The Bum Rap on Biofuels

One of the striking features of modern politics is the speed at which a candidate, or a cause, can topple from the pedestal to the doghouse.

Just a few years ago the emergence of biofuels was considered so important to our country's drive for energy independence that Congress voted a fifty-one-cent-per-gallon subsidy for ethanol to help get this fledgling industry on its feet. Now ethanol and other biofuels are being blamed for everything from global warming, to increased pollution, to the sharp rise in food prices that have triggered riots in parts of Asia and Africa.

My colleagues here at American Thinker have been especially hard on biofuels, and until now I have -- uncharacteristically -- kept my mouth shut. That's because I'm on the board of directors of Earth Biofuels, a Dallas-based producer of fuels including ethanol and biodiesel. Those of you who are country-music fans may have heard of us, because we're the company that markets Willie Nelson's "Bio-Willie" brand of biodiesel. (Until you've sat through a board meeting with Willie, you haven't lived.)

Now I'd like to break my silence and weigh in. I realize that some readers will dismiss everything I'm about to say because I have a financial interest in biofuels. I'm hoping that at least some readers will consider the possibility that -- precisely because I have a financial interest in biofuels -- I keep an eye on this issue and may, perhaps, actually know what I'm talking about.

Since the current kerfuffle is over the impact of corn-based ethanol on food prices -- photos and video clips of rioters in Asia, Africa and even Haiti are on the news every day now -- let's focus here:

Virtually all these people are protesting sharp rises in the prices of rice and wheat, which is what they eat. (Mexico is an exception, because Mexicans use corn to make tortillas.) Since no one has ever converted a rice paddy to a cornfield, the simple notion that rice now costs more because we've converted land from growing food to growing fuel cannot possibly be correct. As for those rising wheat prices, there may be some acreage that had been used to grow wheat that's now being used to grow corn (or soybeans) for biofuels. But the real reason wheat prices are up is that production is lower than it otherwise might have been, because of new strains of fungi that are cutting yields and because of a six-year drought in Australia, which is among the world's major wheat suppliers.

Here in the US we have indeed begun to "grow" biofuels, for instance using mostly corn and also soybeans to produce ethanol. So let's take a look at some numbers: According to the US Department of Agriculture, in 1995 American farmers produced 192 million metric tons of corn. Of this, 14.7 million tons were used to make ethanol, from which 4.9 million tons of dried distillers grain were returned to the grain market. That left 182 million tons available for consumption and export.

In 2007, US corn production rose to 349 million metric tons. Of this, about 62 million tons were used to produce ethanol, of which 21 million tons of dried distillers grains were returned to the grain market. This left a whopping 308 million tons available for consumption and export -- an increase of 110 million tons, or about 82 percent, over the 1995 figures.

During these years, the US population increased by about 14 percent, from 264 million in 1995 to 301 million in 2007. We needed only about 25 million additional tons of corn to meet our rising domestic, non-ethanol consumption and export requirements. In fact, we produced an additional 126 million tons. Obviously, the notion that our increased use of corn for ethanol has "caused" food shortages is false.

The answer lies in the biggest, most under-reported story of our lives: Today, more human beings are emerging from poverty than at any time in history. If the present trend continues, within our lifetimes -- or certainly within our children's lifetimes -- the majority of human beings will have emerged from poverty and joined the middle class.

Of course, the first thing people do as they emerge from poverty is improve their diets. They can afford to buy food now, so they do. That's what's really driving up the price of rice. More precisely, leading rice-producing countries, such as Thailand and Vietnam, are cutting back or even stopping all exports simply because their own formerly-starving people now are buying the stuff. This is entirely a good thing -- but it causes painful, short-term dislocations in supply and demand. After all, you cannot rev up food production to meet a growing demand as fast as, say, Apple can rev up production of its latest iPod.

Moreover, as people emerge from poverty not only do they eat more, they eat better. You and I may be cutting back our consumption of meat to hold down our cholesterol levels. But among people who've been malnourished and can now afford food, it's meat they want and need. Meat comes from animals, of course, and if you're in the cattle business what you feed your herds to fatten them up is -- corn.

