Blog author: lglinzak
by on Thursday, July 7, 2011

Political news changes quickly, and now reports are coming out of Washington DC that Senator Dianne Feinstein, who has been leading the way in killing the ethanol subsidy and tariff, has struck a deal with Senators Amy Klobuchar and John Thune, two stalwarts for protecting ethanol. While the rumored deal does not indicate the repeal of the blending mandate it is a step in the right direction.

However, while we wait on Congress and the President for action, the Brazilian ethanol industry is eying the U.S. ethanol market. Repealing the tariff will allow Brazil to expand its ethanol industry. Many questions need to be answered before ethanol is imported into the U.S. from Brazil.

In a previous post I posed concerns about whether ethanol can meet both U.S. and Brazilian demands. Furthermore, what are the environmental consequences of ethanol? Reports are showing deforestation in the rainforest. Finally, what will happen to food prices?

It is unfortunate that there are even more questions that need to be answered.

Like the corn based ethanol in the U.S., Brazil’s sugar based ethanol is a false market created by the government. Brazil doesn’t subsidize ethanol; instead it resorts to high taxes. Brazilian gasoline taxes are at 53 percent while the tax placed on ethanol is much lower making ethanol cheaper than gasoline. The question is how long can an industry last and actually be sustainable when it is propped up by the government and is a false market?

It is also important to note that the Brazilian ethanol industry needs a large sum of new investment, about $80 billion worth in the next ten years, to meet global demand. In an industry that is heavily dependent on the government one must wonder, who will pay for these new investments?

Another potential hazard of relying on ethanol is crop shortages. Such crop shortages may occur for a variety of reasons, one of which is out of our control: the weather. What happens when fuel relies on crops, and there is actually a shortage in the harvest? How much of the crop goes to fuel and how much goes to the food supply? Both are important. Food nourishes, however, fuel gets people to their jobs where they earn a salary which they use to purchase food. Brazil may be forced to answer these questions this year as sugarcane production is currently down 25 percent as compared to last year. The lack of production is due to bad weather and aging plants.

However, because of the lack of production sugar prices are on the rise as they saw a 14 percent surge in June. While some are sounding the alarm, other analysts are remaining calm, such as Eli Mamoun Amrouk of the United Nations’ Food and Agriculture Organization:

El Mamoun Amrouk, sugar analyst at the Rome-based FAO, said: “It’s difficult to predict exactly what’s going to happen to the sugar price because the market’s so volatile and so any new information can have a big effect on price. The speculation is still there, exacerbating the trend and changes in the dollar also play a part.

“But the signs are that production is growing significantly and, especially in India and Thailand, the prospects are very positive, so we should see the price start coming down in the summer,” he said.

Whether sugar prices do come down or not, we still face a critical question. If we continue to pursue an energy plan based on biofuels, what happens when we do face a shortage in crop production? The world will be faced with not just rising food prices but also with rising fuel prices. How do people in developed countries, who already have a difficult time affording food, feed themselves when the food supply is actually going into the fuel supply?


  • fred

    You write: “Another potential hazard of relying on ethanol is crop shortages.”  Are you SERIOUS?  Are you aware the U.S. has a surplus of 1 billion tons of biomass available for cellulosic ethanol production?  Are you aware that the U.S. has had a surplus of grain for the past 50 years and is expected to double its yield in the next 20 years?  You ought to be aware of these FACTS before you conclude anything about crop shortages.

  • Anonymous

    Fred,

    First of all my post doesn’t even address cellulosic
    ethanol. Instead, as I distinguish, I’m discussing both corn and sugar based
    ethanol. There is a large difference between the two in terms of the product
    used to make it, production costs, emissions, efficiency, energy generated,
    etc. One distinction that must be made is cellulosic ethanol comes from wood,
    grasses, and non-edible parts of plants. One can not take into account the
    effects cellulosic ethanol has on food supply when it isn’t even a food product.

    However, it would be foolish to not take into account the
    adverse effects crop shortages may have on fuel and crops if we continue to
    pursue an energy policy that relies on crops, such as ethanol. In my blog post,
    Are Rising Food Prices a Result of the Ethanol Subsidy?” I explain how rising
    food prices can not only be attributed to biofuels but also to terrible weather
    conditions. For example, a drought in China has resulted in damage to approximately
    42 percent of its winter wheat crop. This is also bearing in mind that China is the
    world’s largest wheat producer. China
    isn’t the only country with problems. I also explain the predicted shortage of Texas’ wheat crop in my post “Food or Fuel?” And times are not expected to get any easier as an article in Foreign Policy articulates many variables contributing to causing crop
    shortages in the near future. These variables include a population increase,
    arable lands depleting, the increasing demand for water, and urban sprawl.
    Furthermore, because of these variables which will negatively impact all crop yields,
    and inconsistent crop production throughout the past, it would be irresponsible
    and poor management to assume we will double our yields in 20 years. These same
    problems that are yielding negative results for the food supply will also have
    effects on cellulosic ethanol.

    Also comparing grain production (which includes crops that are not used in ethanol production) would be making a false comparison. It is important to note that global stockpiles are eroding which is because of an increase of demand and an expand use of crops (such as their use as biofuels), and it is also important to keep in mind the role the United States plays in supplying food products to other countries throughout the world. To not take this into account is irresponsible. How we decide to use crops grown in the U.S. effects more people than just those who reside in the boundaries of the U.S. The U.S., the largest corn producer in the world, is even seeing these negative effects. Corn stockpiles in the U.S. currently amount to about 5
    percent of its annual use which is far below the 13.6 percent average
    the
    stockpiles have been kept at over the last 15 years. And yes while corn
    production is increasing, so is demand. More and more corn is going towards
    ethanol production throughout the world, and especially in the U.S. where currently 40 percent of corn produced by the U.S. now goes to ethanol production. This amount will only increase as the government has mandated an increase of ethanol production.

    As I’ve addressed in my past blog posts on ethanol (all of
    which can be found by clicking here)
    there are many unintended consequences to deal with, including a lack of energy
    efficiency compared to gasoline. Ethanol gets less miles per gallon.
    Furthermore, it is a government created market, sustained through subsidies. Ethanol
    needs to prove it can be a competitive option without government and taxpayer
    support.

     

    There are positives and negatives with all options and
    before we jump on a bandwagon towards cellulosic ethanol, it needs a pragmatic
    approach. Cellulosic ethanol faces hurdles it needs to get over first, such as
    the expensive enzymes needed for the production process.

     

    I hope by reading some of my past posts and through the
    comments above I’m able to address your concerns.

  • http://naturalaw.failuretorefrain.com jurisnaturalist

    The real problem lies in the artificial mandate requiring increased levels of ethanol in at-the-pump gasoline.  Not quite a price control but a quota of sorts having similar, and in the future quite harmful, welfare effects.
    Everything else is actually a good demonstration of how markets react to a change in relative price ratios in response to exogenous shocks (read: legislation).  Without these responses the negative effects of the mandate would be even worse.
    markets work, despite regulation.