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After decades of ethanol dreaming, farmers are seeing their vision come true. Corn prices are up, venture capital is flowing into the Farm Belt, and farmers and agricultural corporations are on a roll. There is money to be made from ethanol. If you don't believe that, you should have been in St. Louis in October.
There in America's heartland, about 1,300 people filled the city's convention center for a two-day biofuels conference organized by the Department of Energy and the Department of Agriculture and titled "An American Rural Renaissance."
Speakers included top officials from both departments; the chief executive officers of DuPont, agricultural giant Archer Daniels Midland, and the National Corn Growers Association; farm-equipment makers, and other pro-ethanol corporate leaders, as well as a mix of scientists and entrepreneurs hoping to make a buck on renewable fuel.
Opening and closing the conference was President George W. Bush himself.
First, in a conference-opening video, the President's voice boomed with energy snippets from his last State of the Union address while images of waving fields of corn, windmills, oil fields, cars, coal miners, farmers, and more corn dissolved into one another on two huge screens in the cavernous hall.
Bush talked of America's oil addiction and how embracing ethanol is a way to reduce U.S. imports of Middle East oil.
"By applying the talent and technology of America, this country can dramatically improve our environment, move beyond a petroleum-based economy, and make our dependence on Middle Eastern oil a thing of the past," the President said. He even talked of switch grass and the goal of making biomass- and other cellulose-based ethanol technologies "practical and competitive within six years."
Then as the conference closed, the President actually appeared. Bush swept into the hall, having pulled himself away from campaign appearances intended to shore up Republicans in tight Farm Belt congressional races.
His speech was all about renewable energy and his support for biofuels through tax credits, subsidies, and federally funded research. He promised that backing will continue and added that cellulosic ethanol from non-corn-kernel biomass was "right around the corner."
"I like the idea of promoting a fuel that relies on our farmers," Bush said. "I believe a good farm economy is important to our national economy, and it makes sense to have our farmers growing the feedstock for new energy."
Swapping billions of gallons of oil for billions of bushels of corn was the conference theme, repeated again and again, as was the transformation of America's farmland and farming communities by what was defined as a once-in-a-generation opportunity for a new market for rural America.
Although speakers talked of cellulosic ethanol—from corn stover, switch grass, and other biomass—this conference's focus was on corn, the U.S.'s primary agricultural product and the source of nearly all of the nation's ethanol at present.
"This is a time of transition and enormous opportunity," said USDA's Thomas C. Dorr. Dorr was the conference's main organizer and is the head of USDA's rural development program. "Literally week by week, we are breaking new barriers. Today, renewable energy is not business as usual."
Biofuels are "good for national security, good for the economy, good for the environment, and good for rural America. This is the biggest new agricultural market in history," Dorr continued. And he pointedly thanked the attendees, "particularly those who have persevered over the past 30 years. Your passion has sustained us through all of this. This is an extraordinary opportunity for America and indeed for the world."
Meanwhile, the market potential for biofuels has not been lost on petroleum and chemical companies.
At DuPont, biotechnology is now weaved into all product groups, said Charles O. Holliday Jr., DuPont's CEO. In St. Louis, he predicted the company's biotechnology revenues would double to $8 billion, as would R&D investments to $400 million, within 10 years. He called DuPont's biomass-based Sorona polymer "the most significant accomplishment from a DuPont company in 20 years" and compared its development with DuPont's development of nylon 70 years ago.
A recent analysis by Citigroup, circulated widely in rural areas, backs up this rosy scenario. Economics, not government policies, is driving ethanol's expansion, Citigroup said, and ultimately, the price of gasoline will determine ethanol's profitability. Profit margins are above 30% this year, and Citigroup predicts they will remain above 20% for the next decade. Ethanol costs break even if oil drops to $36 per barrel, Citigroup said.
The report predicts that U.S. ethanol capacity will reach 15.2 billion gal per year in 10 years, three times today's record levels. Ethanol would then account for 9% of vehicle fuel and take 31% of the U.S. corn crop, which will grow by 36% or 4 billion bushels over the same period, Citigroup said. Corn prices will continue their rise to $2.90 per bushel from the current $2.58 per bushel, and expansions of ethanol refineries will lead to more than $16 billion in new investments over the next decade with a payback of three to four years.
