Ethanol industry on hard times

The growing disaster

The ethanol industry, once the darling of corn growers, environmentalists
and the auto industry, has fallen on hard times. Producers spent this year
caught between falling ethanol prices and rising corn costs, causing many to
go bankrupt. In response, they are pushing the US Environmental Protection
Agency to increase the amount of ethanol they can blend into gasoline to 15
per cent, up from the current 10 per cent, Allowing this, however, would
only double down on a discredited environmental policy without solving the
industry's fundamental economic problem.

That problem is simple: Ethanol prices trend higher and lower along with the
price of gasoline, yet the cost of producing ethanol tends to rise with
demand, since higher ethanol production exerts upward pressure on the price
of corn. In a free market, corn prices might be expected to eventually fall
as the market adjusts to increased demand. But because the government
heavily promotes ethanol use, through subsidies and regulation, the market
is continually strained.

The problem is magnified because corn is a water- and fertiliser-intensive
crop that requires considerable investment. Worse, since fertiliser is often
an oil-based product, the cost of growing corn tends to rise at the very
moment ethanol prices, which rise with oil prices, might bring a good
return.

The ethanol industry has less incentive to control its costs and diversify
Us market as long as the federal government guarantees it a place at the
pump. Yet Congress's solution to the plight of ethanol suppliers has been to
mandate more ethanol use in gasoline. The Energy Independence and Security
Act of 2007 mandated that use of renewable transportation fuel rise from
nine billion gallons last year to 36 billion gallons in 2022. Although some
of this mandate must be met by advanced biofuels from switch grass and other
sources, corn-produced ethanol is the only large-scale alternative fuel
currently available to meet Congress's mandate.

The ethanol industry appears to recognise that without government mandates
there can be no sustainable market, hence the push for 15 per cent ethanol
fuel. But we should be wary on several grounds. First, many researchers are
convinced that 15 per cent ethanol in gasoline will cause problems in small
engines in everything from lawnmowers to portable generators and boats. Some
car engines will most likely tolerate the higher blend of ethanol, but
others especially those in older vehicles will require costly repairs, a
hardship likely to be borne by lower-income Americans.

Second, if ethanol use was really helping the environment, it might be worth
putting up with higher costs. But many environmental groups dropped their
support for corn-based ethanol after two studies published by the journal
Science last February concluded that ethanol production actually increases
the amount of carbon dioxide released into the atmosphere. The main culprit
is large-scale conversion of forest and grassland to corn production.
Researchers at Princeton University estimate it would take 167 years of
ethanol use in cars to offset the release of carbon from converting lands to
agricultural production.

Third, a 2008 report prepared for the World Bank concluded that "the most
important factor" in rising global food prices "was the large increase in
biofuels production in the US and the EU", High food prices may be a
hardship for American consumers, but ? they are downright deadly in poor
African nations.

Last, Washington already protects American companies with a 54 cent per
gallon tariff on sugar cane ethanol from Brazil and other countries that
produce it at much lower costs than American farmers can. This tariff not
only hits United States motorists in the pocketbook, it also leads to other
mischief. An entire industry designed to evade the protectionist tax has
cropped up in Trinidad and 23 other Caribbean countries that are exempt from
the tariff. Trinidadian companies import sugar cane ethanol from Brazil,
dehydrate it to comply with the American tariff exemption on products
"substantially transformed" in the Caribbean Basin, and then sell it in
America.

Allowing a higher percentage of ethanol' in gasoline will not make us less
dependent on such foreign energy sources. It will not help the environment.
It will not lower consumer prices. And it will result in' the poor of the
world having less to eat. Instead of raising federal mandates on ethanol,
Congress and the Obama administration should end them entirely.

Russell Harding New Delhi: 01 December 2009, Financial Chronicle, P-4