Chicago Board of Trade Dictates Price of Corn and Oil Companies Control Price of Ethanol
By Brian J. Donovan
July 28, 2009

The issue is whether the proper development of an advanced biofuel industry in the United States is feasible when: (a) independent ethanol producers in the U.S. are at the mercy of volatile commodities markets for feedstock; and (b) the price of ethanol is controlled by the oil companies.

Commodity Market Volatility
The corn-to-ethanol business is highly dependent on corn prices. The price paid for corn is determined by taking the Chicago Board of Trade futures price minus the basis, which is the difference between the local cash price and the futures price. The more corn-to-ethanol contributes to our nation’s energy supplies, the more it drives up corn feedstock prices and consequently its own cost. While increased ethanol production is partially responsible for the increase in corn prices, the main driving factors in the run-up in corn prices are: rising demand for processed foods and meat in emerging markets such as China and India, droughts and adverse weather around the world, a decrease in the responsiveness of consumers to price increases, export restrictions by many exporting countries to reduce domestic food price inflation, the declining value of the dollar, skyrocketing oil prices, and commodity market speculation. It is important to note that excessive speculation is not necessarily driving corn prices above fundamental values. Speculation can only be considered “excessive” relative to the level of hedging activity in the market.

The government’s announcement that it would resurvey corn acreage in several U.S. states launched a rally in Chicago Board of Trade corn on July 23, 2009, giving life to a market that appeared to be sinking toward $3 a bushel. September corn ended up 19 cents to $3.27 a bushel and December corn ended up 19 1/2 cents to $3.38 3/4 a bushel. Traders see the market moving toward the $3.50-$3.75 a bushel range in the December contract. Ethanol futures were also higher. August ethanol ended up $0.065 to $1.597 a gallon and September ethanol ended up $0.064 to $1.555.

Dr. David J. Peters, Assistant Professor of Sociology – College of Agriculture and Life Sciences at Iowa State University, has developed a calculator to determine the long-term economic viability of proposed ethanol plants. Dr. Peters was surprised to learn how sensitive the bottom line is to small changes in corn and ethanol prices. According to Dr. Peters, a typical 100 MGY corn ethanol plant built in 2005 (financing 60 percent of its capital costs at 8 percent interest per annum for 10 years, with debt and depreciation costs of $0.20 per gallon of ethanol produced, and labor and taxes at a cost of $0.06 per gallon) will lose money in the current market:

At $3.25 corn, the ethanol break even price is $1.76 per gallon.
At $3.50 corn, the ethanol break even price is $1.82 per gallon.
At $3.75 corn, the ethanol break even price is $1.88 per gallon.
At $4.00 corn, the ethanol break even price is $1.94 per gallon.

Oil Company Monopoly
U.S. oil companies are using ethanol merely as a blending component in gasoline (in the form of E10) rather than a true alternative transportation fuel (in the form of E85). The major obstacle to widespread ethanol usage continues to be the lack of fueling infrastructure. Only 2,175 of the 161,768 retail gasoline stations in the United States (1.3%) offer E85. These E85 fueling stations are located primarily in the Midwest. According to the U.S. Department of Energy, each 2% increment of U.S. market share growth for E85 represents approximately 3 billion gallons per year of additional ethanol demand.

While alleging an oversupply of corn ethanol, U.S. oil companies, due to a loophole in the Caribbean Basin Initiative, are currently allowed to import thousands of barrels of advanced biofuel (“non-corn ethanol”) every month without having to pay the 54-cent-per-gallon tariff.

Oil companies, or affiliates of oil companies, currently have a monopoly on blending fuel ethanol with unblended gasoline. Many states, e.g., Florida, allow only oil companies and their affiliates to blend and receive the 45 cents-per-gallon blender’s tax credit. This monopoly impairs fair and healthy competition in the marketing of ethanol blends. Independent U.S. ethanol producers have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the blender’s tax credit and be cost-competitive.

In short, independent U.S. ethanol producers do not have bargaining power on either end of the supply chain. Corn ethanol producers are price takers. A comprehensive advanced biofuel industry development initiative is required to disrupt the status quo and establish fair and healthy competition in the marketing of advanced biofuel blends in our nation.

The Louisiana Solution
Louisiana is the first state to enact alternative transportation fuel legislation that includes a variable blending pump pilot program and a hydrous advanced biofuel pilot program. On June 21, 2008, Louisiana Governor Bobby Jindal signed into law the Advanced Biofuel Industry Development Initiative (“Act 382″). Act 382, the most comprehensive and far-reaching state legislation in the U.S. enacted to develop a statewide advanced biofuel industry, is based upon the “Field-to-Pump” strategy.

It is the cost of the feedstock which ultimately determines the economic feasibility of an ethanol processing facility. “Field-to-Pump” does not allow an advanced biofuel producer to fall victim to rising feedstock costs. Non-corn feedstock is acquired under the terms of an agreement analogous to an oil & gas lease. It is not purchased as a commodity. A link exists between the cost of feedstock and ethanol market conditions. Farmers/landowners receive a lease payment for their acreage and a royalty payment based on a percentage of the gross revenue generated from the sale of advanced biofuel. “Field-to-Pump” marks the first time that farmers/landowners share risk-free in the profits realized from the sale of value-added products made from their crops.

Smaller is better. “Field-to-Pump” establishes the first commercially viable large-scale decentralized network of small advanced biofuel manufacturing facilities (“SABMFs”) in the United States capable of operating 210 days out of the year. Each SABMF has a production capacity of 5 MGY. As with most industrial processes, large ethanol plants typically enjoy better process efficiencies and economies of scale when compared to smaller plants. However, large ethanol plants face greater supply risk than smaller plants. Each SABMF utilizes feedstock from acreage adjacent to the facility. The distributed nature of a SABMF network reduces feedstock supply risk, does not burden local water supplies and provides broad-based economic development. The sweet sorghum bagasse is used for the production of steam. Vinasse, the left over liquid after alcohol is removed, contains nutrients such as nitrogen, potash, phosphate, sucrose, and yeast. The vinasse is applied to the sweet sorghum acreage as a fertilizer.

Act 382 focuses on growing ethanol demand beyond the 10% blend market. Each SABMF produces advanced biofuel, transports the advanced biofuel by tanker trucks to its storage tanks at its local gas stations and, via blending pumps, blends the advanced biofuel with unblended gasoline to offer its customers a choice of E10, E20, E30 and E85. Each SABMF captures the blender’s tax credit of 45-cents-per-gallon to guarantee sufficient royalty payments to its farmers/landowners and be cost-competitive. In the U.S., the primary method for blending ethanol into gasoline is splash blending. The ethanol is “splashed” into the gasoline either in a tanker truck or sometimes into a storage tank of a retail station. The inaccuracy and manipulation of splash blending may be eliminated by precisely blending the advanced biofuel and unblended gasoline at the point of consumption, i.e., the point where the consumer puts E10, E20, E30 or E85 into his or her vehicle. A variable blending pump ensures the consumer that E10 means the fuel entering the fuel tank of the consumer’s vehicle is 10 percent ethanol (rather than the current arbitrary range of 4 percent ethanol to at least 24% ethanol that the splash blending method provides) and 90% gasoline. Moreover, a recent study, co-sponsored by the U.S. Department of Energy and the American Coalition for Ethanol, found E20 and E30 ethanol blends outperform unleaded gasoline in fuel economy tests for certain motor vehicles.

