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Ethanol Cost? No. Ethanol is Saving You Cash.

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January 30, 2011 – Comments (24)

In a couple of recent posts TMFDeej made the case that Governments mandate of adding ethanol to gasoline is costing us all in increased food costs.

http://caps.fool.com/Blogs/the-government-really-screwed/524290

http://caps.fool.com/Blogs/be-very-afraid-of-restaurant/528046 

The argument goes like this: total corn grown - corn grown for ethanol = less for the food supply = higher food prices. When you also presuppose that all Gov't intervention into any market, anywhere, is a bad thing, it is easy to just look at that theory for an explanation of higher food prices and say "whup, there it is".

The real world is not so simple.

In one of the replies I wrote that the likely cost to a box of corn flakes from the increased price of a bushel of corn is less than a dime. Deej either did not read it, or did not agree because he followed it with the second post.

I also asked what the cost of a barrell of oil would be if the ten percent that was ethanol, was petroleum instead. Merril Lynch, I have since learned, estimates 15% higher.

This article is from 2008, but everything it says still holds true. The vast majority of your food costs are in processing and distribution - the oil to run the trucks, the lights at the grocery, etc. If the oil was 15% higher, food would cost you more than it does.

http://www.thenewatlantis.com/publications/in-defense-of-biofuels

Last year I went long - only in CAPS - JJG and JJA not because of the influence of biofuels on crop prices, but because of the influence of global warming induced weather extremes on crop production. Austraila was crushed by drought and then trashed by floods, Russia was destroyed by heat and drought, Argentina - drought, Pakistan - flooding. All of that weather could be just weather, just as four major hurricanes hitting Florida could be just weather. But the more "just weather" events there are, whether they are record precipitation, highest ever temps, or number of hurricanes, the more likely global warming is coming to pass. Whether you believe in global warming or not, it is the extreme weather events, + increased food demand + increased oil costs = higher food prices. Ethanol has kept costs down.

Regards,

Steven

PS. I was against ethanol subsidies. No longer.

24 Comments – Post Your Own

#1) On January 30, 2011 at 9:07 PM, RonChapmanJr (32.98) wrote:

http://s09.middlebury.edu/ECON0265A/New%20articles%20-%202008/Cost%20-%20benefits%20of%20ethanol.pdf

Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such as reducing greenhouse gas emissions, and energy security goals. This paper provides the first thorough benefit-cost analysis of increasing ethanol use beyond four billion gallons a year, and finds that the costs of increased production are likely to exceed the benefits by about three billion dollars annually. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test, and that Congress should consider repealing the ethanol tariff and tax credit.

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#2) On January 30, 2011 at 9:26 PM, TMFDeej (99.25) wrote:

Steven, who cares about corn flakes?  It's the rapidly rising cost of meat (and perhaps milk) that's the real problem that's going to hurt consumers.  Do you realize how much corn cattle and pigs eat?  

The daily diet recommended for fattening up a two year old beef steer includes 25 pounds of corn or sorghum silage, four pounds of red clover hay, 14 pounds of corn or ground grain sorghum and a pound and a quarter of linseed meal or cottonseed meal.  

That's PER DAY.  The difference might not be as noticeable here in the United States where we are wealthy compared to the rest of the world, but Google "food riots" and see what impact the rising price of food is having on other countries.  Using food as an inefficient source of fuel when people are starving and rioting about food is disgusting.  No wonder everyone hates us.

Not only that, but the production of corn and farming in general actually consumes oil.  Tractors and other farm machinery run on gas.  So in essence we're burning oil in the form of gasoline to grow corn that we then convert back into gas.  That certainly doesn't sound very efficient to me.

Over 40% of the U.S. corn crop is being converted into ethanol this year and that percentage will likely increase in the future. Ethanol is nothing more than a way for the government to line the pockets of farmers.  It's as simple as that.

