CNN Headline of the Day – Basic Supply and Demand

While running on the treadmill this morning, I was flipping through the channels as I couldn’t manage to run while watching Billy Madison.  Morning TV is such crap, but I’m in Cincinatti and the roads are covered with ice so I’m treadmill bound. 

I never stay on CNN or CNBC because watching news while running is possibly the most tedious thing I could imagine, but the CNN headline caught my eye.  I can’t remember it exactly now, but the essence was “Ethanol Demand Up, Corn Supply Depleted.”  I stopped and listened to the story which was a long and winding discussion where the main points were:

  • Bush just said “we need alternative fuels (e.g ethanol)”
  • Ethanol comes from corn
  • Corn prices have risen from $1.80 / bushel to over $3 / bushel
  • Corn prices are going to keep going up
  • Oil prices are going to keep going down
  • Ethanol will become more expensive and – as oil becomes less expensive – we’ll keep using it
  • This will impact lots of other things – like the cost of beef – which are going to go up

Um – yeah – high school macroeconomics.  I love the broad “the market will take care of this” discussion.  Er, um, government subsidiaries anyone?

  • Switchgrass could be the solution. My family are farmers and own thousands of acres in Oklahoma and have access to more. My father and I are seriously considering getting into the game with both farming, transport, and processing. Just started the research, so interesting you touch on this. Who else is investing in this besides Vinod Khosla?

  • PRoales

    I have one foot in the Ag Econ world and one in the VC world, so while I’m not a Ethanol researcher this area being talked about on this blog is interesting to me.

    A few things I have picked up in relation to your comments –
    “* Corn prices are going to keep going up”

    There are many predicting a style cycle to this, spikes in corn prices then a crash in them, possibly as soon as this spring.

    “Er, um, government subsidiaries anyone”

    51 cents per gallon subsidy on Ethanol right now.

    Also interesting, planned ethanol plant building is projected to consume huge percentages of planted corn.

    For some interesting work in this area check out Dr. Wally Tyner’s work on ethanol –

  • Christian

    One of the most important points missing in this discussion is that this is a golden opportunity to build bridges with a traditionally adversarial regional powerhouse – Brazil. Their cars, buses and taxis run on ethanol without a problem, because they use sugar cane.

    We have a VERY strict quota on the importation of sugar cane thanks to the US sugar industry. They were circumvented by the development of high fructose corn syrup, so the development of sugar cane-based ethanol production should be something they lobby hard to get funded.

    I would think states like South Carolina and the deep South would benefit greatly from investments in ethanol production from sugar cane, considering it’s far more efficient than corn, they’re already as far as state economies go, and they could develop both import/export ties to a large market and help with further energy diversification (a term I greatly prefer and actively promote to “alternative energy/fuel”).

    An economic recovery package for Louisiana? Seems like a perfect fit to me….

    The main sticking point: lobbyists and Congress.

  • james

    Ethanol in the USA comes from corn. In Brasil it comes from much more efficient sugar cane. A process that the Brasilians perfected over the past 30 years since the last oil crisis when their economy was also held hostage by OPEC. Seems the Brasilians invested pro-actively and now they have a net positive self sufficient oil economy. Pull up to any gas station in Brasil and you are offered ethanol, gas and natural gas as your alternatives. Cars that run on ethanol, gas or any mixture and combination of the two are extremely common on the road in Brasil. Too bad farm subsidies and import taxes prevent Brasil from economically exporting to the US a cheaper highly efficient version of ethanol. Too bad companies like Exxon and the big three automakers haven’t been behind this type of evolution in our auto market.

  • Bill

    Ethanol isnt about the environment or about the economy. It is about continued justifications of farm subsidies.

    The economics of domestic ethanol dont add up today. E85 is about 25% less efficient (less MPG) than gasoline, at similar prices (including the subsidies) to gasoline. Brazil, who refines ethanol with much cheaper sugarcane, is prevented from importing. Soybeans would be a cheaper and more efficient crop than corn, but it is not employed for that purpose, and cellulostic ethanol is a pipe dream today.

    Emissions are a tradeoff at best. It is cleaner than gasoline in CO and NOx emissions, but acetaldehydes are given off, which are known irritants and possible carcinogens.

    Although it is arguable that ethanol production in the US has net LOSSES of energy, the best cases state that there is 25% net gain after calculating the energy required to create ethanol. Of the roughly 100 quad BTU’s of energy used in the US, this 25% net gain (best case scenario) in energy will net out .16 quads, or less than 0.2 of 1 percent (yes, that is 0.0016) at federally mandated ethanol production numbers. And oh yeah, that will require upwards of 8.5 million MORE acres of farmland for that corn.

    Sounds like yet another political boondoggle for inefficient agribusiness.

  • Steve

    It’s a bigger issue than just the impact on the corn market. First of all, corn is a lousy feedstock for ethanol production. 1) corn is demanding on the soil and requires lots of fertilizer (from petroleum) to maintain yields; 2) the ethanol conversion rate for corn is mediocre even compared to other starchy crops like sugar cane; 3) starchy crops themselves are transitional feedstocks at best — we need to get to cellulosic ethanol production before the economics make any sense.

    On top of that, the wonderful production facilities we’re building to produce fuel-grade ethanol all require a heat source to distill the raw ethanol — typically by burning natural gas. So as we push for higher outputs of ethanol based on corn, we increase the consumption of oil and gas in the process. Not a smart trade-off. Nowhere have I seen a proposal to use renewable energy sources to drive the distillation process, and it seems so obvious.

  • Rick Mason

    Long term I don’t think that you need about the price of corn staying elevated. In the near term the government could release the setaside acres that farmers are being paid not to plant.

    Soon however there will be a better alternative.
    A number of startups are working on creating ethanol from grass or other feed stock and it will soon be a far more cost competitive way to make ethanol than corn.

    Brazil just gave the go ahead for limited planting of genetically modified sugar cane that yields 25% more mass per hectacre.

    Personally I would much rather drive a car powered by 80% ethanol than own an expensive trouble prone hybrid.

    Unfortunately there are strong economic and political forces aligned against this happening on a wide scale. Who would be hurt if oil dropped under $20 a barrel and stayed there?

    If anyone doubts me all you have to do is look at Brazil. They don’t have an energy problem and aren’t beholden to the middle east.