So far this year, venture capitalists have poured more than $250 million into ethanol-related investments, nearly 10 times the levels in 2000, said the National Venture Capital Association's Emily Mendell, vice president of strategic affairs and public outreach. These private and institutional investors make only a part of U.S. ethanol investments and don't include corporate investments, she told C&EN, but they are an important sign. "There is a ton of interest in this area by investors who believe ethanol is going to be successful and commercially viable. It speaks to the promise of what could be done here."
Today, nobody puts down ethanol in farming communities, but some do worry.
"Ethanol could be great for the economics of our communities," said Chuck Hassebrook, executive director of the Center for Rural Affairs in Lyons, Neb. "We've really struggled out here. Although these new plants don't produce a lot of jobs, they do provide good jobs here in rural Nebraska. But this is not going to be a savior for the family farm, nor is it going to change the underlying structural trends in agriculture."
He predicts that small and marginal farms will profit less than will megafarms that grow more corn and have more to invest. "It could be the kind of thing that provides a short-term boost but in the end leaves us with only a very few people owning much of anything and with the profits going right out of the communities and the environment damaged."
Hassebrook worries about the overall impact of energy crops on the environment, as well as the economy of farmlands. "We can't just let this go on automatic pilot and expect that market signals alone will take it in the right direction," Hassebrook warns.
The government is deeply involved in ethanol through incentives, subsidies, production targets, and funding. Missing, however, are agricultural policies for energy crops. But that is likely to change.
DOE and USDA officials are talking of an energy section in next year's farm bill. Corporations and members of Congress are already hinting at provisions they would like to include to expand production of energy crops.
One of the biggest players is Patricia A. Woertz, Archer Daniels Midland's CEO. She told conference attendees that the new ethanol boom is a return to an ancient path. "Henry Ford made the first flexible-fuel vehicle that could run on pure ethanol or gasoline." For Ford, she said, ethanol, not gasoline, was the transportation fuel of choice.
She described the Administration's commitment to ethanol, China's plan to double its consumption of renewable energy by 2020, and Wal-Mart's goal of making E85, a mix of 85% ethanol and 15% gasoline, available in all its U.S. stores. She noted, "With the world's largest energy consumer, the fastest growing energy consumer, and the world's largest retailer all committed, the question becomes how big the biofuels market will be, not whether it will come."
ADM produces about one-fifth of U.S. ethanol, some 1.1 billion gal this year from eight plants. The company plans to increase its production by 50% by 2008.
ADM's size, however, is the exception in this highly segmented market, consisting of many small, often farmer-owned plants, mostly located in the Midwest.
Broin Companies is the next largest, made up of partnerships among 18 small companies that produce 832 million gal of ethanol per year. VeraSun Energy Corp. comes next with three plants producing 230 million gal per year. The rest are smaller still.
There are 106 ethanol biorefineries in the U.S., and another 54 are under construction (47) or planned for expansion (seven). When all constructions and expansions are completed, U.S. annual production capacity will grow from 5.1 billion gal to about 9 billion gal, according to ADM and the Renewable Fuels Association (RFA).
Today, 48 of the 106 currently operating refineries are locally owned, according to RFA. They produce about 1.9 billion gal per year, or 37% of total U.S. ethanol production. However, that may change. Of the 54 plants under construction or planned for expansion, seven are locally owned, and they will produce about 363 million gal or about 9% of new capacity, according to RFA and ADM figures. Therefore, a smaller share of plants will be locally owned.
Driving the ethanol push is a mix of record-high gasoline prices, ethanol's environmental benefits, the President's call for reducing oil imports from the Middle East, and support from politicians and others who back agriculture and alternative energy fuels and want federal requirements and financial support for ethanol.
Support includes several federal targets: a production goal of a minimum of 7.5 billion gal of fuel from renewable sources by 2012 in last year's energy bill and the President's goal of reducing oil imports from the Middle East by 75% by 2025. This reduction works out to about 14 billion gal of gasoline but 21 billion gal of ethanol, because ethanol has only two-thirds the energy value of gas. Also recently, DOE upped the ante and is calling for enough ethanol to displace about 30% of today's gasoline consumption by 2030. That works out to about 60 billion gal of ethanol per year by 2030.
The phaseout of the oxygenate methyl tert-butyl ether (MTBE) as a gasoline additive also has given ethanol a boost because it is being substituted for MTBE.
