Jolley: Doing the math on ethanol

Chuck Jolley  |  Updated: 11/20/2012

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Following Bill Clinton’s suggestion, I’m trying to do the arithmetic and it’s not working.  Somebody at the Environmental Protection Agency (EPA) must have worked out the numbers using the new math.  On Friday, their numbers-challenged researchers joined hands with the USDA and refused to waive the Renewable Fuels Standard.  Their bottom line showed on average temporarily setting aside the Renewable Fuel Standard (RFS) would only reduce corn prices by about 1 percent.

"We recognize that this year's drought has created hardship in some sectors of the economy, particularly for livestock producers," said Gina McCarthy, assistant administrator for EPA's Office of Air and Radiation. "But our extensive analysis makes clear that congressional requirements for a waiver have not been met and that waiving the RFS will have little, if any, impact."

But there is this little ongoing problem called the widespread drought.  It’s the worst in the US since the 1950’s and it pushed the global food price index up six percent in July, according to a report by the United Nations’ Food and Agriculture Organization. On one hand, the USDA says the price of corn is no big deal; on the other hand, they expanded drought assistance in September to crop and livestock producers in 22 states.

The main driver of that expansion was the skyrocketing price of corn.  Ethanol demand took about a third of the crop and a production shortfall helped bump up the price of a bushel to near record levels.

There seems to be a split among ag community special interest groups that rival the recent political schism.  If you’re growing corn, you’re sure the EPA made the correct decision.  If you’re buying corn as feed, you’re convinced the ‘fix’ was in.

Maybe the fix was in.  Chasing down the arithmetic from other sources, I went to the Wall Street Journal.  Their editors said “ethanol production is expected to consume about 42% of this year’s corn crop, and the current price of around $7.45 a bushel is sure to rise as the supply dwindles.”  WSJ quoting Bloomberg News, said “that means that losses could rise to $0.36 a gallon based on December contracts for corn and ethanol. Last year ethanol makers were making a profit of $0.24 a gallon on ethanol.”

Looking elsewhere, I discovered that falling U.S. demand for gasoline, combined with high corn prices, have already forced the closure of several U.S. ethanol plants. Even with artificial price supports, ethanol makers are losing money on every gallon of the fuel they make this year.  A mandate enacted during the Bush administration requires the production of 13.2 million gallons of ethanol to mix with gasoline this year.  Demand, of course, has nothing to do with it.

In 2008, the government made a choice between feeding cattle or Cadillacs.  They took the long view and chose Cadillacs.  Alas, it was the wrong view.  As the price of a gallon of gas surged, the public chose to drive less or trade in that Cadillac for a Prius.  The average household chose groceries over gas and the assumptions made half a decade ago are still forcing the marketplace to head down a road that few want to travel.

If there was ever a place where the free market should decide, this is it.  The ethanol business was propped up and given a good run at being successful.  It created a lot of new jobs, especially in areas that needed new industry.  Like most government enforced markets, though, their ‘five year plan’ was pre-loaded with problems.  It never took into account the inevitable swings in demand, allowing producers to adjust output quickly.  The supply/demand equation became just a supply equation.  The mandate says make some ethanol this year and make more next year.

Never mind the marketplace.

So we have an artificially created market glut of ethanol bumping heads with a real market demand for more feed corn.  Ethanol producers are losing $0.36 a gallon, a swing of $.60 in one year and fighting for their right to keep pursuing that insane business model.  Animal agriculture wants a little relief on feed prices and the Feds say freeing up 42% of the corn market to establish real fair market prices would only make a 1% difference.  Somebody needs to send a $2.00 calculator to Gina McCarthy.

Mr. Clinton, we need you.

The opinions expressed in this commentary are solely those of Chuck Jolley, a veteran food-industry journalist and commentator.
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Bill Akins    
Longview, Tx.  |  November, 21, 2012 at 09:08 AM

I would like to make a couple comments about the actual reduction of petroleum products due to the use of corn to make ethanol.
1) Ethanol has 1/2 the energy of gasoline. Therefore, it takes twice as much ethanol as gasoline which means the miles per gallon is 1/2 of gasoline.
2) Ethanol burns at a different rate than gasoline; therefore, it needs a different compression ratio and timing than gasoline. Since gasoline typically has 10% ethanol, then your automotive engine has a compression ratio and timing set for gasoline, not ethanol. Therefore, the fuel mileage is reduced even further since the alcohol is not being efficiently burned.
3) I calculate the gas mileage of every tank of gas I use. Gasoline gets an average of 10% less gas mileage than straight gasoline. This means that the 10% ethanol is completely wasted.

