The irrational exuberance over ethanol that swept through the American corn belt over the last few years has given way to a dreary hangover, especially among those who invested heavily in the sprawling production facilities now dotting the rural landscape. It’s the Midwest’s version of the tech bubble, and in some ways, it is remarkably familiar: overeager investors enamored of a technology’s seemingly unlimited potential ignore what, at least in retrospect, are obvious economic realities.
More than a hundred biofuel factories, clustered largely in the corn-growing states of Iowa, Minnesota, Illinois, Indiana, South Dakota, and Nebraska, will produce 6.4 billion gallons of ethanol this year, and another 74 facilities are under construction. Just 18 months ago, they were cash cows, churning out high-priced ethanol from low-priced corn, raising hopes of “energy independence” among politicians, and capturing the attention–and money–of venture capitalists from both the East and West Coasts.
Now ethanol producers are struggling, and many are losing money. The price of a bushel of corn rose to record highs during the year, exceeding $4.00 last winter before falling back to around $3.50 in the summer, then rebounding this fall to near $4.00 again. At the same time, ethanol prices plummeted as the market for the alternative fuel, which is still used mainly as an additive to gasoline, became saturated. In the face of these two trends, profit margins vanished.
The doldrums of the ethanol market reflect the predictable boom-and-bust cycle of any commodity: high prices drive increased production, and soon the market is oversupplied, causing prices to crash. But the large-scale use of corn-derived ethanol as a transportation fuel has economic problems all its own. Even though crude oil is at near record prices, and companies that use ethanol in their gasoline receive a federal tax credit of 51 cents per gallon, ethanol struggles to compete economically. And with limited infrastructure in place to distribute and sell the biofuel, demand will remain uncertain for the foreseeable future.
More alarming, the boom in ethanol production is driving up the price of food. Of the record 93 million acres of corn planted in the United States in 2007, about 20 percent went to ethanol. Since most of the rest is used to feed animals, the prices of beef, milk, poultry, and pork are all affected by increases in the cost of corn. The international Organization for Economic Coöperation and Development (OECD) recently warned that the “rapid growth of the biofuels industry” could bring about fundamental shifts in agricultural markets worldwide and could even “cause food shortages.”
All this comes at a time when the need for alternatives to petroleum-based transportation fuels is becoming urgent. At press time, the price of crude oil was near $90 a barrel. And worries about the impact of greenhouse-gas emissions from the roughly 142 billion gallons of gasoline used every year in the United States are deepening. Expanded use of biofuels is central to the federal government’s long-term energy strategy. In his State of the Union speech on January 23, 2007, President Bush set the goal of producing 35 billion gallons of renewable and alternative fuels by 2017, citing the need for independence from foreign oil. The U.S. Department of Energy has set the similar goal of replacing 30 percent of gasoline use with biofuel use by 2030.
- Boom or Bust? (PDF: Charts and graphs of the economics of biofuels)
- See images of high-protein grains and the production of hydrocarbons.
- University of Minnesota researchers explore the future of biofuels.
- C. Ford Runge explains the problems of corn ethanol.
- Venture capitalist Vinod Khosla details the market potential of alternative energies.
Hitting both targets, however, will require significant technological breakthroughs. In the United States, for now, ethanol means the corn-derived version. (Brazilian producers were expected to make 4.97 billion gallons of ethanol in 2007, mostly from sugarcane; but that semitropical crop is agriculturally viable in only a few parts of the United States.) Even proponents of corn ethanol say that its production levels cannot go much higher than around 15 billion gallons a year, which falls far short of Bush’s goal.