IS ETHANOL GETTING A BUM RAP?

From: BusinessWeek Magazine
May 1, 2008
By John Carey

Ethanol is taking a tumble. Once hyped as a magic brew for reducing both oil addiction and global warming, alcohol made from corn kernels is now being accused both of triggering a global food crisis and doing more ecological harm than good. Ethanol critics, ranging from environmental groups to pig farmers facing high feed prices, blame mandates from Washington and Brussels stating that billions of gallons of fuel must come from ethanol or other plant-based fuels. These critics are now fighting to get those laws repealed. "What started as an energy policy is leading to spreading hunger and political instability around the world," charges Lester Brown, president of the Earth Policy Institute. Companies are piling on, too. The Grocery Manufacturers of America has substantially stepped up its lobbying efforts to reduce the corn in gasoline.

There are grains of truth in this backlash, experts say. "There are bad biofuels and good biofuels," says Daniel Sperling, director of the Institute of Transportation Studies at the University of California at Davis. Corn-based ethanol ranks as mediocre. Yet it is only a minor cause of high food prices, and better biofuels are on the horizon. The transition to these superior fuels will get a boost from policies now being developed, with California leading the way.

First, a reality check on corn ethanol, which isn't quite the villain critics make it out to be. Last year, American farmers grew a record 13.1 billion bushels of corn on 85 million acres. Of that, 22% went to make about 7 billion gallons of ethanol. That still left enough corn to supply the domestic market, increase exports to record levels, and stockpile a 10% surplus. McKinsey principal Bill Caesar estimates farmers will be able to keep increasing corn-based ethanol production to 15 billion gallons in 2015 (a level of output mandated by federal policy) without reducing the amount going for food and feed, and without increasing acres planted. The secret: continuing improvements in yields.

Of course, it's impossible to divert nearly one-quarter of the corn crop to fuel without causing prices to rise. Corn is now around $5.50 per bushel, more than double its price in 2005. But this has had a relatively small impact on the broader runup in global food prices. Higher corn costs add 2 cents to a box of corn flakes, or 11 cents to a gallon of milk from corn-fed cows. Corn prices have little to do with the increases in rice and wheat, and only a small connection to soybean price jumps. "Biofuels are a very, very small factor" in rising food costs, says David Morris, vice-president of the Institute for Local Self-Reliance, a nonprofit group that tries to strengthen communities politically and economically around the world. Absent corn ethanol, food prices would still be up dramatically because of soaring global demand, fast-rising prices for oil and natural gas used to make fertilizer, and climatic factors such as Australia's drought. It's also worth noting that these high crop prices save taxpayers billions of dollars in reduced subsidies to farmers -- far more than is spent to subsidize ethanol.

Certainly, a rapid rise in food prices brings misery to poor countries. But over the long haul, "it's not obvious that high grain prices are inherently bad," asserts Nathanael Greene, senior policy analyst at the Natural Resources Defense Council. Years of cheap, subsidized grain in the U.S. and Europe have left farmers in the developing world unable to compete. They can't invest in better seed, machinery, or cultivation practices (page 26). As a result, global average yields for corn, wheat, and rice are less than half what the world's top 10% of farmers achieve. While American corn farmers produce 150 bushels per acre, farms in the developing world often get only 30. "If there is a crime against humanity, it is these low yields," not biofuels, says Richard Hamilton, CEO of Ceres Inc., a Thousand Oaks (Calif.) startup developing biofuel crops. Those low yields will improve if farmers make more money. In the long term, "high prices will lead these countries to produce more of their own food," says Morris, easing the supply shortages.

Ethanol critics also may forget other benefits. For one, the billions of gallons of ethanol are moderating oil prices by "easing energy bottlenecks," says Francisco Blanch, head of global commodity research at Merrill Lynch (MER). Blanch figures that oil prices would be at least 15% higher than they are, if not for today's output of ethanol. And given the dependence of the whole food supply chain on oil and gas, "food prices might be higher if we were not producing biofuels," says venture capitalist Vinod Khosla. The stacks of corn going into ethanol "act as a large cushion," adds Illinois farmer John Reifsteck. As corn prices climb, ethanol companies make less money. When corn becomes too valuable to convert to biofuels, the grain will go back into feed and food.

THE WRONG CROP

Still, corn ethanol is far from perfect. It barely helps in the fight against global warming, because of the carbon emissions from all the fossil-fuel energy needed to make it. "Everyone agrees corn is not the right crop," says Merrill Lynch's Blanch. Brazilian sugarcane is more efficient. It doesn't grow in the Amazon region, so it doesn't cause rainforest destruction, and it can be turned into other, more valuable fuels. On Apr. 23, Amyris Biotechnologies in Emeryville, Calif., announced plans, with Brazilian partners, to make biodiesel, jet fuel, and bio-gasoline from sugarcane.

Even better is biofuel from feedstocks that don't eat into food supplies, displace crops, or cause greenhouse gas emissions from plowing up forests or prairies. One prime candidate is switchgrass, a perennial prairie plant. Thanks to nine-foot-deep roots, switchgrass in test plots in the American Southeast thrived last summer despite an historic drought. The growth and decay of those deep roots also adds carbon to soil, making switchgrass cultivation a boon to fighting global warming. Ceres figures that its new commercial strain of the plant, with improved yields, could be grown on former tobacco, cotton, and rice fields across the southern U.S. "There are a lot of available acres out there," says Ceres' Hamilton.

Instead of throwing out biofuels, the key is to speed up the transition from corn to crops that offer more benefits. There's a surprisingly simple way to do it: Judge fuels on how much greenhouse gas is emitted during their entire production and transport, including emissions caused by converting land from food crops and other uses to fuel crops. Then ratchet down the amount of carbon that's allowed.

This low-carbon fuel standard approach sets the market free to pick the best fuels to meet the standard. It immediately rules out biofuels from palm oil plantations carved out of the rainforest, for instance. It would also steer farmers away from corn because of corn ethanol's lack of substantial greenhouse gas benefits. "Almost all of the pathways for using food crops to make energy will look very bad with a carbon metric," explains UC Davis' Sperling, who has worked on the approach. "The low-carbon fuel standard is one of the most outstanding policy instruments we have ever developed," he says. Make this approach widespread, and it should be possible to have our biofuels and eat our crops, too.

Blame energy costs, not ethanol, for your grocery bill

Has ethanol contributed to the surge in food prices? Not very much, concludes a group of agricultural economists at Texas A&M University in an Apr. 10 report from the school's Agricultural & Food Policy Center. "The underlying force driving changes in the agricultural industry, along with the economy as a whole, is overall higher energy costs," the researchers conclude, not biofuels. In addition, reducing the amount of ethanol the government requires each year "does not result in significantly lower corn prices," they say. That's because the ethanol industry is here to stay, since it is now being driven largely by market forces rather than by the government's renewable- fuel mandate.

Carey is a senior correspondent for BusinessWeek in Washington .

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