Ethanol Bailout Coming?

A couple of weeks ago, I started hearing “rumors” in my circle about the recent (and not unexpected) financial struggles and closings of ethanol facilities. It was time to revisit ethanol.

It doesn't take a rocket scientist to understand the futility of ethanol and the even more offensive taxpayer sponsorship of such irresponsibility. Never mind how ethanol might be affecting the food supply. After pouring billions of taxpayer dollars into a politicized pipe dream, our “chickens are coming home to roost”.

On October 31st, VeraSun Energy, Inc , the nations 2nd largest producer of ethanol with a capacity of 1.64 billion gallons per year , announced that it had filed for Chapter 11 bankruptcy. This was after collecting revenues of $1.084 billion and a net loss of $476.1 million in the 3rd quarter ending September 30th. According to the press release, it intended to continue operations but since that time has closed 2 plants and has delayed indefinitely the opening of it's 110 million gallons per year (MMGY) facility in Janesville, MN.

On November 26th, Boot Hill Biofuels was taken into involuntary bankruptcy by a creditor. Construction of the 110 MMGY plant, scheduled to begin in June of 2007, was still on hold. (Wichita Eagle, Dec. 9, 2008, “Involuntary Bankruptcy Sought Against Boot Hills Biofuels”)

On November 28th, Pine Lake Corn Processors of Iowa ceased production at its 30 MMGY facility in Steamboat Rock.

On Friday December 12th, Gateway Ethanol's 55 MMGY plant in Pratt, KS went into bankruptcy after no bidders could be found. (Hutchinson News Online, Dec.12, “Ethanol Plant In Pratt Up For Sale”) Gateway filed for Chapter 11 protection in October estimating that it owes between $50 and $100 million. (Associated Press, October 7, 2008)

In early December, Altra Biofuels of California, after securing over $250 million in debt and equity financing to build facilities capable of producing 500 MMGY of ethanol, shut down its Coshocton, OH (50-100 MMGY) facility after only 10 months of production. It also closed its Cloverdale, IN plant at about the same time. (Hoosier Ag Today, Dec. 8, 2008)

So what happened?

  1. Cellulosic ethanol is still unproven on a commercial scale.
  2. Ethanol from corn is questionable at best. Even at a just $2.00 per bushel, feedstock cost alone for a gallon of ethanol (at 2.8 gal/bu.) would be $0.71 per gallon BEFORE adding any other costs of production, refining or distribution.
  3. Thanks to a number of factors including the adulterated demand for corn created by ethanol, corn skyrocketed to more than$7.00/bu. this past summer. That places feedstock cost at $2.50/gal or more.
  4. Many refiners, expecting high corn prices to continue, forward-contracted corn at those inflated prices.
  5. Corn at this writing is down to about $3.00 (still 50% higher than its historical average). Oil is down to the $40 range from $140 and gasoline is retailing for a $1.50 after adding all the costs, taxes and profit to it. $2.50 ethanol can't and won't pencil.

Corn growers planted their crop at a time when input costs were driven by the $7.00 market price of corn. Many covered their investment by forward contracting the sale of at least part of their crop. When corn and oil collapsed, refiners were unable to honor their commitments to the growers and the grower has gotten stuck sitting on a $7.00 crop in a $3.00 market. Can we not comprehend how government intrusion has so corrupted these markets?

On December 19th, 2007 President Bush signed HR 6, “The Energy Independence and Security Act” which calls for usage of at least 36 billion gallons of ethanol per year by 2022. To add insult to injury, it also authorizes a “new” $200 million to install blender pumps. (ACE Press Release, December 19, 2007)

  • 36 billion gallons of ethanol from corn would consume ALL of our corn crop (over 12 billion bushels, 78 million acres, in a GOOD growing year).
  • 36 billion gallons of ethanol from much haloed Switchgrass at 1,150 gallons per acre would require 31 million acres. (DOE Bioenergy Feedstock Development Program).
  • 36 billion gallons of ethanol represents 25% of our 2007 Motor Gasoline Consumption of 142 billion gallons and 11% of our 317 billion gallons of total petroleum consumption (DOE – EIA).
  • The United States has 343.521 million acres of arable land (excluding Alaska, 2008 CIA Factbook).

No matter how you figure it we're being asked to convert AT LEAST 10% of our arable land to biofeedstocks, disrupting the economy  for 25% of our gasoline and 11% of our total petroleum.

The much referenced Billion Ton Vision is a study published by the DOE in April 2005. It concludes that we need (and can) produce 1 billion tons annually of sustainable biomass to displace 30% of our petroleum. It goes on to state explicitly that the purpose of the study was NOT to:

assess the economic competitiveness of a billion-ton bioenergy and bioproducts industry, and its potential impacts on the energy, agriculture (food and feed production), and forestry sectors of the economy

Short version? Yeah, we can find a billion tons of biomass, but we can't say that it's feasible. I submit that we would be astounded at what it will take to gather, store, process and dispose of a billion tons of biomass, much of it subject to the fickleness of nature, and all for (only) a theoretical 30% of our petroleum usage, never mind the disruption to the environment and economy.

For the 6 years ended in 2007, the taxpayer has provided an excise tax exemption of $12.03 billion on production of 23.589 billion gallons of ethanol (51 cents/gallon), (Renewable Fuels Association). It is impossible to calculate how much funding has been provided for Research and development, but I venture to say that it is much more than the tax exemption. We've been subsidizing for over 30 years and it is still not viable.

On December 4th, the American Coalition for Ethanol, a trade group of 1,500 advocates asked Congress to include text in the “Auto Bailout Bill” that would “guarantee that fuel retailers can dispense 15 percent ethanol blends and require auto companies to stand by warranties for car owners that choose to use such blends”. Fortunately, it was not inserted.

Secretary of Agriculture Ed Schafer has already said that he would consider using USDA Rural Development Funds to assist ethanol producers that have “suffered losses in the volatile corn futures markets”.  Rural Development funds have been used in the past to promote ethanol and biodiesel plants. (DesMoines Register, Oct. 18, 2008

After pouring 10's (maybe 100's) of billions into a political pipe dream, that has brought the grain industry to the brink of collapse; considering the “no mis-managed, corrupt, government regulated, collapsing industry left behind” policies that have been implemented in the last few months, it is safe to say that there will be some kind of effort to save an industry that nobody wants. not even the environmentalists! But, then again, whatever the people want, Congress is going to do the opposite. (Can we say TARP?)

The USDA, on November 12th announced it was accepting applications for the Biorefinery Assistance Program.

“The Biorefinery Assistance Program provides loan guarantees for the development, construction and retrofitting of viable commercial-scale biorefineries producing advanced biofuels. The maximum loan guarantee is $250 million per project subject to the availability of funds. Preference will be given to projects where first-of-a-kind technology will be deployed on a commercial scale. Advanced biofuels are defined as fuels that do not rely on corn kernel starch as the feedstock.” (USDA Press Release 0298.08)

Wow, $250 million per project. Non-corn starch. I bet that made the corn growers real happy!.

The futility of it all can be illustrated by a statement from American Corn Grower's Association (ACGA) President Keith Bolin at the ACGA Convention on January 18th, 2008 defending the 54 cent per gallon tariff on imported ethanol:

“The $0.54-per-gallon tariff on ethanol imports is the only way to recoup the $0.51-per-gallon blender's tax incentive which is paid to the petroleum companies to use ethanol.”

Did I miss something?

Angier is self employed in agri-business. He can be reached at

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The views expressed in this article belong to the author/contributor and do not necessarily reflect the views of the Nolan Chart or its ownership

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