Heavy price of corn-based biofuels

It's the Midwest's version of the tech bubble, and in some ways, it is remarkably familiar: overeager investors enamored of a technology's seemingly unlimited potential ignore what, at least in retrospect, are obvious economic realities.

More than a hundred biofuel factories, clustered largely in the corn-growing states of Iowa, Minnesota, Illinois, Indiana, South Dakota, and Nebraska, will produce 6.4 billion gallons of ethanol this year, and another 74 facilities are under construction. Just 18 months ago, they were cash cows, churning out high-priced ethanol from low-priced corn, raising hopes of 'energy independence' among politicians, and capturing the attention - and money - of venture capitalists from both the East and West Coasts.

Corn being unloaded from a railcar at an ethanol plant in Windsor, Colorado. The plant processes some 150 million litres of ethanol annually. Credit: NREL/Gerry Harrow

The doldrums of the ethanol market reflect the predictable boom-and-bust cycle of any commodity: high prices drive increased production, and soon the market is oversupplied, causing prices to crash. But the large-scale use of corn-derived ethanol as a transportation fuel has economic problems all its own.

Rising food prices

Even though crude oil is at near record prices, and companies that use ethanol in their gasoline receive a federal tax credit of 51 cents per gallon, ethanol struggles to compete economically. And with limited infrastructure in place to distribute and sell the biofuel, demand will remain uncertain for the foreseeable future.

More alarming, the boom in ethanol production is driving up the price of food. Of the record 93 million acres of corn planted in the United States in 2007, about 20 per cent went to ethanol. Since most of the rest is used to feed animals, the prices of beef, milk, poultry, and pork are all affected by increases in the cost of corn. The international Organization for Economic Co�peration and Development (OECD) recently warned that the "rapid growth of the biofuels industry" could bring about fundamental shifts in agricultural markets worldwide and could even "cause food shortages."

All this comes at a time when the need for alternatives to �petroleum-based transportation fuels is becoming urgent... Expanded use of biofuels is central to the federal government's long-term energy strategy.

In his State of the Union speech on January 23, 2007, President Bush set the goal of producing 35 billion gallons of renewable and alternative fuels by 2017, citing the need for independence from foreign oil. The US Department of Energy has set the similar goal of replacing 30 per cent of gasoline use with biofuel use by 2030.

Hitting both targets, however, will require significant techno�logical breakthroughs. In the United States, for now, ethanol means the corn-derived version... Even proponents of corn ethanol say that its production levels cannot go much higher than around 15 billion gallons a year, which falls far short of Bush's goal.

While President Bush and other advocates of biofuels have often called for ethanol to be made from alternative feedstocks such as switchgrass - a plant native to the US prairie states, where it grows widely - the required technology is, according to most estimates, at least four to five years from commercial viability. Meanwhile, advanced biological techniques for creating novel organisms that produce other biofuels, such as hydrocarbons, are still in the lab. So far, researchers are making quantities that wouldn't even fill the tank of a large SUV.

The economic woes and market limitations of corn ethanol are a painful reminder of the immense difficulties facing developers of new biofuels. "The bottom line is that you're going to have to make fuel cheap," says Frances Arnold, a professor of chemical engineering and biochemistry at Caltech. "We can all make a little bit of something. But you have got to make a lot of it, and you have got to make it cheaply. The problem is so huge that your technology has to scale up and do it at a price that is competitive. Everyone is going to be competing on price alone."

Corn Blight

...It is not just the short-term economics of ethanol that concern agricultural experts. They also warn that corn-derived ethanol is not the "green fuel" its advocates have described. That's because making ethanol takes a lot of energy, both to grow the corn and, even more important, to run the fermentation facilities that turn the sugar gleaned from the corn kernels into the alcohol that's used as fuel. Exactly how much energy it takes has been the subject of intense academic debate in various journals during the last few years.

According to calculations done by University of Minnesota researchers, 54 per cent of the total energy represented by a gallon of ethanol is offset by the energy required to process the fuel; another 24 per cent is offset by the energy required to grow the corn. While about 25 per cent more energy is squeezed out of the biofuel than is used to produce it, other fuels yield much bigger gains, says Stephen Polasky, a professor of ecological and environmental economics at Minnesota.

Making etha�nol is "not a cheap process," he says. "From my perspective, the biggest problem [with corn ethanol] is just the straight-out economics and the costs. The energy input/output is not very good."

The high energy requirements of ethanol production mean that using ethanol as fuel isn't all that much better for the environment than using gasoline. One might think that burning the biofuel would release only the carbon dioxide that corn captures as it grows. But that simplified picture, which has often been conjured up to support the use of ethanol fuel, doesn't withstand closer scrutiny.

In fact, Polasky says, the fossil fuels needed to raise and harvest corn and produce ethanol are responsible for significant carbon emissions. Not only that, but the cultivation of corn also produces two other potent greenhouse gases: nitrous oxide and methane. Polasky calculates that corn-derived ethanol is responsible for greenhouse-gas emissions about 15 to 20 per cent below those associated with gasoline: "The bottom line is that you're getting a slight saving in terms of greenhouse-gas emissions, but not much."

If corn-derived ethanol has had little impact on energy markets and greenhouse-gas emissions, however, its production could have repercussions throughout the agricultural markets. Not only are corn prices up, but so are soybean prices, because farmers planted fewer soybeans to make room for corn.

In the May/June 2007 issue of Foreign Affairs, C. Ford Runge, a professor of applied economics and law at Minnesota, cowrote an article titled How Biofuels Could Starve the Poor, which argued that "the enormous volume of corn required by the ethanol industry is sending shock waves through the food system." Six months later, sitting in a large office from which he directs the university's Center for International Food and Agricultural Policy, Runge seems bemused by the criticism that his article received from local politicians and those in the etha�nol business. But he is steadfast in his argument: "It is clearly the case that milk prices, bread prices, are all rising at three times the average rate of increase of the last 10 years. It's appreciable, and it is beginning to be appreciated."

The recent OECD report, released in early September, is just the latest confirmation of his warnings, says Runge. And because a larger percentage of their income goes to food, he says, "this is really going to hit poor people." Since the United States exports about 20 per cent of its corn, the poor in the rest of the world are at particular risk. Runge cites the doubling in the price of tor�tillas in Mexico a year ago.

All these factors argue against the promise of corn ethanol as a solution to the energy problem. "My take," says Polasky, "is that [ethanol] is only going to be a bit player in terms of energy supplies." He calculates that even if all the corn planted in the United States were used for ethanol, the biofuel would still displace only 12 per cent of gasoline consumption.

"If I'm doing this for energy policy, I don't see the payback," he says. "If we're doing this as farm support policy, there may be more merit there. But we're going to have to go to the next generation of technology to have a significant impact on the energy markets."

The full text of this article is published in the January-February 2008 issue of Technology Review published by MIT.

Copyright Technology Review 2007.

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