In addition, ethanol benefits from fuel and farm subsidies to the tune of $5.1 billion to $6.8 billion per year, according to a report by the International Institute for Sustainable Development. More than half the subsidies come from tax avoidance for companies that blend ethanol. They get a 51-cent-per-gal tax credit to encourage ethanol's use. Another $800 million to $1.4 billion is ethanol's share of federal corn subsidies. The rest comes from a mix of state and local farm aid programs. The report's author, economist Doug Koplow, estimated that the petroleum industry gets about the same total support.
Ethanol production is also promoted for environmental benefits, particularly ethanol's lower impact on climate change compared with that of fossil fuels. Of course, burning plant-derived ethanol emits carbon dioxide, but the CO2 emissions are recycled by new plant growth and remain within Earth's current carbon cycle. Gasoline upsets the carbon cycle by releasing CO2 from carbon captured in fossil fuels millions of year ago.
Environmental activists also back ethanol because it burns more cleanly than gasoline, producing less carbon monoxide and particulates. However, compared with gasoline, it generates the same levels of nitrogen oxides and releases more volatile organic compounds through evaporation. Environmental groups, moreover, are taking a second look at ethanol as the sweeping impact of energy crops on farmlands becomes increasingly evident.
Other critics note that ethanol production requires about 29% more energy than it can generate. Cornell University professor David Pimentel argues that this negates offsets in CO2 or in oil imports claimed for ethanol. However, he acknowledges that gasoline takes 10 to 20% more energy to pump, refine, and transport than it contains. Other energy sources suffer the same difficulty: Three times more units of energy from coal are needed to make one unit of energy in electricity. However, a kilowatt or a gallon of gas or ethanol is worth far more to society than a lump of coal, a gallon of crude oil, or an ear of corn.
Today's "energy crop" is nearly all corn, and that is not likely to change much in the near future. Cellulosic ethanol—from biomass, corn waste or stover, switch grass—is a much discussed option, but no commercial plants have been built in the U.S. And even if a slow switch occurs, cellulose for biofuels is likely to also come from farmlands. The success of biofuels will change America's farms and farming communities.
Secretary of Agriculture Mike Johanns, speaking at the conference, said it is "unlikely" cellulosic biomass would soon replace corn. He predicted a future with some combination of the two.
Corn production will expand, he said, driven by demand for ethanol. The cost of producing a gallon of ethanol is about $1.10 today, he said, well below the wholesale price of gasoline. "Ethanol is competitive with gasoline even without the 51-cent-per-gallon subsidy," Johanns said, citing DOE figures saying ethanol will be competitive with gasoline with oil at $40 per bbl, higher than Citigroup's critical oil price of $36 per bbl but still below today's oil prices.
"The productivity of the American farmer is nothing short of remarkable," he said. Corn yield increases of 40% are possible with improved hybrid plants, he said, predicting that ethanol production could double within five years without affecting corn used for animal feed or the small amount used for human consumption just due to increased productivity.
Secretary of Energy Samuel W. Bodman, echoing Johanns' boosterism, said: "I think this has the potential to be the best thing we do during my tenure as energy secretary. The reason I am so optimistic is that the American biotech industry really is the most advanced and most competitive in the world."
Bodman and Johanns are putting a lot of federal money into ethanol, and more is sure to come. At the conference, Johanns estimated that USDA has placed some $2 billion in energy programs since 2000. DOE investments, however, are hard even to add up. Bodman described recent programs spending some $500 million to help build new cellulose-based demonstration biorefineries and another $250 million for genomic research to develop enzymes to break down cellulose into sugars.
Ethanol advocates throw around a lot of production numbers. To try to sort them out, Keith Collins, chief USDA economist, pointed out that today's U.S. gasoline consumption is about 140 billion gal per year. Ethanol output this year is around 5.1 billion gal–equivalent to 3.3 billion gal of displaced gasoline when its lower energy value is figured in.
Collins estimated that some 19% of U.S. corn—more than 2 billion bushels—went for ethanol this year, comparable with the amount of U.S. corn exported annually.
Overall, about half this year's 12 billion-bushel corn crop fed livestock; around 10% was used for human food, seed, and industrial uses; and the rest was split between ethanol production and exports. About 80 million acres were used to grow this corn.
