're too cold.

6) They will increase the ethanol component in gasoline (E15 is coming), likely because they can, and likely because they have so much ethanol-producing capacity now. I don't see why they shouldn't.

Ethanol is a partial answer, not the full answer.

Any issues I missed?

tweell said...

The elephant in the room here, so to speak, is the government. Our government has been pushing ethanol via subsidies for years now, otherwise we wouldn't have the capacity to turn over 40% of the corn crop into ethanol in the first place.
So, how long will the subsidies continue? I can see a scenario where the ethanol plants are taken over by the government (either directly for national security reasons or after removing subsidies and then 'intervening to save jobs').
Given corn's low EROI, I expect to see these ethanol plants used to convert other plant matter into go-juice eventually. I'm not sure if it will be private industry running it, though.

Anonymous said...

Greg, I think the bigger picture to look at is the rate of change in gasoline supplies since this will greatly affect consumer behavior.

If gasoline supplies decline at a slow and gradual rate over a long period of time, consumers will have time to readjust to the changes and new technologies will be discovered to offer alternatives. Heck it can be natural gas, coal-to-liquids or whatever.

If gasoline supplies decline at a rapid pace over a short period of time, consumers will react by simply jumping on the alternative that is available in the short run. This is most likely Ethanol or some other fuel source that I may not know about.

Now we can look at the Ethanol mandates in states like California. I believe the current blend is 5.7% ethanol and the state consumes 1 billion gallons a year. I read somewhere that ethanol cannot be transported through oil pipelines and ethanol-only pipelines is too expensive. The only way to transport the stuff is through truck (this won't be viable) and rail (Buffet did buy BNSF). I imagine that the government and states will mandate a higher mixture of ethanol to be added to gasoline to offset the overall decline in gasoline supplies until it stops working, I'm sure you can figure out at what point this occurs.

I'll add that corn based ethanol is very inefficient. If I recall correctly the conversion process is 1:1 so there isn't a net gain in energy for turning corn into ethanol. The costs must be placed on someone and they are the people who live on food stamps. The government will continue to subsidize this technology (each state gets 2 senators and the farming states band together to pass whatever they feel like) until the system just collapses.

~Liberal Arts College Student

Stephen B. said...

I agree that, at least to a certain point, it depends on the government subsidies. But even those can only warp the market so far.

I say both production and consumption of corn go down. I know you didn't explicitly ask about oil affecting corn production, but your correct assumption that gasoline consumption is coming down is built (obviously) on declining crude throughput, meaning diesel goes south too and diesel and nat. gas are what our corn production is based on.

As for demand for corn as a motor fuel component or mainstay, I say it goes down with gasoline consumption.

The question for corn prices is, given both changing supply and demand curves, is the new price/quantity intersection at a higher price, or lower. I'm not sure, but the quantity at that new meeting point is much lower.

I was a person who was initially surprised that the price and consumption of natural gas went south after the 2008 oil run up as I simply didn't understand how much the nat. gas market was destroyed when oil destroyed the economy. Then too, nat gas is a substitute for oil, and I overplayed that aspect in my mind. Now, learning from that error, I think a somewhat similar, and even more direct effect is going to be in play here with sinking gasoline throughput yanking down corn demand. Corn just doesn't really work without gasoline to pull it along, bureaucrat's car experiment excepted. (Most other cars just can't handle E85 unless designed for it, and we're not going to rebuild the car fleet that fast.)

Summary: Corn quantity down - way down- and corn prices - they depend on how badly diesel and later nat. gas kill corn production. But if I HAD to guess, I'd say demand destruction outruns failing production, sending corn prices as well as quantity shipped down.

Stephen B. said...


We've discussed your point #2 here before. I think we all agree and understand that sweet corn and field corn are two different things, but they aren't as different as you imply every few months here.

Two things:

1.) People I think, eat FAR more field corn than sweet corn. Sweet corn is such a small part of our diet it is almost meaningless. Corn flour products, corn oil, corn syrup (both the concentrated "high fructose" and normal varieties) and corn fed to people via animals especially have to GREATLY outweigh the canned, frozen, and on the cob stuff. Given this, shunting corn into fuel tanks takes it from people. No question about it.

2.) Even IF people ate lots of sweet corn and popcorn, as demand (as indicated by prices) shifts to field corn, farmers can and will shift away from sweet corn and popcorn to field corn as the land, tools, and growing techniques are very similar, and then again, people come up the losers.

By the way, sweet corn is not simply "immature corn" but is a family of corn varieties much better suited to growing sweet as opposed to starchy kernels. Sweet corn is generally a much shorter, more delicate plant as well.

One can try to eat field corn before it "matures" and dries, but you'll only make that mistake once.