Hydrous advanced biofuel, which eliminates the need for the costly hydrous-to-anhydrous dehydration processing step, results in an energy savings of 35% during processing, a 4% product volume increase, higher mileage per gallon, a cleaner engine interior, and a reduction in greenhouse gas emissions. On February 24, 2009, the U.S. EPA granted a first-of-its-kind waiver for the purpose of testing hydrous E10, E20, E30 & E85 ethanol blends in non-flex-fuel vehicles and flex-fuel vehicles in Louisiana. Under the test program, variable blending pumps, not splash blending, will be used to precisely dispense hydrous ethanol blends of E10, E20, E30, and E85 to test vehicles for the purpose of testing for blend optimization with respect to fuel economy, engine emissions, and vehicle drivability. The Louisiana Department of Agriculture & Forestry Division of Weights and Measures will conduct the vehicle drivability phase of the test program. Fuel economy and engine emissions testing will be conducted by Louisiana State University in Baton Rouge, Louisiana. Sixty vehicles will be involved in the test program which will last for a period of 15 months.

Louisiana Act 382 ensures: (a) ethanol producers in the U.S. are no longer at the mercy of volatile commodities markets for feedstock; (b) farmers/landowners share risk-free in the profits realized from the sale of value-added products made from their crops (c) the price of ethanol is no longer controlled by the oil companies; (d) feedstock supply risk, the burden on local water supplies, and the amount of energy necessary to process advanced biofuel are minimized; and (e) rural development and job creation are maximized. Furthermore, due to the advantages of producing advanced biofuel from sweet sorghum juice, the use of sweet sorghum bagasse for the production of steam in the SABMF, and the energy savings of processing hydrous advanced biofuel, the Louisiana solution reduces field-to-wheel lifecycle GHG emissions by 100%.

Louisiana Enacts the Most Comprehensive Advanced Biofuel Legislation in the Nation

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Advanced Biofuel Industry Development Initiative Benefits Consumers,

Farmers and Gas Station Owners with Localized “Field-to-Pump” Strategy

Baton Rouge, LA (July 26, 2008) – Governor Bobby Jindal has signed into law the Advanced Biofuel Industry Development Initiative, the most comprehensive and far-reaching state legislation in the nation enacted to develop a statewide advanced biofuel industry.  Louisiana is the first state to enact alternative transportation fuel legislation that includes a variable blending pump pilot program and a hydrous ethanol pilot program.

Field-to-Pump Strategy

The legislature found that the proper development of an advanced biofuel industry in Louisiana requires implementation of the following comprehensive “field-to-pump” strategy developed by Renergie, Inc.:

(1) Feedstock Other Than Corn

(a) derived solely from Louisiana harvested crops;

(b) capable of an annual yield of at least 600 gallons of ethanol per acre;

(c) requiring no more than one-half of the water required to grow corn;

(d) tolerant to high temperature and waterlogging;

(e) resistant to drought and saline-alkaline soils;

(f) capable of being grown in marginal soils, ranging from heavy clay to light sand;

(g) requiring no more than one-third of the nitrogen required to grow corn, thereby reducing the risk of contamination of the waters of the state; and

(h) requiring no more than one-half of the energy necessary to convert corn into ethanol.

(2) Decentralized Network of Small Advanced Biofuel Manufacturing Facilities

Smaller is better.  The distributed nature of a small advanced biofuel manufacturing facility network reduces feedstock supply risk, does not burden local water supplies and provides for broader based economic development.  Each advanced biofuel manufacturing facility operating in Louisiana will produce no less than 5 million gallons of advanced biofuel per year and no more than 15 million gallons of advanced biofuel per year.

(3) Market Expansion

Advanced biofuel supply and demand shall be expanded beyond the 10% blend market by blending fuel-grade anhydrous ethanol with gasoline at the gas station pump.  Variable blending pumps, directly installed and operated at local gas stations by a qualified small advanced biofuel manufacturing facility, shall offer the consumer a less expensive substitute for unleaded gasoline in the form of E10, E20, E30 and E85. 

Pilot Programs

(1) Advanced Biofuel Variable Blending Pumps – The blending of fuels with advanced biofuel percentages between 10 percent and 85 percent will be permitted on a trial basis until January 1, 2012. During this period the Louisiana Department of Agriculture and Forestry Division of Weights & Measures will monitor the equipment used to dispense the ethanol blends to ascertain that the equipment is suitable and capable of producing an accurate measurement.

(2) Hydrous Ethanol – The use of hydrous ethanol blends of E10, E20, E30 and E85 in motor vehicles specifically selected for test purposes will be permitted on a trial basis until January 1, 2012.  During this period the Louisiana Department of Agriculture and Forestry Division of Weights & Measures will monitor the performance of the motor vehicles. The hydrous blends will be tested for blend optimization with respect to fuel consumption and engine emissions.  Preliminary tests conducted in Europe have proven that the use of hydrous ethanol, which eliminates the need for the hydrous-to-anhydrous dehydration processing step, results in an energy savings of between ten percent and forty-five percent during processing, a four percent product volume increase, higher mileage per gallon, a cleaner engine interior, and a reduction in greenhouse gas emissions.

HB 1270, entitled “The Advanced Biofuel Industry Development Initiative,” was co-authored by 27 members of the Legislature.  The original bill was drafted by Renergie, Inc.   Representative Jonathan W. Perry (R – District 47), with the support of Senator Nick Gautreaux (D – District 26), was the primary author of the bill.  Reflecting on the signing of HB1270 into law, Brian J. Donovan, CEO of Renergie, Inc. said, “I am pleased that the legislature and governor of the great State of Louisiana have chosen to lead the nation in moving ethanol beyond being just a blending component in gasoline to a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline.  The two pilot programs, providing for an advanced biofuel variable blending pump trial and a hydrous ethanol trial, established by the State of Louisiana should be adopted by each and every state in our country.”

State Agencies Must Purchase or Lease Vehicles That Use Alternative Fuels

Louisiana’s Advanced Biofuel Industry Development Initiative further states, “The commissioner of administration shall not purchase or lease any motor vehicle for use by any state agency unless that vehicle is capable of and equipped for using an alternative fuel that results in lower emissions of oxides of nitrogen, volatile organic compounds, carbon monoxide, or particulates or any combination thereof that meet or exceed federal Clean Air Act standards.”

Advanced Biofuel Price Preference for State Agencies

Louisiana’s Advanced Biofuel Industry Development Initiative provides that a governmental body, state educational institution, or instrumentality of the state that performs essential governmental functions on a statewide or local basis is entitled to purchase E20, E30 or E85 advanced biofuel at a price equal to fifteen percent (15%) less per gallon than the price of unleaded gasoline for use in any motor vehicle. 

Economic Benefits

The development of an advanced biofuel industry will help rebuild the local and regional economies devastated as a result of hurricanes Katrina and Rita by providing:

(1) increased value to the feedstock crops which will benefit local farmers and provide more revenue to the local community;

(2) increased investments in plants and equipment which will stimulate the local economy by providing construction jobs initially and the chance for full-time employment after the plant is completed;

(3) secondary employment as associated industries develop due to plant co-products becoming available at a competitive price; and

(4) increased local and state revenues collected from plant operations will stimulate local and state tax revenues and provide funds for improvements to the community and to the region.