Deej

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#3) On January 30, 2011 at 9:43 PM, TMFDeej (99.25) wrote:

Food subsidy cuts increase rioting risk, U.N. official says

http://www.post-gazette.com/pg/11030/1121655-82.stm

The global recession has eroded government aid that helped people in poorer countries afford bread, cooking oils and other staples. The trend raises the odds of unrest even though prices have improved in many nations from 2007-2009, Ms. Sheeran said. During that period, more than 60 food riots occurred worldwide, according to the State Department.

The U.N.'s Food Price Index surged to 214.8 in December, exceeding the previous record in 2008 when rising costs and fears of shortages sparked riots from Haiti to Egypt. More than 100 people have died this month in protests in Tunisia against food inflation, unemployment and alleged corruption, according to the U.N., and at least three were killed in Algeria...

Global food costs jumped 25 percent last year to an all- time high in December because of record sugar and meat prices, according to the U.

Deej 

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#4) On January 30, 2011 at 9:45 PM, TMFDeej (99.25) wrote:

Tensions rise on surging food prices

http://money.cnn.com/2011/01/28/news/international/inflation_food_prices_middle_east/index.htm

Deej 

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#5) On January 30, 2011 at 11:28 PM, devoish (96.42) wrote:

Ron,

After a quick skim of the paper you linked, I would like to point out they failed to put a dollar value on the savings of decreased oil consumption, their baseline was $45/barrell from an old EPA paper. They did not consider the savings from no longer subsidizing farmers not to grow corn. It is also so old they estimated pollution from ethanol plants rather than go get real measurements (could be worse than they thought - or better).

Deej,

Tony the Tiger cares. And I supposed a person might care about the corn in cornflakes or coca cola if they cared about the corn in gasoline or beef. If it costs that much corn to fatten up a steer, then BEEF is a waste of corn. As I posted in your blog it takes 7lbs of corn (average of all beef from grass/no corn fed to all corn fed beef) to grow one pound of beef.

I won't add up the crops lost to weather events last year for you. But Cargill says they did well predicting crop losses from weather events.

However please read the article, especially the portion that says corn production is not a zero sum game, at present, and which describes the increased acreage tilled to corn and that it did not decrease other crop acres. (in the last decade acreage to corn is up 20 mil, soy is up 5 mil and wheat is down 10 mil).There was and still is empty land that can become tilled which is also confirmed by the portion of the USDA crop report I shared on your blog. There is a lot of good information, including the confirmation of another thing I read and posted to your blog - that corn ethanol production is expected to peak around 15 billion(?) barrels. In the article it says corn ethanol production is capped at 15 bil and then continued growth will come from cellulosic ethanol which explains the expectations in the other article I read.

Please read the article I linked to. I think it will add to your knowledge.

Here is the article from Amber waves i refferred to in the reply I left on your "government screwed up" blog.

http://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htm

And finally, when you come right down to it the entire premise of your article is incorrect - if there is additional land. It is not a choice of ethanol or food from a limited amount of land. The land is there. So it is a choice of whether or not to let market forces dictate our decision not to plant when people are hungry.

I say collect some taxes and plant, but lets stop doing it the unsustainable way - through borrowings from the financial industry.

Regards,

Steven

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#6) On January 30, 2011 at 11:39 PM, Dean47 (< 20) wrote:

When you also presuppose that all Gov't intervention into any market, anywhere, is a bad thing

How about when you are predisposed to thinking that it's a good thing?

Devoish who???

 

Tractors and other farm machinery run on gas.

Deej, come out the farm some time!   Over 90% of our machinery runs on diesel.  Only our small tractors use gas, and some small grain trucks. 

 

What's the real reason for high food prices?  Hmm -- what's the real reason for high oil prices?  Silver, cotton, wheat, cattle, steel, copper -- they're all relatively high.   Somehow natural gas is still ever so cheap.

I'm getting new flooring -- there is a manufacturer's letter at the store saying they need to jack carpet prices up.

Pretty much everything has soared 25-50% in six months.  If you think that's because of ethanol subsidies, you're loony as a toon.

That said, eliminating 90% of the federal government would be the biggest boon to the American Economy EVER.

 

P.S. 

Dear Global Warming: 

Any Freakin' Time. 