The country in which the largest number of human beings is emerging from poverty is China. Once again, let's look at some numbers:

In 1995 Chinese meat consumption stood at 25 kilograms per capita. It takes about five kilograms of grain to produce one kilogram of meat. So in 1995 China, with a population of about 1.2 billion, required about 150 million tons of grain for its livestock to meet its citizens' demand for meat. By 2007, Chinese meat consumption had more than doubled to 53 kilograms per capita. With a population now of 1.3 billion, China required about 350 million tons of grain for livestock.

And what's happening in China is happening elsewhere. For example, Latin America's annual economic growth rate is about 4 percent now, which is bringing tens of millions of Latinos out of poverty. Africa still has its disasters, such as Rwanda a few years ago and now Darfur, but today there are 17 countries on the African continent whose annual economic growth rates consistently exceed 4 percent. That's terrific, because it means a lot more kids in Africa are getting enough to eat.

In short, although the supply of food is actually increasing, the demand for food is rising even faster. And that's pushed prices up around the world.

Here in the US, our own rising food prices have led elected officials and candidates in both parties to call for repealing the ethanol subsidy that was enacted to help get the biofuels industry going.

Obviously, if you convert even one acre from growing food to growing fuel you reduce supply. That's basic economics. But as we've seen, the notion that ethanol production is the driving cause of rising food prices simply isn't true. The underlying cause is the emergence of this global middle class and the inevitable glitches in supply and demand that happen along the way.

There are two additional reasons why food prices are soaring: First, the cost of oil has been skyrocketing, and as the price of oil rises, so too does the price of everything else -- including food. Second, there's a lot of market speculation going on right now. If you were wondering what those greedy imbeciles who wrecked the housing market with their sub-prime mortgage gimmicks and funds are up to these days -- well, they're speculating in commodities futures including wheat and corn. Among grown-ups in both the agriculture and financial communities, there's a spreading queasiness that this speculation is helping drive commodities futures prices through the roof -- and a growing consensus that Congress should start looking into this speculation, fast.

In any case, has everyone in Washington completely forgotten what launched the biofuels industry in the first place? Apparently they have, so let's remind ourselves what all this is really about: We import a lot of our oil, and some of the countries we buy it from don't like us. Indeed, several of them would like to see us dead. (Killing your customers makes no sense as a business plan, but that's the Mideast for you.) So we want to become energy independent, or at the very least we want to reduce our dependency on foreign oil. There's a major role here for biofuels, as there are roles for nuclear power, solar power, wind power, and whatever new kind of power some American genius might invent in the coming years. It was our national, bipartisan decision to reach for energy independence that gave rise to the biofuels industry.

In fact, ethanol is already reducing our dependence on foreign oil. For instance, in most states now when you stop for gas you're pumping E-10 fuel into your tank. That's gas comprised of 10 percent ethanol -- which means we've already reduced our dependence on foreign oil for driving our cars by that amount. Not bad at all, for starters.

Of course, the issue of government subsidies is always controversial, and honorable people will disagree over which subsidies are justified and which aren't. There's nothing wrong with that. But in thinking about the ethanol subsidy, keep in mind that not every subsidy is actually called a subsidy. For example, here in the US we want to encourage families to have children, so we have a per-child tax credit. That's a subsidy -- and it isn't "fair" to single people and couples that are childless. We wish to encourage home ownership, so people with mortgages are allowed to deduct the interest on their mortgage payments from their taxable income. That's also a subsidy, and it isn't "fair" to people who rent.

For those among you who oppose the very concept of an ethanol subsidy -- and this includes quite a few of my colleagues here at American Thinker - here's a point to ponder:

When people on the political Left chant at their demonstrations that "This War is about Oil" they're implying, wrongly, that we're fighting in Iraq and elsewhere so that a bunch of oil-industry fat-cats can get rich over the dead bodies of American soldiers. That's vicious nonsense. But in another sense -- which the left-wingers fail utterly to grasp -- they have a valid point: In the modern world, oil is to an economy what blood is to a body. A child's body contains just three to four quarts of blood. An adult's body contains five to six quarts of blood. As the world economy grows -- as those tens of millions of people emerge from poverty -- it requires a larger flow of energy to make their emergence from poverty possible.

So the civilized modern world needs more and more oil -- and just about everyone out there, including most of our so-called allies, is depending on the US to keep the stuff flowing from the wells in unstable countries to their local gas stations, power stations, and factories. It isn't an exaggeration to say that a huge percentage of the Pentagon's $440 billion budget is devoted to keeping the oil flowing. Simply put, it's the Armed Forces of the United States -- and may God bless them all -- who are keeping the civilized world from shutting down for lack of oil.