“Representative Perry and Senator Gautreaux have worked tirelessly to craft comprehensive advanced biofuel legislation which will maximize rural development, benefit consumers, farmers and gas station owners while also protecting the environment and reducing the burden on local water supplies,” said Donovan.  “Representative Perry, Senator Gautreaux, and Dr. Strain, Commissioner of the Louisiana Department of Agriculture and Forestry, should be praised for their leadership on this issue.”

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

Florida Company Committed to Moving Ethanol Demand Beyond Being Just a Blending Component in Gasoline to a Truer Fuel Alternative in the Form of Renergie E85

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Renergie E85, Produced Solely from Sweet Sorghum Juice and Priced at 20 Percent Less Per Gallon than Regular Gasoline, Will Benefit Consumers, Farmers and Gas Station Owners

Gainesville, FL (April 25, 2008) – At the pump, the price of a gallon of gasoline increases almost on a daily basis.  The price of corn is expected to rise as high as $7.50 a bushel by summer.  While alleging an oversupply of corn ethanol, U.S. oil companies still import thousands of barrels of ethanol from foreign sources every month. Cargill imports ethanol from its dehydration facility in El Salvador.  Can ethanol provide any relief at the pump to the U.S. driving public?  Renergie believes that ethanol can significantly lower the pump price if it is produced from a non-corn feedstock and marketed directly by the producer as E85.  Ethanol must compete against, rather than be an inexpensive blending component in, gasoline.

Renergie produces ethanol solely from sweet sorghum juice. The controversial “food vs. fuel” debate does not apply to Renergie’s operations.  Sweet sorghum has been called a “camel among crops,” owing to its wide adaptability, its marked resistance to drought and saline-alkaline soils, and tolerance to high temperature and waterlogging.  It can grow in marginal soils, ranging from heavy clay to light sand.  Sweet sorghum requires one-half of the water and only one-quarter the amount of nitrogen used to grow corn.  The energy requirement for converting sweet sorghum juice into ethanol is less than half of that required to convert corn into ethanol.  The Renergie variety of sweet sorghum yields between 500 to 800 gallons of ethanol per acre.  In 2007, China and India produced 1.3 billion gallons of ethanol from sweet sorghum juice.  The Renergie project is the first time that ethanol is produced solely from sweet sorghum juice in the U.S.

Cost of Feedstock

Renergie will not fall victim to rising feedstock costs.  Renergie ensures that there is a link between the compensation paid to Renergie’s feedstock producers and ethanol market conditions.  Farmers will receive a lease payment for their acreage and a royalty payment based on a percentage of Renergie’s gross sales of ethanol.  The Renergie ethanol project will mark the first time that Louisiana and Florida farmers will share in the profits realized from the sale of value-added products made from their crops. 

Decentralized Network of Smaller Plants and Commitment to Rural Economic Development

Renergie was formed on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant has a production capacity of five (5) million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie intends to replicate its Louisiana decentralized network of ethanol plants in Florida.  Upon completion of the initial network of twenty ethanol plants, Renergie will have a total combined annual production capacity of one-hundred (100) million gallons. 

Smaller is better.  The distributed nature of a network of small 5 MGY plants reduces Renergie’s feedstock supply risk, does not burden local water supplies and provides broad-based economic development.  In Louisiana, Renergie is headquartered in the small city of Kaplan (population of less than 5,000).  Renergie has agreed to donate two cents of every gallon of ethanol it sells to the City of Kaplan.  Renergie firmly believes that the success of the ethanol industry requires a long-term commitment to rural economic development.

Infrastructure Development

Renergie’s “field-to-pump” strategy is to produce ethanol locally and market ethanol locally. There is not an oversupply of ethanol.  The major obstacle to widespread ethanol usage continues to be the lack of fueling infrastructure.  Only 1,413, of the nearly 180,000 retail gasoline stations in the United States, offer E85.  The day of building 100 MGY corn-to-ethanol plants in the Midwest corn belt, for the sale of E10 to consumers on the U.S. East Coast and West Coast, is over!  Renergie is focusing its efforts on locally growing ethanol demand beyond the 10% blend market.  Initially, Renergie will directly market E85, a blend of 85 percent ethanol and 15 percent gasoline for use in FFVs, to local fuel retailers under the brand Renergie E85.  Renergie’s unique strategy is to blend fuel-grade ethanol with gasoline at the gas station pump.  Currently, ethanol providers blend E10 and E85 at their blending terminal and transport the already blended product to retail gas stations.  Once state approval is received, Renergie’s variable blending pumps will be able to offer the consumer a choice of E10, E20, E30 and E85.  Via use of the Blender’s Tax Credit, Renergie will be able to ensure that gas station owners are adequately compensated for each gallon of fuel-grade ethanol that is sold via Renergie’s variable blending pumps at their gas stations.

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

Why the Ethanol Import Tariff Should be Repealed

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Repeal Would Enable Ethanol Demand to Move Beyond Being Just a Blending Component

in Gasoline to a Truer Transportation Fuel Alternative

Gainesville, FL (August 3, 2008) – The question is whether the 54 cents per gallon tariff the United States places on imported ethanol should be eliminated when:

(a) U.S. farm acreage is being diverted from the production of food crops to energy crops and record high corn prices are impacting the agriculture, food and beverage industries;

(b) American families and businesses are paying record high prices for fuel;

(c) U.S. oil companies are using ethanol merely as a blending component in gasoline rather than a true alternative transportation fuel;

(d) The renewable fuels standard (“RFS”) requires that gasoline sold in the United States contains a renewable fuel, such as ethanol, and the expanded RFS specifically requires the use of an increasing amount of “advanced biofuels” – biofuels produced from feedstocks other than corn; and

(e) U.S. oil companies, due to a loophole in the Caribbean Basin Initiative, are currently allowed to import thousands of barrels of ethanol every month without having to pay the 54 cents per gallon tariff.

The Ethanol Import Tariff of 1980
Since 1978, in order to stimulate an increase in U.S. ethanol production and consumption, producers of ethanol-blended gasoline have received a subsidy, or tax credit. This incentive, known as the Blender’s Tax Credit, is currently valued at 51 cents per gallon of pure ethanol used in blending.

Ethanol imported into the United States is subject to two customs duties: an ad valorem tariff rate of 2.5 percent and a secondary tariff of 54 cents per gallon. The Ethanol Import Tariff of 1980 imposed the 54 cents per gallon tariff on imported ethanol. A key motivation for the establishment of the tariff on imported ethanol was to offset the Blender’s Tax Credit incentive for ethanol-blended gasoline. Unless imports enter the United States duty-free, the tariff effectively negates the incentive for those imports.

Food Prices

Corn is used as the feedstock for approximately 98% of the ethanol produced in the United States. Brazil uses sugarcane as a feedstock, while China is focusing on using cassava and sweet potatoes as feedstocks for ethanol production. USDA estimates that 3.2 billion bushels of corn (or 24% of the 2007 corn crop) will be used to produce ethanol during the September 2007 to August 2008 corn marketing year.  In January, 2002, the price for a bushel of corn was $1.98. In July, 2008, the price for a bushel of corn was $5.61.