 

It's -10 F. Right now. I don't like it.

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#7) On January 30, 2011 at 11:42 PM, devoish (96.42) wrote:

Deej,

#4. We agree that food prices are rising. We agree that people who cannot eat will get restless.

Ethanol is Little Bo Peep compared to the Jolly Green giants of weather related events, and rising incomes in china and India.

Not eveything is economics or politics. We have been a little to hard on Mother Nature and it is too late to entirely avoid a spanking. The 2000 US Presidential election will go down in history as the major turning point in our failure to reduce the impacts of global warming.

Why prices are rising: Bad weather in Australia and Russia over the summer severely diminished wheat crops, partially fueling the latest commodities surge. (and Pakistan and Argentina)

Rising incomes in emerging markets like China and India also play a role, analysts at the Eurasia Group say. The growing middle class in those countries has prompted a shift from a grain-based diet to one consisting of more meat.

And a push toward biofuels has also led to rising demand for corn and sugar, pushing up commodity prices.

Regards,

Steven

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#8) On January 31, 2011 at 6:35 AM, fmahnke (87.67) wrote:

Hey devo,

I think you (and the democrats) are fighting yesterdays war.

Forget ethanol, solar, wind and clean coal.  Focus on fixing the fracking issue (FTK appears to be close), and convert more vechicles to natural gas.  So many problems would be solved

i'm thinking that the environmentalist, won't accept an solution which only addresses 80% of the problem, or that the Ag lobbyists share the unions grip on BHO's shorthairs.  Otherwise this solution would be in the process of implementation on a grand scale.

PS,  I think LA is scheduled to get their last bus off diesel this month

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#9) On January 31, 2011 at 7:27 AM, devoish (96.42) wrote:

fmanke,

I am not sure that all the damage to water/land is done from the chemicals in the fracking fluids, just that some of it is. Some of the harm being done may also be from the release of natural toxins that would otherwise have stayed deep below ground had the rocks not been fractured.

That said, I would certainly prefer a non-toxic fluid, and at least reduce that portion of the damage.

I also do not believe that nat gas solves 80% of anything, and I need you to clear up what the problem you are referring to is; toxic fluids solve 80% of water contamination or nat gas solves 80% of pollution problems.

Worker unions are almost entirely busted. The union that has Congress and the President by the shorthairs is the financial industry and the industries that tithe them with interest payments.

When Congress gets serious, there will be a publicity campaign about properly inflated tires, and a rebate for white roofing shingles and paint.

I know it would be better for me for Congress to subsidize lowering my energy costs by helping me become a producer of electricty through solar panels, put LED's in my light fixtures, or geothermal in my heat, than to subsidize nat gas or nuclear which will keep draining my pocket forever.

Steven

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#10) On January 31, 2011 at 10:31 AM, rofgile (99.43) wrote:

How does ethanol keep food prices down?  I fail to see the logic this time.

a) ethanol is produced by corn, which requires oil.  Oil input into corn growing is well documented in terms of fertilizers/pesticides derived from oil, and fuel for motorized tractors.

b) ethanol in gas results in less mileage than oil.  So, if ethanol is being used in gas for transporting food, the transporters have to buy more gas. 

c) increased corn prices do show up at the supermarket - in 2008, frito and other corn chips were about a dollar more expensive than 2007, and prices fell back lower in 2009-2010. 

---

 -Rof  

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#11) On January 31, 2011 at 10:50 AM, Melaschasm (53.59) wrote:

If US corn ethanol is a low cost fuel, then why do we have a 50 cent tax on imports, while giving 100's of millions in subsidies to domestic ethanol production?

If ethanol was a low cost solution, the government would not have to require ethanol, they would just have to allow its use.

 

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#12) On January 31, 2011 at 1:58 PM, leohaas (30.99) wrote:

Bottom line: this whole discussion is an excellent pitch for POT and other fertilizer producers!

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#13) On January 31, 2011 at 5:22 PM, devoish (96.42) wrote:

leohaas,

Because of the high costs of inputs (fertilizer) the trend in farming is toward farm practices that use less fertilizer.