Though not a professional farmer, I've grown sweet corn (yellow, white, and bicolor), popcorn, as well as several varieties of field corn as backyard garden/farm projects for years. They all need lots of compost (especially composted manure) or chemical fertilizers to grow well. They're also very ground depleting too if one does not carefully husband the soil.

Here are just a few corn varieties to show all the variations:

Greg T. Jeffers said...


For the sake of this discussion, let us NOT take government subsidies into consideration... they might not be as important to the physics of this as one might think...

Very much looking for comments, perhaps from friends or colleagues with less political and more mathematical bent....

Greg T. Jeffers said...

Again, I don't want to influence this with MY thinking as I am trying to get some independent thought here...

confederate miner said...

Of all the many uses for Corn some Will be priced out of the market and This Will be done via higher prices

Stephen B. said...

Sorry about confusing the issue Greg.

As I said in my post, I don't think subsidies can warp the market all that far.

The comments I offered about corn quantity consumed dropping with gasoline consumed dropping I think will stand regardless of subsidies.

Anonymous said...

According to the Nebraska government website, the price of ethanol has risen and fallen with that of unleaded gasoline for almost 30 years.
But you asked about demand for ethanol.
So with this historical price relationship,it seems the demand for ethanol will track right along with gasoline until there is literally no gasoline available such as with Germany in WW2. In that case, the demand for ethanol may skyrocket.
But maybe not because demand destruction is a huge force. Especially when there is so much waste in the system. And using fossil fuels to produce corn ethanol with a 1 to 1 eroei is a prime example of that willingness to waste...driven by reasons other than rationality or need.
If its about trading corn or ethanol futures, good luck. Too many ghosts in the machine.

Donal Lang said...

Bur; you drive a Le Sabre?

THAT explains a lot! ;-)

bureaucrat said...

Thanks for your comments, Stephen :)

The EROEI for corn ethanol isn't 1:1, but it is close .. 1.3:1, depending on what you count.

Getting back to Jeffer's issue - what to invest in ...

If you just want a pure corn futures play, I just put some $ in DBA -- an agricultural EFT. Food is always a good investment.

We can all agree on the 25-year EIA oil imports chart, which yells loudly what Jeffers has been saying. For the last 4 years, oil imports have been dropping, after 20 years of increasing. Now, is that because the U.S. economy doesn't need the oil right now, and we don't have anywhere to put it anyway, or is it because our import sources just have no more oil to sell us. Hmmmm ...

After the demise of MTBE as a gasoline additive, most of the U.S. now has the 10% ethanol additive to gasoline .. the E10. Almost everyone drives their cars on E10. The EPA is set to raise that to E15, and probably higher someday. The farmers what it, the politicians what it .. everyone but the car makers want it. It's going to happen.

Slowly, the country will gravitate to more ethanol in their gasoline. But if we should ever get to E85 as being popular, it CANNOT supply the BTUs we need for all the gasoline and diesel we now use in the U.S. There just isn't enough corn, and there will never be enough corn. Ethanol will be a "boutique fuel," but it's better than nothing.

I think Jeffers answered his own question. In the short run, in small doses, ethanol will be added to the fuel supply. But if anyone is thinking ethanol, cause it is made from renewable corn, can take the place of gasoline or diesel, they are sorely mistaken.

There will always be gasoline and diesel. Just a question of how much you want to pay for it.

bureaucrat said...

(Mommy's car -- cost me nothing). :)

K said...

Has anyone considered demand from overseas, i.e. China et al?

Dan said...

I reckon it depends on the nature of the energy inputs into the ethanol. If the inputs are primarily natural gas then E10 can easily become E85; on the other hand if the inputs are primarily petroleum then at some point they go down together. We need transportation fuels; EOEI has nothing to do with it.

N.B. tractors that run on gasoline can be converted to run on propane or natural gas relatively quickly. Then you just swap gas cylinders as needed similar to a forklift. However, maintenance expense will go up.

Dan said...

In the book Omnivore’s Dilemma, Michael pollan puts the percentage of calories from field corn in the American diet as well over the 40% that comprises the Mexican diet bases on carbon 13 analysis. (Description of methodology between pg. 19 and pg. 23)

If that be so; there is no way corn prices race to the stars without massive government intervention. These are the same clowns that blew 24 trillion backstopping our TBTF banks.

Anonymous said...

Remember Ethanol uses at least 6 gallons of water per gallon, in processing--this alone becomes an issue in many states with water tables lowering and droughts hitting large portions of the country.

If someone could truly account for the massive amount of energy required to produce corn from fertilzers, chemical sprays, diesel machines, and transportation, and then include the govt $ which allows the US to produce corn for less than it costs to produce it--Ethanol doesn't look so hot.

It's much more viable to use crops such as hemp or alfafa which don't utterly destroy the soil like corn does and make biodiesel. The math on biodiesel is much more friendly, and the distribution system whouldn't have to be so compartmentalized if we went that direction. If the US invests heavily in Ethanol even further, then the doomers will be right.