Corn is a significant ingredient for meat, dairy, and egg production. However, while increased ethanol production is partially responsible for the increase in corn prices, the real factors driving up retail food prices are: rising demand for processed foods and meat in emerging markets such as China and India; droughts and adverse weather around the world; commodity market speculation; export restrictions by many exporting countries to reduce domestic food price inflation; the declining value of the dollar; and skyrocketing oil prices.

Record high prices for diesel fuel, gasoline, natural gas, and other forms of energy affect costs throughout the food production and marketing chain. Higher energy prices increase producers’ expenditures for fertilizer and fuel, driving up farm production costs and reducing the incentive for farmers to expand production in the face of record high prices. Higher energy prices also increase food processing, marketing, and retailing costs. In 2005, the most recent year for which data are available, direct energy costs and transportation costs accounted for roughly 8 percent of retail food costs. These higher costs, especially if maintained over a long period, tend to be passed on to consumers in the form of higher retail prices.

Increased demand for farm commodities could outstrip existing production capabilities, straining food supplies and boosting prices. Moreover, population growth and rising incomes are altering global food consumption patterns and boosting the demand for food, further supporting higher prices. Demand for bio-fuels, especially in the United States, has led to a decline in corn inventories, despite a record corn crop. This increase in U.S. corn acres limited the production of other crops.

Historically, food prices have surged during times of higher crude oil prices. Moreover, research shows that energy prices are quickly passed through to higher retail food prices, with retail prices rising 0.52 percent in the short-term for every 1 percent rise in energy prices. As a result, a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices.

Fuel Prices

Gasoline is one of the major fuels consumed in the United States and the main product refined from crude oil. Consumption in 2007 was about 142 billion gallons, an average of about 390 million gallons per day and the equivalent of about 61% of all the energy used for transportation, 44% of all petroleum consumption, and 17% of total U.S. energy consumption.

In January, 2002, the price of oil was US$18.68 per barrel. As of the date of this article, the price of oil is US$125.10 per barrel. In January, 2002, the average U.S. retail price for a gallon of regular grade gasoline was US$1.11. As of the date of this article, the price for a gallon of regular grade gasoline is US$3.96.

The price of crude oil is set through the interaction of world demand and supply. The following factors are driving up crude oil and gasoline prices: (a) increased world demand for crude oil as witnessed by the sharp increase in imported crude oil by China and India; (b) instability in oil-producing regions, including Iraq and Nigeria’s delta region; (c) limited U.S. refinery capacity to supply gasoline; (d) a decline in the value of the dollar compared to other currencies has increased the dollar price of oil on futures markets; (e) the continuing possibility of a supply disruption from natural disasters like Hurricanes Katrina and Rita in 2005; (f) speculators, who have entered the commodity markets in large numbers looking for ways to increase their monetary investments rather than to trade in oil and oil products, are causing an unacceptable upward pressure on prices; and (g) governments in developing countries are subsidizing energy, blunting the incentive to conserve by keeping prices low. China is expected to spend about $40 billion this year in subsidies. Venezuela and Egypt are forecast to spend more than 5 percent of their total economic output on subsidies this year.  As a result, while demand for oil in the developed world is expected to fall about 1 percent this year, consumption in emerging and developing countries is forecast to rise 3 percent, according to estimates by I.M.F. economists.

World demand for crude oil grew by 1.3% in 2007 to 86.0 mbd.  It is forecast to grow by 1.5% to 87.3 mbd in 2008. World supply was 87.3 mbd in March 2008, leaving relatively little excess supply to draw on if the market were disrupted by natural or political disasters. When excess supply on the market is low, prices tend to rise and become more volatile.

Higher prices for crude oil tend to translate directly into higher prices for gasoline. Currently, crude oil accounts for about 72% of the cost of gasoline. Refining, distributing, and marketing account for about 16% of the cost of gasoline, and taxes account for about 13%. However, until recently crude oil’s share of the cost of gasoline has been more typically in the range of 45% to 55%. In May 2007, for example, with gasoline at $3.15 per gallon, crude oil contributed 46% of the cost; refining, distributing and marketing 41%; and taxes 13%.

On July 31, 2008, Exxon Mobil Corp. reported second-quarter earnings of $11.68 billion, the biggest quarterly profit ever by any U.S. corporation. On August 1, 2008, Chevron reported record oil prices drove second-quarter earnings up 11 percent to $5.98 billion, its highest-ever profit.

Imported petroleum does not pay a tariff, yet clean, renewable ethanol from our own hemisphere is assessed a 54 cent-per-gallon tariff.

Lack of Ethanol Infrastructure

RU.S. oil companies are using ethanol merely as a blending component in gasoline (in the form of E10) rather than a true alternative transportation fuel. There is not an oversupply of ethanol. The major obstacle to widespread ethanol usage continues to be the lack of fueling infrastructure. Only 1,528 of the nearly 180,000 (or 8/10 of 1%) retail gasoline stations in the United States offer E85. These E85 fueling stations are located primarily in the Midwest.

While alleging an oversupply of corn ethanol, U.S. oil companies still import thousands of barrels of ethanol from foreign sources every month without having to pay the 54 cents per gallon import tariff. Can ethanol provide any relief at the pump to the U.S. driving public?  Renergie, Inc. believes that ethanol can significantly lower the pump price if it is produced from a non-corn feedstock and marketed directly by the producer as E85.  Ethanol must compete against, rather than be an inexpensive blending component in, gasoline.

Renergie’s “field-to-pump” strategy is to produce ethanol locally and market ethanol locally. The day of building 100 MGY corn-to-ethanol plants in the Midwest corn belt, for the sale of E10 to consumers on the U.S. East Coast and West Coast, is over!  Renergie is focusing its efforts on locally growing ethanol demand beyond the 10% blend market.  Initially, Renergie will directly market E85, a blend of 85 percent ethanol and 15 percent gasoline for use in FFVs, to local fuel retailers under the brand Renergie E85.  Renergie’s unique strategy is to blend fuel-grade ethanol with gasoline at the gas station pump.  Currently, ethanol providers blend E10 and E85 at their blending terminal and transport the already blended product to retail gas stations.  Once state approval is received, Renergie’s variable blending pumps will be able to offer the consumer a choice of E10, E20, E30 and E85.  A recent study, cosponsored by the U.S. Department of Energy and the American Coalition for Ethanol, found E20 and E30 ethanol blends outperform unleaded gasoline in fuel economy tests for certain autos. Via capturing the Blender’s Tax Credit, Renergie will be able to ensure that gas station owners are adequately compensated for each gallon of fuel-grade ethanol that is sold via Renergie’s variable blending pumps at their gas stations.

Renergie will further grow ethanol demand beyond the 10% blend market by being the first company to test hydrous ethanol blends in the U.S. As provided for in Act No. 382, the use of hydrous ethanol blends of E10, E20, E30, and E85 in motor vehicles specifically selected by Renergie for test purposes will be permitted on a trial basis in Louisiana until January 1, 2012.  The hydrous blends will be tested for blend optimization with respect to fuel consumption and engine emissions. Preliminary tests conducted in Europe have proven that the use of hydrous ethanol, which eliminates the need for the hydrous-to-anhydrous dehydration processing step, results in an energy savings of between ten percent and forty-five percent during processing, a four percent product volume increase, higher mileage per gallon, a cleaner engine interior, and a reduction in greenhouse gas emissions.