Melaschasm,

I think you were looking out the window and got distracted, there is no low cost energy, it is all relative, and relatively expensive.

Rofgile,

A quick google of 'kellogs corn flakes prices' reveals a range of $3.99 for an 18oz box at Kohls and $4.99 at Walgreens for 12 oz. lets go shopping and imagine we can buy that 12oz box for the low price of $2.50.

The price of corn has impacted the price of a 12oz box of cornflakes $.03 cents in the last two years.  According to Merrill lynch removing the 10% of gasoline which is ethanol and replacing it with petroleum would raise the price of a barrel of oil $15.00, or more than 15% at todays price. If the 'after farm' oil cost of cornflakes - the processing, the transport, the supermarket heat and lights is 20%, and I can make the case that it is much more, Then even at $1.00/12oz box for generic cornflakes you have broken even. The corn costs $.03, and fuel savings equals $.03. So if that is breaking even how does it save money? Because the 15% fuel cost would also impact your heating oil, gasoline, electric, television, pc, etc, costing you money.

And to be fair to Deej, he is correct that the impact to 'the worlds poorest' is greater because they do not spend oil on supermarket lights and the processing and the transportation. But the cost of their countrymen in china and India changing their diets and eating more corn guzzling meat or the cost of the crops lost to extremem weather events last year, far outweighs the impacts of the additional corn grown for ethanol acres that have been added in the last two years.

Hope that helps,

Steven

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#14) On February 01, 2011 at 6:58 AM, FleaBagger (28.07) wrote:

After learning that rising labor costs increase business profits, even ethanol mandates decreasing food costs doesn't surprise me anymore.

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#15) On February 01, 2011 at 12:12 PM, geneticbiscuit (98.23) wrote:

"According to Merrill lynch removing the 10% of gasoline which is ethanol and replacing it with petroleum would raise the price of a barrel of oil $15.00, or more than 15% at todays price."

This may be true, but only because of the heavy subsidies on ethanol - something like $6 billion/year (for 4 billion gallons...).  Factor in a net loss in efficiency burning ethanol vs. traditional gasoline as a fuel, and simply dumping that ethanol money into oil subsidies (clearly not ideal...) could more or less negate any price increase, not to mention freeing up the agricultural land to grow - I don't know - food.

Don't even get me started on possible energy savings of slimming down our fat American asses by growing a more healthy food supply than corn-syrup and cow/chicken/pig feed....

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#16) On February 01, 2011 at 2:38 PM, devoish (96.42) wrote:

Flea,

Rising labor costs increases the number of potential customers for a product or service. If your burgers are good enough you'll get some of that money. Every product has different input costs. If one of those costs is 3% - say corn - and another is 20% - say fuel - then the corn can double costing you $.03, but if the fuel comes down 15% saving you $.033 cents then you saved .003 in input costs that you can keep in your pocket, generously share with an underpaid sweeper, or blow on a kegger to share with your classmates.

geneticbiscuit,

I don't know if Merrill is calculating/guessing/pulling a number out of their ass that says a 1% increase in fuel consumption will equate to a 1.5% increase in costs in todays market. I am not challenging their number, you can if you want (it might be an interesting excersize to see what any % supply disruption does to prices). What I do know is that the ethanol subsidy is $.45 cents, and at the pump E10 (10% ethanol) is more than $.45 cents more expensive than E85 (85% ethanol) fuel. So right now, subsidy or not, ethanol is less expensive than gasoline.

"Factor in a net loss in efficiency" Now you are getting into the land of accurate. In my car, using E85 cost me 13% in fuel mileage. So at $3.00/gallon for E10, E85 has to be $2.60 for me to benefit personally. The E85 was more than 13% cheaper so I continued to buy it. Where you are correct is that it is not enough cheaper to make up both the mpg loss and the subsidy but it would have made up about half the subsidy. Because gasoline is more expensive than ethanol, the higher oil goes the closer to not needing a subsidy ethanol will get. Ethanol also has additional upside by switching to more productive feedstocks. I ranted against GWB and Cheney when they subsidized corn ethanol. I whined that they chose the least productive feedstock, and the only renewable that helped the oil companys.