Although Collins calls himself a biofuels "cheerleader," in St. Louis, he warned of ethanol's impact on farm and fuel markets, the environment, food, and livestock feed.
He predicted that as ethanol production claims more of the corn harvest, corn prices will rise, as will corn acreage, having a ripple effect on agricultural commodity markets as farmers shift production. Top corn yields are about 150 bushels per acre in 2006, and using that figure, he estimated that each billion gallons of ethanol will need nearly 2.5 million acres planted to corn. That means the President's goal of 7.5 billion gal of ethanol fuel by 2012 would draw around 20 million acres, or about 25%, of U.S. corn farmland.
If all the U.S. corn crop goes to ethanol, the maximum output at current yields and acreage would be 32 billion gal, only half the current goal of 60 billion gal by 2030.
But Collins also noted that corn yields have increased fourfold since 1948, from 40 bushels per acre to a record 160 bushels in 2004. He cited better fertilizers, crop management, and new corn hybrids as ways to get more corn from the same fields. He noted that a 5-bushel increase in yield is the equivalent of adding around 2.5 million acres to corn plantings and producing another 1 billion gal of ethanol each year.
Collins did not do the projections, but Citigroup did and predicted that a corn yield increase to 180 bushels per acre and an acreage expansion of 13 million acres would produce 15 billion gal of ethanol by 2016. The new acreage will come from soybeans cropland, the shift driving expansion of the soybean market to South America.
Although optimistic, Citigroup's vision is nothing compared with that of Monsanto, an agricultural technology company.
Robb Fraley, Monsanto's chief technology officer, speaking at the conference, predicted that corn yields would double within the next 25 years, matching their historical best growth. He estimated that by 2030, U.S. farmers could produce a whopping 300 bushels of corn per acre.
He added that if production acres were increased to 90 million, total grain production would reach 25 billion bushels per year, twice today's level. That's enough corn, he said, to provide all needs for animal feed and to produce 50 billion gal of ethanol. Toss in corn stover for cellulosic ethanol, Fraley said, and the numbers would be at DOE's 60 billion gal per year.
Cellulosic ethanol has created much buzz in farming communities and boardrooms. DuPont's Holliday pointed to a recent deal with Broin, announced early in October, to build a biorefinery using corn stover as a feedstock (C&EN, Oct. 16, page 25). "We believe we can put this in the bank," Holliday said. "Using stover to make ethanol, we can double ethanol production per acre. But we will have to change harvesting techniques."
Removing stover leads to soil erosion and hurts long-term soil quality, however, and the push for corn might result in single-crop corn production and intensive farming practices.
Hassebrook notes that highly concentrated corn production would change Midwest farming, ending crop rotation, putting set-aside conservation lands into production, and encouraging use of more herbicides and fertilizers. He also worries about the trend to co-locate cattle feedlots near biorefineries, because cattle can still eat the corn waste after sugars are extracted. He values manure as a fertilizer, but he predicts such concentration would overwhelm the ability of farmlands to use manure.
Kenneth A. Cook, director of the Environmental Working Group, worries too about the impact of energy crops on farmlands and wants to see a national debate on the impact of the ethanol market. He also wants to increase vehicle gas mileage to cut gasoline use, rather than a single-minded push for more ethanol to replace gasoline.
"To go big, it is really important that we get the agricultural sustainability part right," said James D. McMillan, manager of bioprocessing R&D for the National Renewable Energy Laboratory. Commenting on the differences within USDA and DOE over energy and agricultural policies, he added, "It is hard to structure what is the right policy framework. Our technologies are way ahead of our policies."
McMillan believes that corn stover and waste products may be a bridge to other energy crops and that even ethanol may prove to be just a first step for biofuels. He singles out biobutanol, a biofuel being developed by DuPont and BP that has many advantages over ethanol and is expected to be commercialized by 2010 (C&EN, June 26, page 9).
A similar prediction was made at the conference by Vinod Khosla, cofounder of Sun Microsystems, a venture capitalist, and a heavy investor in ethanol.
"It is entirely possible that we will not be using any ethanol in 25 years," Khosla said. "Why? Because as soon as you open an area to innovation, scientists will start inventing better solutions. The problem with oil is that it has been locked up and not subject to innovation. Our scientists will invent better fuels every day, and that will happen, and the world will be best supplied by biomass-based fuel that may flow in a very different way than today."
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