Imported ethanol is especially important for coastal states since almost all domestic ethanol is produced in the Midwest and is costly to transport because it cannot be moved through a pipeline. Elimination of the ethanol import tariff would provide the U.S. with sufficient ethanol to: (a) move ethanol demand beyond being just a blending component in gasoline to a truer transportation fuel alternative; and (b) create the required fueling infrastructure. 

Renewable Fuels Standard (“RFS”)

The Energy Policy Act of 2005 established the Renewable Fuels Standard (“RFS”) which directs that gasoline sold in the U.S. contain specified minimum volumes of renewable fuel.  The Energy Independence and Security Act of 2007 (“H.R. 6”), which became law on December 19, 2007, sets a new RFS that starts at 9.0 billion gallons of renewable fuel in 2008 and rises to 36 billion gallons by 2022.  Of the latter total, 21 billion gallons of renewable fuel in U.S. transportation fuel is required to be obtained from advanced biofuels. The term “advanced biofuel” means renewable fuel, other than ethanol derived from corn.  Brazil uses sugarcane as a feedstock for its ethanol production.

The CBI Loophole

U.S. oil companies, due to a loophole in the Caribbean Basin Initiative (“CBI”), are currently allowed to import thousands of barrels of ethanol every month without having to pay the 54 cents per gallon tariff.

The CBI was established in 1983 to promote a stable political and economic climate in the Caribbean region. The CBI allows the imports of most products, including ethanol, duty-free. While many of these products are produced in CBI countries, ethanol entering the United States under the CBI is generally produced elsewhere and reprocessed in CBI countries for export to the United States. The U.S.-Central America Free Trade Agreement (CAFTA) would maintain this duty-free treatment and set specific allocations for imports from Costa Rica and El Salvador.

Duty-free treatment of CBI ethanol has raised concerns, especially as the market for ethanol has the potential for dramatic expansion under P.L. 109-58 and P.L. 110-140. In the United States, fuel ethanol is largely domestically produced. A value-added product of agricultural commodities, mainly corn, it is used primarily as a gasoline additive. To promote its use, ethanol-blended gasoline is granted a significant tax incentive. However, this incentive does not recognize point of origin, and there is a duty on most imported fuel ethanol to offset the exemption. But a limited amount of ethanol may be imported under the CBI duty-free, even if most of the steps in the production process were completed in other countries. This duty-free import of ethanol has raised concerns, especially as U.S. demand for ethanol has been growing. Further, duty-free imports from these countries, especially Costa Rica and El Salvador, have played a role in the development of the U.S.-Central America Free Trade Agreement (CAFTA).

The main steps to ethanol production in the U.S. are as follows:

a. The feedstock (e.g., corn) is processed to separate fermentable sugars.

b. Yeast is added to ferment the sugars.

c. The resulting alcohol is distilled.

d. Finally, the distilled alcohol is dehydrated to remove any remaining water.

This final step – dehydration – is at the heart of the issue over ethanol imports from the CBI, as discussed below.

According to the United States International Trade Commission, the majority of all fuel ethanol imports to the United States came through CBI countries between 1999 and 2003.  In 2004, imports from Brazil to the United States grew dramatically, but in 2005, CBI imports again represented more than half of all U.S. ethanol imports. With an increase in ethanol demand in 2006 due to voluntary elimination of MTBE – a competitor for ethanol in gasoline blending –  imports grew dramatically, roughly quadrupling imports in any previous year. Most of this increase was in direct imports from Brazil. Historically, imports have played a relatively small role in the U.S. ethanol market. Total ethanol consumption in 2005 was approximately 3.9 billion gallons, whereas imports totaled 135 million gallons, or about 4%. Imports from the CBI totaled approximately 2.6%. In 2006, total imports represented roughly 13% of the 5.0 billion gallons consumed in 2006; ethanol from CBI countries represented roughly 3.4%. In 2007, total imports represented roughly 6% of U.S. consumption (6.8 billion gallons); ethanol from CBI countries represented roughly 3.6%.

As part of the initiative, duty-free status is granted to a large array of products from beneficiary countries, including fuel ethanol under certain conditions. If produced from at least 50% local feedstocks (e.g., ethanol produced from sugarcane grown in the CBI beneficiary countries), ethanol may be imported duty-free. If the local feedstock content is lower, limitations apply on the quantity of duty-free ethanol. Nevertheless, up to 7% of the U.S. market may be supplied duty-free by CBI ethanol containing no local feedstock. In this case, hydrous (“wet”) ethanol produced in other countries, historically Brazil or European countries, can be shipped to a dehydration plant in a CBI country for reprocessing. After the ethanol is dehydrated, it is imported duty-free into the United States. Currently, imports of dehydrated ethanol under the CBI are far below the 7% cap (approximately 3% in 2006). For 2006, the cap was about 270 million gallons, whereas about 170 million gallons were imported under the CBI in that year.

Dehydration plants are currently operating in Jamaica, Costa Rica, El Salvador, Trinidad and Tobago, and the U.S. Virgin Islands.  Jamaica and Costa Rica were the two largest exporters of fuel ethanol to the United States from 1999 to 2003. Despite criticisms in the U.S., new dehydration facilities began production in Trinidad and Tobago in 2005 and the U.S. Virgin Islands in 2007.

If there is such an over-abundant domestic supply of ethanol in the U.S., why are U.S. oil companies purchasing ethanol from foreign sources? As domestic ethanol consumption continues to grow, so will the volume of imported duty-free ethanol under this CBI loophole.

Conclusion

As discussed above, the Ethanol Import Tariff should be repealed for the following reasons:

(a) Record prices for gasoline are increasing the costs of producing, transporting, and processing food products.  Research shows that energy prices are quickly passed through to higher retail food prices, with retail prices rising 0.52 percent in the short-term for every 1 percent rise in energy prices. As a result, a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices.

(b) Imported petroleum does not pay a tariff, yet clean, renewable ethanol from our own hemisphere is assessed a 54 cent-per-gallon tariff.

(c) Elimination of the ethanol import tariff would provide the U.S. with sufficient ethanol to move ethanol demand beyond being just a blending component in gasoline to a truer fuel alternative and create the required fueling infrastructure. 

(d) The Energy Independence and Security Act of 2007 sets a new RFS that starts at 9.0 billion gallons of renewable fuel in 2008 and rises to 36 billion gallons by 2022.  Of the latter total, 21 billion gallons of renewable fuel in U.S. transportation fuel is required to be obtained from renewable fuel, other than ethanol derived from corn.

(e) U.S. oil companies, due to a loophole in the CBI, are currently allowed to import thousands of barrels of ethanol every month without having to pay the 54 cents per gallon tariff.

At a time of record high gas prices, repeal of the 54 cents per gallon import tariff on foreign ethanol would create market competition by allowing U.S. blenders to purchase cheaper ethanol from foreign sources, which could help lower gas prices, increase the supply of ethanol to coastal markets, and ease the economic strain that is impacting the agriculture, food and beverage industries.