But this is a Democracy that does not have strong popular support. So it is impossible to ram healthcare or solar power down our collective asses without first enlisting the support of the financial empire. And the end result is third or fourth best.

"freeing up agricultural land"  Here you fell into the same trap as deej. This is not ten acres of corn minus one for ethanol. It is ten acres of corn plus one more for ethanol. Right now, in 2011, there is empty arable land. Someday in the dim and distant future it might become a trade off of food or ethanol, but right now it is food and ethanol, and there is still empty farmland.

And as far as slimming down our fat American asses by growing a better quality food - I'm with you.

 

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#17) On February 01, 2011 at 4:34 PM, geneticbiscuit (98.23) wrote:

I beleive that there is also a producer subsidy on top of that 45 cents/gallon...but that makes little difference.

 The major problem with producing such vast quantities of corn is the total devastation of the land upon which it is grown.  Sure, it will be fine for a few years, but eventually any soil nutrients will be used up and more and more fertilizer ($$$) will be needed just to achieve average crop yields.  All of that free arable land will be needed just to allow for proper crop rotation to slow the deterioration (not stop...) and squeeze out a few more years of "cheap" ethanol.  Not to mention the effects on rivers and streams (runoff nitrogen causing algal blooms which essentially turn the water into an anaerobic wasteland - look at the Mississippi).

 Mortgaging our agricultrual future just to save a few dollars and create a few jobs today...sounds an awful lot like the current FED policies that so many people are screaming about....

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#18) On February 01, 2011 at 8:10 PM, devoish (96.42) wrote:

geneticbiscuit,

All of the issues you raised concerning soil depletion, waste run-off and water pollution are real problems with conventional farming in the USA. Because it matters to me I buy organic products and local when I can. I agree with your concerns about conventional corn farming.

Deej's issue that corn ethanol is removing land from food production is incorrect. What the corn is grown for does not impact the issues you raised. please remember that the corn subsidy ends at 15bil gallons, and we are almost there. then ethanol producers will switch feedstocks.

What the ethanol subsidy has done is begin an ethanol industry, which can and will begin to function on more productive and less land destructive switchgrass and other feedstocks.

Regards,

Steven

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#19) On February 02, 2011 at 8:42 AM, ChrisGraley (29.68) wrote:

I buy my gas at one of the few stations in the area that still pumps real gas and not that blended crap.

On average, I pay about 5 cents more a gallon for it. I get about a 25% improvement in MPG though, so it's worth the extra $1.50 for me every fill up.

If that station starts selling the blended crap, I'll drive down to the closest marina to buy my gas.

The next car that I buy will be electric or a hybrid. I don't want to be dependent on the Middle East any more than I have to, but ethanol is just a big lie. It doesn't help the environment, it makes it worse. It damages the consumer and environment equally.

The only reason that it exists today is because of the lobbyists from Archer Daniels Midland.

Keep buying the lie and you'll only succeed in improving their bottom line.

 

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#20) On February 02, 2011 at 8:38 PM, devoish (96.42) wrote:

I get about a 25% improvement in MPG

;-)

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#21) On February 02, 2011 at 10:17 PM, ChrisGraley (29.68) wrote:

Wink all you want. It's true.

I drive a truck, so it's a difference of a few miles a gallon, but 25% is still 25 %.

I know it doesn't mean much to people that live in liberal fantasy land, but it does mean something to me.

What really gets me is that given your stance on the environment why you would support something that pollutes more than what we already have.

Is that fact ignored in the liberal love fests?

 

 

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#22) On February 02, 2011 at 10:18 PM, ChrisGraley (29.68) wrote:

Wink all you want. It's true.

I drive a truck, so it's a difference of a few miles a gallon, but 25% is still 25 %.

I know it doesn't mean much to people that live in liberal fantasy land, but it does mean something to me.

What really gets me is that given your stance on the environment why you would support something that pollutes more than what we already have.