If you don't think this is a kind of subsidy -- well, just close your eyes and imagine what you'd be paying at the pump if Exxon-Mobil and the rest of Big Oil had to field their own armies, navies and air forces. (Go ahead: I'll wait while you faint and then re-gain consciousness.)

All of us in the biofuels industry understand two things: In the long run, for our industry to survive we've got to produce ethanol and other biofuels at prices that don't require subsidies -- and that don't depend on crops that could otherwise be used for food. Cellulosic ethanol, which could be made from wood chips or switch grass, looks to be the future here in the US. (In Brazil, they produce huge amounts of ethanol from sugar cane.) The hard part is getting from here to there, and throughout the biofuels industry smart people are working hard -- and investors are risking their money -- to figure it out. Every biofuels company, including the one on whose board I sit, has suffered through disappointments and costly setbacks when technologies that looked promising didn't pan out. But no one's giving up, and my guess is that good old American ingenuity will win the day -- maybe even sooner than anyone expects.

Achieving energy independence is too important to let become entangled in politics or ideology. It isn't biofuels, but the rising global demand for more and better food that's driving up the price of corn -- and rice, and wheat. This rising demand is entirely a good thing -- indeed, it's the biggest change of life on earth that's ever happened. But its impact is widespread and complicated, and neither the US Congress nor the UN can repeal the law of supply and demand. Managing the emergence of this global middle class will require all the brains and talent the world's political leaders can muster. Blaming biofuels to grab a headline -- or a vote -- doesn't help.

Herbert E. Meyer served during the Reagan Administration as Special Assistant to the Director of Central Intelligence and Vice Chairman of the CIA's National Intelligence Council. He is author of How to Analyze Information.

In 2007, US corn production rose to 349 million metric tons. Of this, about 62 million tons were used to produce ethanol, of which 21 million tons of dried distillers grains were returned to the grain market. This left a whopping 308 million tons available for consumption and export — an increase of 110 million tons, or about 82 percent, over the 1995 figures.

What the writer is leaving out is the grain that was snatched up at the then low prices and is even now stored away for future bio-fuel use. Most of the new ethanol plants are just now coming online, making these figures meaningless.

It’s actulally a tax credit to the gasoline excise tax that only goes to the blender not the producer, which is now 51 cents per gallon of ethanol used. The only incentive for alcohol production is the small producers credit of 10 cents for production under 15 million gallons per year with a capacity of no more than 30 million gallons per year.

You could argue that this would subsidize ethanol production by allowing blenders to pay more for ethanol, raising the breakeven price of production and allowing producers to make a profit at a higher corn and natural gas price. But this isn’t reflected in current prices, as gas and ethanol are selling about the same on a BTU basis.

As far as the burning our food argument, if ethanol production is burning our food than so is soft drink production.

First, with oil at $100/barrel, ethanol still cannot be produced without a subsidy....the ethanol crowd pushed for ethanol at $30/barrel with all sorts of competitive claims.

Collecting the subsidy is not the same as needing one. If money is being offered for a practice and it is not collected, that is a poor business decision. I always claim my mortgage exemption on my tax returns, even though in theory I should be able to pay more taxes.

The problem is that the subsidies shift biofuel production to favored producers (i.e. corn farmers) rather than the ones the market would naturally select (i.e. developers of techniques to produce fuel from otherwise worthless — and therefore dirt cheap — biomass).

Making ethanol from "worthless" biomass is in fact a very expensive process, and requires substantially more subsidies than corn fermentation just to entice any investment at all. Without excessive subsidies, the process actually makes little or no economic sense.

"But moving a percentage of corn from the food supply to energy production decreases the availability of corn for food, and increases the price for corn and substitute items proportionally."

Excuse me, but bullshit. Look at the numbers---the total amount of corn went UP hugely, even after the amount of corn used in ethanol production is subtracted out from total production. By the law of supply and demand, the price of CORN derived products should have gone DOWN based on the increased supply.

It may be true that there would be some increase in the price of wheat, rice, rye and sorghum products to the extent that acreage used for their production was "switched" to corn---but NOT for corn products, so the driver for the price increase in CORN products is NOT ethanol production AT ALL, but some other factor. My guess is increased fuel costs, speculation, and opportunistic price gouging.