U.S. oil companies, corn farmers and fertilizer producers are benefiting from the 54 cents per gallon import tariff on foreign ethanol at the expense of the average American consumer. At a time when our own government’s Federal Reserve Chairman is saying food inflation and fuel costs are contributing to our dangerous economic condition, working toward eliminating this barrier to free market competition is more needed than ever.

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

From the December 2008 Issue of Ethanol Producer Magazine:

The Future of Midlevel Blends

2009 could be a big year for midlevel ethanol blends. UL certified E85 fuel dispensers and blender pumps should be available by the first half of the year. In addition, Congress is expected to address tax legislation that limits fuel retailers’ ability to claim credits for blender pumps distributing E85. Testing of midlevel blends will continue, and an E20 fuel waiver request could be submitted to the U.S. EPA before the end of the year.

by Erin Voegele

The nation’s first ethanol blender pump was installed in Britton, S.D., in March 2006. Less than three years later, the American Coalition for Ethanol lists more than 80 retail stations that have installed the pumps. That list continues to grow.

More station owners are expressing interest in installing the fuel dispensers, driven in part by the rising demand for midlevel ethanol blends. The trend, which began in the Midwest, is beginning to gain traction in other areas of the country.

However, there are some important elements that must be addressed before widespread use of midlevel ethanol blends can be achieved. Most importantly, a midlevel blend must be approved by the U.S EPA for use in standard nonflexible fuel engines. This approval would significantly increase the market for ethanol-blended fuels. The lack of Underwriters Laboratory Inc. approved fuel dispensers is another issue that must be overcome before some retailers will consider installing E85 dispensers and blender pumps.

UL Certification
UL certification is one issue that should be resolved in 2009. Gilbarco Veeder-Root and Dresser Wayne have each submitted blender pumps for E85 UL certification. According to Scott Negley, Dresser Wayne’s director of product management for North America, the equipment his company manufactures has already passed UL’s required testing procedures for E85.

However, UL is requiring that a full fuel dispensing system be certified, which also includes the hose, nozzle, and other hardware elements that are attached, which Dresser Wayne doesn’t manufacture. “Until you get a full set of components certified, we are not allowed to put a label—a certification mark—on our dispenser because the system lacks certification,” Negley says. Many of those items have been submitted by their respective manufacturers and are going through the testing process. According to Negley, hoses will likely be the last element to gain approval.

Gilbarco is expecting its dispenser to be approved by UL during the fourth quarter of 2008. In the meantime, the company is marketing the model it submitted to UL. According to Richard Browne, Gilbarco’s vice president of North American marketing, many fire marshals have approved the model for installation even though it currently lacks UL certification. “Our flexible-fuel unit has special material coating and elastomers that will stand up to the aggressive/corrosive nature of high alcohol fuels,” Browne says. “Every component in the dispenser that comes in contact with the fuel has been upgraded.”

According to Browne and Negley, both companies are experiencing heightened interest in the fuel dispensers. Dresser Wayne has also designed a new piece of equipment that will be compliant with some state-specific regulations that have been enacted. “We are developing a blender [pump] that will allow blends from two hoses on one side of the dispenser,” Negley says. Conventional fuels such as unleaded and E10 will be dispensed from one hose. Higher blends of ethanol, from E20 to E85, will be dispensed from the other. Negley says the new equipment is expected to be available in January 2009.

As UL-approved equipment becomes available, it is likely that each state will deal with previously installed E85 dispensers and blender pumps differently. Mark Buccelli, director of the Minnesota Weights and Measures Division, says the state is not going to require fuel dispensers already in operation to be replaced with a UL-approved dispenser. David Pfahler, director of South Dakota Weights and Measures, says the issue has not yet been addressed in South Dakota. UL-certified dispensers are expected to spur growth in the availability of E85 and midlevel blends. “I know of a number of large companies that have expressed interest in installing E85 fueling systems,” says Phillip Lampert, executive director of the National Ethanol Vehicle Coalition. “Given the risk management associated with not having a UL-approved dispenser, they have refrained from doing so.”

Robert White, deputy director of the Ethanol Promotion and Information Council, says that before UL certification was pulled for E85 dispensers, a lot of big box retailers were considering installing E85 pumps. “When UL pulled their certification, that removed some of the comfort level that those big box retailers had with the product and the dispensing of the product,” White says. When a UL certified pump becomes available, he expects those who have been sitting on the sidelines to jump back onboard. “On the E85 side, that could mean a lot of new stations almost as quickly as they can produce dispensers,” he says.

Ron Lamberty, vice president of market development for ACE, agrees that the pending UL certification has caused some stagnation in retail installations. “If marketers are looking at putting in E85 right now, most of them figure the smart thing is to wait out the UL-approval process,” he says. Since there is no history of reports or complaints of equipment failure, ACE would like to see a phase-in period established for UL-certified equipment.

“When the major pump manufacturers submitted pumps to the UL for testing, they submitted blender pumps,” Lamberty says. “I think that’s a good sign. I think they recognize that this is the wave of the future.” Although not all retailers installing the UL approved E85 fuel dispensers will offer midlevel ethanol blends right now, having the equipment installed should ease the transition into midlevel blends in the event one is approved by the U.S. EPA for use in standard nonflexible fuel engines.

Blending Tax Credits
Lamberty and Lampert also agree that the industry must address income tax legislation enacted under the Energy Policy Act of 2005 that prevents retailers installing ethanol blender pumps from claiming a 30 percent tax credit that is available to those who install dedicated E85 fuel dispensers.

“We are leading the effort to ensure that blender pumps receive the benefits of the federal income tax credit,” Lampert says. “The way that credit has been interpreted by the Internal Revenue Service marginalizes the value of the credit for blender pumps.” For blender pumps to really make a positive impact on the industry, the federal income tax credit needs to apply to them, he says.

Lamberty says Gilbarco has been working on getting legislation passed that would increase the credit to 50 percent of the installation cost and apply it to blender pumps. “Frankly, right now, if all we did was get the 30 percent to apply to any pump that sells E85, I think there is the potential for much faster growth,” Lamberty says. He adds that by including blender pumps, the government may also end up covering less of the total expenditure because it is often cheaper to install a blender pump than to break ground installing a new tank, hose and pipe for a dedicated E85 pump. Lampert says he expects the issue to be considered during the next congressional session in January 2009.

Midlevel Testing Grounds
In October, DOE’s National Renewable Energy Laboratory and Oak Ridge National Laboratory released a preliminary report on midlevel blends testing. The results included data from testing E15 and E20 on 13 vehicles and 28 small nonroad engines. The report showed that most regulated emissions were within the normal test variations.

The report provided results available to date from the first stages of a large overall test program, which was initiated by the DOE in 2007 to evaluate the potential impacts of intermediate ethanol blends on a variety of engine types. The broad test program is intended to evaluate the effects of E15 and E20 on tailpipe and evaporative emissions, catalyst and engine durability, vehicle drivability, engine operability, and vehicle and engine materials.