Is that fact ignored in the liberal love fests?

 

 

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#23) On February 03, 2011 at 12:18 PM, devoish (96.42) wrote:

By "blended crap" are you referring to e85 or e10?

Because if its e10, you are NOT getting 25% better gas mileage out of a gallon of pure gasoline with less than 4% more energy in it.

And if its e85, where I live it is more than .50 cents/ gallon cheaper, not a nickel.

In fact in my experience in my car, e85 is priced to save me enough cash to break even against my mpg loss as compared to regular gas (e10) when e10 has been between $2.80 and $3.00/gallon and over $3.00/gallon the e85 begins to come out ahead, while below $2.80 the e10 wins.

Of course, without that 10% ethanol pure petroleum gas would cost me 15% more, according to Merrill.

So at the Liberal Love Fest, we have to decide which Government policys we want to ram down your throat, and which Government policys we want to use to avoid having other individuals trying to ram their mistakes down our throats.

So when we were done making daisy necklasses we all decided that since we believe the climate scientists about CO2 we decided that we need to address two issues, one -excessive CO2- being addressed succesfully by switching to ethanol, and two, the need to fix farm subsidys that encourage using corn over other crops that can produce much higher energy than corn for much lower input costs. Some of us decided that we were willing to pay a little more for the ethanol, even if it came from corn, to move us in a better direction, while others agreed with you that the environmental cost was to high, but more are believing that those costs are declining because of the excessive costs of inputs which are making farmers reduce their use as low as possible ( free markets theory at work - shh just leave it alone unless it stops working).

Accidentally we let this Conservative girl into the meeting. She couldn't make a necklass worth a damn, but you know, we admired her effort. She was pretty rational and questioned our numbers, and she also agreed it was pretty difficult to quantify the cost of environmental degradation which I feel is much worse for oil/coal than native switchgrass. What struck her was the idea that the USA had no diversified plan for transportation if oil became ridiculously expensive or supplys were disrupted, although she wasn't sure if it was better to go coal to liquid or switchgrass. Maybe working on both was a good idea, as she didn't want to wait on gas lines or have trouble getting to the store.

And then there was this Tea Party fella there too. He just smooshed the daisy and threw them in the garbage. Wasn't his thing. He was furious. He was pissed that Congress continued to subsidize oil consumption leaving the defense of this great Country vulnerable to oil supply disruptions, and if the USA gets conquered because of their deriliction he would vote every damn Congresscritter right out of office.

That was the wildest Liberal Love Fest since Madonna stayed for the after party.

;-)

Steven

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#24) On February 03, 2011 at 11:33 PM, ChrisGraley (29.68) wrote:

It's e10 and and I get 12 mpg with it vs 16 mpg with gas.

e10 is at about $3.00 right now and Cal's gas is $3.05.

At least in my state, they put a sticker on the pump if the gas is blended, but in a lot of states they don't. Most people don't even know that they aren't getting pure gas, which is what the people subsidizing it are hoping for.

The free market is not gonna help you if you are subsdising corn based ethanol. Corn depletes soil quickly so lots of fertilizer is used. So not only are you adding to the crop land, you are increasing the percentage of it being used for a more polluting crop. Since it's subsidized, the government will just increase the subsidy when input costs get too high for the farmers. I would much rather see oil made from algae over any alcohol based solution. You'd like algae oil. That system actually takes CO2 out of the atmosphere and what you get is a clean oil that's much better than what we are pulling out of most wells.

I don't believe that the idea of supporting a poor solution in the hopes that it will lead to a better one down the line is a good choice.

I'm still really suprised that you support this given your environmental stance. Why not subsidize electric, algae, or hydrogen instead?

Oh I agree that we shouldn't be subsidizing oil or corn and I'll add that I don't think we should really subsidize anything.

I can tolerate money for researching solutions, but those solutions should be able to survive on their own in a free market. It was subsidies that got us in this trouble in the first place. Once a subsidy is in place, lobbyists for companies like ADM bribe enough congressmen to keep them in place forever.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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