Corn Ethanol Is Dead, Long Live Corn Ethanol

The United States is overwhelmingly the world's largest producer and exporter of corn (or maise, as most other people in the world call it). It grows about two fifths of the globe's total, more than twice as much as the next largest grower (China) and almost six times as much as the European Union's 27 countries combined. It accounts for more than half of corn exports, Argentina running a distant second.

So it's of greater than merely parochial interest that last year, for the first time, more of the U.S. corn crop went for the manufacture of ethanol fuel than for livestock feed, traditionally its main use by far. About 40 percent of U.S. corn now goes to ethanol, as Ken Cook of the Environmental Working Group noted on National Public Radio this week.

It's a sign of the fuel's growing maturity that ending direct U.S. support for ethanol production is under serious consideration. Essentially unrelated factors--the desire and need to cut Federal spending, a desperate search for bipartisanship, rising food prices, and (not least) the viability of the corn ethanol industry--are conspiring to end direct government support for the industry.  On June 16 the Senate voted to end both the 45 cent subsidy for every gallon of corn ethanol blended into U.S. gasoline and the 54 cent per gallon import tariff protecting  U.S. industry from Brazilian producers of sugarcane ethanol. Though the measure will not directly become law, it's being pretty universally interpreted as a clear sign that Congress will vote to end the subsidy and import duty by the end of this year.

The U.S. corn ethanol industry is facing the prospect with remarkable equanimity. That's partly because it will continue to benefit from Federal support, mainly in the form of a mandate--the renewable fuels standard--requiring that 7.5 billion barrels of ethanol be blended into automotive fuel in 2012, versus 4 billion in 2006. And it's partly too because corn ethanol is now being manufactured at a cost of $2-.2.50 per gallon, competitive or very nearly competitive with gasoline at current world prices.

To be sure, the case for ethanol has been overstated in terms of net energy and carbon-reduction benefits, by comparison with gasoline. Despite that, a general consensus continues to prevail--and not just in the United States--that substitutes for depleting oil must somehow be found, even if costs are somewhat higher and climate benefits minimal. Accordingly, the ethanol industry is here to stay.

Many dozens of plants are now producing corn ethanol in the United States. The largest single company in the business, POET LLC, operates 27 and produces 1.7 billion gallons per year.

Earlier this month, the U.S. Department of Energy extended a $105 million loan guarantee to POET for expansion of a pilot cellulosic ethanol plant in Emmetsburg, Iowa, which will manufacture ethanol from corncobs, husks, and leaves. It is the first such Federal loan guarantee for production of cellulosic ethanol and thus represents a major milestone.

Another milestone this month: Shell Oil's announcement that its Brazilian joint venture Raizen will invest $7 billion in the next five years to double production of sugarcane ethanol. With Petrobras and BP making sizable investments in sugarcane ethanol as well, Brazil is poised to take advantage of the opening of the U.S. biofuels market.

In the short run, to be sure, Brazil is not expected to be a major factor in the U.S. market: With domestic demand high and current production unexpectedly low, Brazilian ethanol prices are much higher than U.S. prices. That's yet another reason why U.S. Congress is almost sure to decide to save the Treasury $6 billion a year by ending subsidies and tariffs.

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