“The DOE along with NREL and ORNL have approximately 20-plus projects either underway or in the planning stages, all related to different aspects of intermediate blends,” says Steve Przesmitzki, NREL’s senior project leader. “This [report] is just a first look. Things look promising, but it is a first look. It is not conclusive evidence that E20 or E30 will work.” Przesmitzki estimates that testing will continue until 2010 or 2011. He expects a report on vehicle drivability to be released in 2009, as well as a first look at materials compatibility testing results. A project testing more than 30 different fuels on more than 20 different vehicles is also planned. “From what I’ve been told, it’s one of the biggest vehicle tailpipe emissions projects for research that EPA has ever undertaken, and they are doing it jointly with the DOE,” he says.

Waiver Request
According to Ralph Groschen, Minnesota Department of Agriculture’s senior market specialist, there are five different areas of data EPA requires along with a waiver request. These data sets include drivability, materials compatibility, emissions, durability and health effects. The research projects being undertaken by the DOE should help provide this data.

“We are feeling very good that federal government and other agencies that deal with these testing and things are sinking a lot of time and effort into this,” Groschen says. “Those are the kinds of data and materials that we need to answer the broad range of questions.”

In 2005, Minnesota passed a law that replaces the state’s current E10 mandate with E20 by 2013. Under the law, the mandate will take effect unless 20 percent of the state’s vehicle fuel already consists of ethanol by 2010. Groschen says the implementation also depends on EPA certification of a fuel containing 20 percent ethanol. “The particular time when it’s determined whether or not the law will be implemented is Aug. 31, 2010,” Groschen says. If EPA has not approved a waiver for E20 by this time, the law expires.

“The implementation of our law depends on national certification of E20,” Groschen says. “So, we’ve bitten off a pretty big chunk here. Thank goodness there are other people who want to see some progress in this area.” Under current regulation, the EPA must respond to a fuel waiver application within 180 days of receipt. To ensure the application is considered in time for the 2010 deadline, it must be submitted in 2009 or early 2010.

“EPA expects the industry to file the application,” Groschen says. “We hope to be a part of that application to show support, but they’re likely the ones that are going to be filing it.” Groschen says he hopes to see a waiver request submitted to the EPA, but that will likely depend on the status of the midlevel blends testing. He also expects the application process to be impacted by world events. “There are times when, if the political will is there nationally, things happen,” he says.

Erin Voegele is an Ethanol Producer Magazine staff writer. Reach her at evoegele@bbiinternational.com or (701) 373-8040.

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

The Monster That Ate Wall Street

How ‘credit default swaps’—an insurance against bad loans—turned from a smart bet into a killer.

Matthew Philips

NEWSWEEK

From the magazine issue dated Oct 6, 2008

They’re called “Off-Site Weekends”—rituals of the high-finance world in which teams of bankers gather someplace sunny to blow off steam and celebrate their successes as Masters of the Universe. Think yacht parties, bikini models, $1,000 bottles of Cristal. One 1994 trip by a group of JPMorgan bankers to the tony Boca Raton Resort & Club in Florida has become the stuff of Wall Street legend—though not for the raucous partying (although there was plenty of that, too). Holed up for most of the weekend in a conference room at the pink, Spanish-style resort, the JPMorgan bankers were trying to get their heads around a question as old as banking itself: how do you mitigate your risk when you loan money to someone? By the mid-’90s, JPMorgan’s books were loaded with tens of billions of dollars in loans to corporations and foreign governments, and by federal law it had to keep huge amounts of capital in reserve in case any of them went bad. But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital?

What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a “credit default swap,” and it was a twist on something bankers had been doing for a while to hedge against fluctuations in interest rates and commodity prices. While the concept had been floating around the markets for a couple of years, JPMorgan was the first bank to make a big bet on credit default swaps. It built up a “swaps” desk in the mid-’90s and hired young math and science grads from schools like MIT and Cambridge to create a market for the complex instruments. Within a few years, the credit default swap (CDS) became the hot financial instrument, the safest way to parse out risk while maintaining a steady return. “I’ve known people who worked on the Manhattan Project,” says Mark Brickell, who at the time was a 40-year-old managing director at JPMorgan. “And for those of us on that trip, there was the same kind of feeling of being present at the creation of something incredibly important.”

Like Robert Oppenheimer and his team of nuclear physicists in the 1940s, Brickell and his JPMorgan colleagues didn’t realize they were creating a monster. Today, the economy is teetering and Wall Street is in ruins, thanks in no small part to the beast they unleashed 14 years ago. The country’s biggest insurance company, AIG, had to be bailed out by American taxpayers after it defaulted on $14 billion worth of credit default swaps it had made to investment banks, insurance companies and scores of other entities. So much of what’s gone wrong with the financial system in the past year can be traced back to credit default swaps, which ballooned into a $62 trillion market before ratcheting down to $55 trillion last week—nearly four times the value of all stocks traded on the New York Stock Exchange. There’s a reason Warren Buffett called these instruments “financial weapons of mass destruction.” Since credit default swaps are privately negotiated contracts between two parties and aren’t regulated by the government, there’s no central reporting mechanism to determine their value. That has clouded up the markets with billions of dollars’ worth of opaque “dark matter,” as some economists like to say. Like rogue nukes, they’ve proliferated around the world and now lie hiding, waiting to blow up the balance sheets of countless other financial institutions.

It didn’t start out that way. One of the earliest CDS deals came out of JPMorgan in December 1997, when the firm put into place the idea hatched in Boca Raton. It essentially took 300 different loans, totaling $9.7 billion, that had been made to a variety of big companies like Ford, Wal-Mart and IBM, and cut them up into pieces known as “tranches” (that’s French for “slices”). The bank then identified the riskiest 10 percent tranche and sold it to investors in what was called the Broad Index Securitized Trust Offering, or Bistro for short. The Bistro was put together by Terri Duhon, at the time a 25-year-old MIT graduate working on JPMorgan’s credit swaps desk in New York—a division that would eventually earn the name the Morgan Mafia for the number of former members who went on to senior positions at global banks and hedge funds. “We made it possible for banks to get their credit risk off their books and into nonfinancial institutions like insurance companies and pension funds,” says Duhon, who now heads her own derivatives consulting business in London.

Before long, credit default swaps were being used to encourage investors to buy into risky emerging markets such as Latin America and Russia by insuring the debt of developing countries. Later, after corporate blowouts like Enron and WorldCom, it became clear there was a big need for protection against company implosions, and credit default swaps proved just the tool. By then, the CDS market was more than doubling every year, surpassing $100 billion in 2000 and totaling $6.4 trillion by 2004.

And then came the housing boom. As the Federal Reserve cut interest rates and Americans started buying homes in record numbers, mortgage-backed securities became the hot new investment. Mortgages were pooled together, and sliced and diced into bonds that were bought by just about every financial institution imaginable: investment banks, commercial banks, hedge funds, pension funds. For many of those mortgage-backed securities, credit default swaps were taken out to protect against default. “These structures were such a great deal, everyone and their dog decided to jump in, which led to massive growth in the CDS market,” says Rohan Douglas, who ran Salomon Brothers and Citigroup’s global credit swaps research division through the 1990s.