Where are our trains? Why the hell do we rely so heavily on semi-trucks for long distance transport?


tweell said...

Leaving government out of it, I'm thinking that the coming dearth of oil and cheap fertilizer will make corn ethanol uneconomical to produce. It will decline along with the gasoline it's supposed to replace. Sawgrass and such, oil palm where climate permits, these have the ability to provide much higher EROI on bio-fuel.

Anonymous said...

Dan's right. As long as we can convert $24 worth of NG into $80 of ethanol, it will happen. Same goes for coal to oil. EROI means nothing. EROI is just more goofy pseudo-economics of the left. As always, real economics will prevail. Eventually the price of everything that can be converted into liquid transport fuel will rise as the infrastructure to convert it is developed.


Coal Guy.

Anonymous said...

To assume rationality coal guy, Is to make a bad assumption. If everything was done purely on economic rationality, then the US would have started heavily investing in trains for transport to shift the 70% Semi's/30% Train ration for freight, to the converse.

Short term myopia is a big part of the problem and doesn't mesh well with dealing with long-term energy problems and their close ties to economic problems.

As long as a handful of people can get rich, then the more powerful vested interest remains--no need to change from Oil to natural gas, although I think this isn't really viable, beyond a stop-gap measure to reduce the 'pain' of transitioning to a more efficient/lower energy future.


Anonymous said...

Some investors are not so myopic. Warren Buffet bought Burlington Northern just recently. The market will rationalize these things eventually. But, too much fooling around with markets, and planned economy stuff leads to horrible mal-investment. The string of corpses of planned economies provides plenty of evidence of this folly.

You think that improved rail is part of the answer. It probably is. Who should be in charge of forcing freight onto rails that is still cheaper to send by truck? You? Me? Obama? Is there an even better solution? Millions of minds independently trying to figure this out in the market will provide a better solution than you, or I, or any bunch of government weenies will.


Coal Guy.

Anonymous said...

For hauling freight any reasonably long distance Trains are much cheaper than Semi-Trucks. Although, little research includes the cost of infrastructure, accidents etc.

If you count the massive amount of damage Semi's do to our transport system, the cost of Semi's for long hauls would go up even more, although much of this is subsidized by tax-base at large. Many of our highways would last much longer if not for the heavy trucks that do significant damage/wear and tear to highway system.

The big issues with trains, is the lack of investment and the difficulty with private investment into rail infrastructure through public lands through various counties and states. So the US quit investing in the infrastructure in the 50's, so to pursue trains (not high speed crazy expensive non-sense) again would require a lot of up front money.

It's pretty sad the GE sells almost all its state of the art trains to China/India etc. and the US continues to invest in the status quo.

There aren't too many Buffet's around to front capital for such ventures, this is why nation states exist to some degree, some things need to be done by gov't--such as the military.

Comparison of external costs of rail and truck freight transportation: Public Policy Center, The University of Iowa, Iowa City, IA 52242, USA
Received 30 March 1999;
revised 1 August 1999;
accepted 4 October 1999. ;
Available online 11 January 2001.

In this article we estimate external costs for four representative types of freight trains. For each type of freight train, we estimate three general types of external costs and compare them with the private costs experienced by railroad companies. The general types of external costs include: accidents (fatalities, injuries, and property damage); emissions (air pollution and greenhouse gases); and noise. Resulting private and external costs are compared with those of freight trucking, estimated in an earlier article. Rail external costs are 0.24 cent to 0.25 cent (US) per ton-mile, well less than the 1.11 cent for freight trucking, but external costs for rail generally constitute a larger amount relative to private costs, 9.3–22.6%, than is the case for trucking, 13.2%.


Anonymous said...

Why, yes! A classic case of government planning and meddling in markets causing mal-investment. If truck freight actually paid it's share of road maintenance, etc., it would be in a much worse economic position today relative to the RRs. My point exactly.

Regardless, as the price of fuel rises, rail freight will increase at the expense of trucking. There is still rail service to within a few miles of almost everyone in the US.

When someone invests his life's savings in a business, you can bet he's examined it from all angles and is thoroughly convinced it's worth the risk. His livelihood is on the line. And still, the majority fail. When government planners screw up, they just raise taxes. There is no comparison in the care and effort and rational thinking that goes into the decisions.


Coal Guy

Anonymous said...

Just because ethanol is both an addivtive and a replacement for gasoline doesnt mean they have an inverse relationship.
As oil imports decrease (supply)---> fuel costs increase------>economy gets worse----->demand for fuel decreases---->demand for fuel decrease-----> ethanol as both and addivite and a replacemnt of gasoline decreases====the price falls. Then the same process in reverse. I dont think the question is WILL corn/ethanol/oil increase, of course they will, but then they will all fall. The real question is WHEN?