Oh, where to start? Where to start?

1. Alcohol is a LOUSY motor fuel. Low energy content to begin with, very high latent heat of vaporization, hygroscopic as hell, etc.

2. Production is an energy hog as well. I see all kinds of numbers about how much energy it takes to produce a gallon, and no-one can claim it’s cost-effective.

3. Corn production uses a lot of chemical fertilizers, which are significant contributors to river pollution.

4. High feed corn demand means higher meat, dairy and poultry prices, no doubt about it. We see it already - who has paid $4.00 for a gallon of milk lately?

5. Acetone is very aggressive toward the plastic seals and hoses in your fuel system. I would not add it to anything of mine, except my 1962 BSA which was made before plastic.

6. There are FAR more useful bio-fuel technologies coming along - let’s not waste our subsidies on grain alcohol, which is a dead end.

"The input of "big corn" is a factor in the decision making process of the USDA."

"Not exactly, they’re owned by ADM."

You morons obviously spend too much time "conspiracy theorizing". ADM and other corn producers (aka "big corn")use the statistics gathered by the USDA in their planning processes just like everyone else does. If the statistics are wrong, then their plans will be wrong too. The USDA has got to deliver good numbers to ALL their customers, both producers and consumers (consumers in this case being the folks who process ag products into final food products).

Last I checked, ADM wasn’t a corn producer. They are shysters that buy their grain from producers and sell to users. Not only do they have the motive to influence grain markets, they are large enough to do so. Given their political contributions, no Federal decision concerning grain can be considered clean.

How many times in the last several weeks have I suggested the impact of the BRIC economies (Brazil, Russia, India, China) and their impact on competition for all resources only to be slandered by urban dwellers with expertise in agriculture? And once again, I don’t have a problem with discarding subsidies as long as Ag is not cherry-picked while others are ignored. Tax breaks for all businesses, subsidies, welfare, housing, subsidies for retirees, medicaid, medicare, etc. Git rid of them all to make for a level playing field.

Most urban dwellers just hate these USDA figures on Ag production and buy the oil business and old media vilification of farmers.

“So all these people lept into the middle class last year and it just happened to coincide with an insane rush to bio-fuels?”

I suggest you look at where the items you buy from the world’s largest retailer, and most other retailers, are made and think about it.

“”As far as the burning our food argument, if ethanol production is burning our food than so is soft drink production.””

Same goes for fat food (junk food) and ethanol in addictive drinks with more car accidents related to the 50,000 plus alcohol-related auto deaths every year.

You morons obviously spend too much time “conspiracy theorizing”. ADM and other corn producers (aka “big corn”)use the statistics gathered by the USDA in their planning processes just like everyone else does. If the statistics are wrong, then their plans will be wrong too. The USDA has got to deliver good numbers to ALL their customers, both producers and consumers (consumers in this case being the folks who process ag products into final food products).””

And neither is ADM the only producer of ethanol. In fact, most of the facilities in the midwest are owned by COOPs, farmers, and other investors who like the idea of solar captured energy in the tank plus the high protein feed left as a by-product. Wart, your problem is you know too much about agriculture and the urban dwellers are buying the old media and big oil attacks on ethanol.

How do you think ADM influences the corn market?

In this case, sitting on huge stockpiles while waiting on prices to rise. This would be acceptable behaviour if they weren’t also pushing the government to give away taxpayer money to drive up consumption.

ADM's position is hedged. An increase in the price of corn after its purchased and hedged doesn't increase ADM's profit.

Actually, an increase in the value of corn decreases ADM's net profit by the amount that it costs ADM to meet its margin call.

I never said that the diversion of corn to ethanol is solely responsible for the increase in food prices, and you're right that the diversion should have been more than offset by the increase in production.

But for the author to claim that the diversion of corn to fuel rather than food does not affect the price of rice is bullshit.

There are many and more important factors in the current price spike of food, but the diversion of food to fuel is certainly and unequivocally an upward pressure on all food prices. It is impossible for it not to be.

Subsidies screw up everything they are applied to, the Opportunity Cost equation becomes skewed and that means that resources are wasted. Just like the Welfare system makes for bad investment of scarce resources and resulting in a negative ROI.

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