Add to that the fuel consumption of the farm equipment, processing equipment, and transportation equipment, not to mention the pollution from all of these sources for ethanol and I feel that you will agree that we gain nothing and more likely burn more fossil fuels and pollute the atmosphere more by adding ethanol to our gasoline.

B Posch    
Canada  |  November, 23, 2012 at 05:40 AM

I completely agree with your observations. I would also like to add the problem of gasoline going stale quickly with ethanol added. Lawn mowers and small engines will barely start if the gas has been sitting in the tank for two months. I bought high test gas (without ethanol) for my chain saw and the oil/mixed can is still good after a year.

MEL    
NE  |  November, 23, 2012 at 08:19 AM

anyone who goes to the wallstreet journal for mythical so called facts about ethanol needs to stop commenting .their facts and numbers seldom add up.The 15% gasoline at my E-85 pump must really be good as my malibu gets 30 to 32 MPG. Bias againts ethanol shows.

kent    
mo  |  November, 23, 2012 at 09:50 AM

So does ignorance.

Jeff P    
Iowa  |  November, 23, 2012 at 10:07 AM

Since personal experience passes for scientific fact here, I have seen a 10% reduction in milage with E85, but only 1-2% with E10 and studies show the same for E15. I have never had a problem with any of my 5 small engines using E10. The ethanol is mandated as an oxygenate to reduce air pollution where needed (a major reason why the waiver was not granted) and even here in Iowa anyone that wants to can buy regular un-leaded if they want.
If ethanol is sooo evil, can we then please stop shipping our corn co-products to Texas by the unit train? The demand for co-product by Texas feedlots has raised the cost of those co-products to feeders and ranchers in the midwest. You can't have it both ways; ethanol BAD, co-products GOOD.

Bump    
Nebraska  |  November, 23, 2012 at 10:12 AM

When "doing the math on ethanol" - please do all of it. Distillers grains return 33%, by weight, of the corn taken
into ethanol plants, back to the feed market. That shifts your 42% consumption number to 26.8%. How much
has corn production increased since the enactment of the RFS? The corn market has responded to the increased
demand, by increasing production from what was 9 to 10 billion bushels per year to 12 to 13 billion bushels per
year...roughly a 30% increase in production to compensate for a roughly 27% increase in demand.

The drought of 2012 was disastrous - but how much worse could the impact have been if ethanol weren't in the
picture?

John S    
Wa.  |  November, 23, 2012 at 02:08 PM

I don't know about other states but on the west coast it is almost impossible to find unblended gas. I travel 4-5000 miles a month and gain 10% mpg when I can find non ethanol gas. It is interesting to me that the positive sentiments toward ethanol are from corn states. If we were seeing the so called by product benefits why is DDG so expensive, and how much DDG do you think we can feed a dairy or beef animal. The numbers dont add up. We are not reducing our carbon footprint with this selfish policy.

rick    
il  |  November, 23, 2012 at 03:07 PM

I raise cattle and make most of my living off of them. I also raise corn. I believe ethanol has raised the price of corn, and that could raise feed costs. However, if you take advantage of the by products, it reduces the cost of feed!! Corn gluten can be almost substituted pound for pound for corn with no difference in feed value. I know this from experience, not what someone who probably doesn't own a cow wrights. I, also, am not tolerant of the wanting to reduce profit of the corn farmer so beef people can do better. Tearing down someone so that you can get ahead is not right. I want to make a profit on both cattle and corn, and do!

bob    
November, 23, 2012 at 05:55 PM

I agree. I raise cattle in Iowa and the larger feedlots that purchase the by product get a great deal. What is behind the idea of changing things? Basically the corn is used twice. Once by the ethanol plant and then once by the feedlot. So why not get the use out of the product BEFORE it is consumed by cattle? We grass feed our cattle so it does not make much difference to us, but other farmers & the feedlots here in Iowa depend on the system as is and it works well. In addition the market price of gasoline is lowered by the presence of ethanol. When the ethanol subsidy was first instituted the market price of gas dropped significantly. You want to know where it was the lowest in the nation? Iowa! No refineries, but the price was manipulated so people would not see a difference in price between straight gas and ethanol blend. How is it that gasoline in Iowa is the same exact price as ethanol? With no refineries? I guess it is free to ship things to Iowa!

Jessie    
Texas  |  November, 23, 2012 at 06:16 PM

What do you pay for DDG and corn
gluten feed in Iowa?

rick    
November, 23, 2012 at 06:41 PM

Ten years ago the livestock industry had a buyers market for corn but today they have competition from another industry and think that this is unfair.
We export just about half the soybean crop, lets embargo soybeans so that hog farmers can have cheap soybean meal.
The real problem here is that livestock farmers receive too small a percentage of the retail price.

Rick    
November, 24, 2012 at 05:41 AM

Isn't it a little ironic? In the adjacent article about "Out of Calves" they are complaining that there aren't any calves and herd reduction continues.
If you waive ethanol just what are you going to feed all that corn to?
This is begining to look like a "Big Money" conspiracy by the packers. Let's figure out how to get some cheap corn to feed to all this high priced beef and really make a windfall profit.

Jack    
Charleston, SC  |  November, 24, 2012 at 09:44 AM

BTU's per 1 US gallon

Gasoline - 114,000

Ethanol - 76,000

Ethanol like most government programs is sorely lacking in the honesty department.

John S    
Wa.  |  November, 24, 2012 at 07:45 PM

Come on lets be reasonable. You may be using corn twice but it takes 56 lbs of corn to make 17.5 lbs. of DDG. I have to limit the amount of DDG or I will be over feeding protein and fat. The ethanol industry doesnt manufacture corn gluten feed, that comes from the wet milling industry so I dont understand how that is part of the discussion. I have been feeding cattle for over 30 years and also know from experience the pros and cons of feeding DDG's.

W.E.    
KY  |  November, 25, 2012 at 09:10 PM

Most respondents here seem to still embrace the status quo approach of "profit" at any cost. If beef producers were to decide on a grand scale to let our cattle function as ruminants, as their digestive systems are adapted and designed to function, we wouldn't have to worry about the price of corn or the mathematics of ethanol production, and we could have more control over our own markets. Cattle got along fine without corn for several thousand years before we decided they needed it. Do the real math, and you'll see that the late twentieth century took cattlemen on an expensive and unnecessary detour. Taking several million acres of erodible land out of corn, wheat and soybean production, planting that land back to grass, and carefully grazing and resting that grass could help us avoid another Dust Bowl type disaster, which is what widespread twenty-inch deficits of rainfall threaten. Or we can just keep playing the bandit like so many of our predecessors did a generation or two ago, and lose it all, all over again.

MA    
s.d.  |  November, 25, 2012 at 09:51 PM

The same people who want to complain about the cost of corn could have used the futures last summer to lock in sub $5 corn. Remember that without ethanol, gas prices would be substantialy higher.

Bill Akins    
Longview, Tx.  |  November, 26, 2012 at 01:08 PM

I did not realize the emotion that would be stirred when I sent the first reply to this article. I may be the only non biased respondent. I consider myself an environmentalist, but I do feel that I have some common sense. I raise grass fed organic cattle that I do not feed grain to. They are raised and finished on grass. Therefore, the corn prices do not affect me. I have found the fuel stations locally that do not have ethanol blend and I can assure you that I get 10% better fuel mileage from the non ethanol fuel. However, when I travel, it is nearly impossible to avoid the ethanol blend. If you keep track of your fuel mileage, I feel that you will find the same thing. If there was a 100% ethanol fuel, then it may make sense. The 10% blend with an engine's timing and compression ratio set for gasoline, does not make sense.

Bob    
November, 27, 2012 at 08:28 AM

My Malibu gets 33-34 when I use gasoline.