Soon, companies like AIG weren’t just insuring houses. They were also insuring the mortgages on those houses by issuing credit default swaps. By the time AIG was bailed out, it held $440 billion of credit default swaps. AIG’s fatal flaw appears to have been applying traditional insurance methods to the CDS market. There is no correlation between traditional insurance events; if your neighbor gets into a car wreck, it doesn’t necessarily increase your risk of getting into one. But with bonds, it’s a different story: when one defaults, it starts a chain reaction that increases the risk of others going bust. Investors get skittish, worrying that the issues plaguing one big player will affect another. So they start to bail, the markets freak out and lenders pull back credit.

The problem was exacerbated by the fact that so many institutions were tethered to one another through these deals. For example, Lehman Brothers had itself made more than $700 billion worth of swaps, and many of them were backed by AIG. And when mortgage-backed securities started going bad, AIG had to make good on billions of dollars of credit default swaps. Soon it became clear it wasn’t going to be able to cover its losses. And since AIG’s stock was one of the components of the Dow Jones industrial average, the plunge in its share price pulled down the entire average, contributing to the panic.

The reason the federal government stepped in and bailed out AIG was that the insurer was something of a last backstop in the CDS market. While banks and hedge funds were playing both sides of the CDS business—buying and trading them and thus offsetting whatever losses they took—AIG was simply providing the swaps and holding onto them. Had it been allowed to default, everyone who’d bought a CDS contract from the company would have suffered huge losses in the value of the insurance contracts they hadpurchased, causing them their own credit problems.

Given the CDSs’ role in this mess, it’s likely that the federal government will start regulating them; New York state has already said it will begin doing so in January. “Sadly, they’ve been vilified,” says Duhon, who helped get the whole thing started with that Bistro deal a decade ago. “It’s like saying it’s the gun’s fault when someone gets shot.” But just as one might want to regulate street sales of AK-47s, there’s an argument to be made that credit default swaps can be dangerous in the wrong hands. “It made it a lot easier for some people to get into trouble,” says Darrell Duffie, an economist at Stanford. Although he believes credit default swaps have been “dramatically misused,” Duffie says he still believes they’re a very effective tool and shouldn’t be done away with entirely. Besides, he says, “if you outlaw them, then the financial engineers will just come up with something else that gets around the regulation.” As Wall Street and Washington wring their hands over how to prevent future financial crises, we can only hope they re-read Mary Shelley’s “Frankenstein.”

U.S. Environmental Protection Agency Grants First-of-its-Kind Testing Exemption to Renergie

__________________

Renergie to Test Hydrous E10, E20, E30 & E85 Ethanol Blends

in Non-Flex-Fuel Vehicles and Flex-Fuel Vehicles in Louisiana

Gainesville, FL (February 11, 2009) – The U.S. Environmental Protection Agency has granted a testing exemption to Renergie, Inc.  Under the test program, the first of its kind in the U.S., Renergie will use variable blending pumps, not splash blending, to precisely dispense hydrous ethanol blends of E10, E20, E30, and E85 to test vehicles for the purpose of testing for blend optimization with respect to fuel economy, engine emissions, and vehicle drivability. Sixty vehicles will be involved in the test program which will last for a period of 15 months.

Hydrous Ethanol

Preliminary tests conducted in Europe have proven that the use of hydrous ethanol, which eliminates the need for the hydrous-to-anhydrous dehydration processing step, results in an energy savings of between ten percent and forty-five percent during processing, a four percent product volume increase, higher mileage per gallon, a cleaner engine interior, and a reduction in greenhouse gas emissions.

Variable Blending Pump

In the U.S., the primary method for blending ethanol into gasoline is splash blending. The ethanol is “splashed” into the gasoline either in a tanker truck or sometimes into a storage tank of a retail station. Renergie believes the inaccuracy and manipulation of splash blending may be eliminated by precisely blending the ethanol and unleaded gasoline at the point of consumption, i.e., the point where the consumer puts E10, E20, E30 or E85 into his or her vehicle. A variable blending pump would ensure the consumer that E10 means the fuel entering the fuel tank of the consumer’s vehicle is 10 percent ethanol (rather than the current arbitrary range of 4 percent ethanol to at least 24% ethanol that the splash blending method provides) and 90% gasoline.

Team Approach

“On June 21, 2008, Governor Bobby Jindal signed into law the Advanced Biofuel Industry Development Initiative (“Act 382”), the most comprehensive and far-reaching state legislation in the nation enacted to develop a statewide advanced biofuel industry.  Act 382 is based upon the “Field-to-Pump” strategy developed by Renergie.  Louisiana is the first state to enact alternative transportation fuel legislation that includes a variable blending pump pilot program and a hydrous ethanol pilot program,” said Meaghan M. Donovan, founder of Renergie, Inc. “We are excited and proud that Renergie, the Louisiana Department of Agriculture & Forestry, the Louisiana Department of Environmental Quality, and the U.S. Environmental Protection Agency are acting as a unified team to develop a network of small advanced biofuel manufacturing facilities and the necessary fueling infrastructure throughout Louisiana. Representative Jonathan W. Perry (R – District 47), Senator Nick Gautreaux (D – District 26), and Dr. Mike Strain, Commissioner of the Louisiana Department of Agriculture and Forestry, should be praised for their leadership on this issue. Renergie’s decentralized network of small advanced biofuel manufacturing facilities reduces Renergie’s feedstock supply risk, maximizes rural economic development, maximizes job creation in the state and does not burden local water supplies. The legislature and governor of the great State of Louisiana have chosen to lead the nation in moving ethanol beyond being just a blending component in gasoline. By blending fuel-grade ethanol with gasoline, via blending pumps at its gas stations, Renergie will offer the consumer a fuel that is renewable, competitively-priced, cleaner, and more efficient than unleaded gasoline in the form E10, E20, E30 and E85.”

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

The American Coalition for Ethanol

Study Finds Certain Ethanol Blends Can Provide Better Fuel Economy Than Gasoline

“Optimal Blend” Is Likely E20 or E30; Coalition Calls for Further Government Research

Sioux Falls, SD (December 5, 2007) – Research findings released today show that mid-range ethanol blends—fuel mixtures with more ethanol than E10 but less than E85—can in some cases provide better fuel economy than regular unleaded gasoline, even in standard, non-flex-fuel vehicles. Previous assumptions held that ethanol’s lower energy content should always directly correlate with lower fuel economy for drivers. Those assumptions were found to be wrong. Instead, the new research strongly suggests that there is an “optimal blend level” of ethanol and gasoline—most likely E20 or E30—at which cars will get better mileage than predicted based strictly on the fuel’s per-gallon Btu content.

The new study, cosponsored by the U.S. Department of Energy and the American Coalition for Ethanol (ACE), also found that mid-range ethanol blends reduce harmful tailpipe emissions and that vehicles without any adjustments can operate well on higher ethanol blends than previously thought.

“Initial findings indicate that we as a nation haven’t begun to recognize the value of ethanol,” said Brian Jennings, executive vice president of the American Coalition for Ethanol. “This is a compelling argument for more research on the promise of higher ethanol blends in gasoline. There is strong evidence that the optimal ethanol-gasoline blend for standard, non-flex-fuel vehicles is greater than E10 and instead may be E20 or E30. We encourage the federal government to move swiftly to research the use of higher ethanol blends and make necessary approvals so that American motorists can have the cost-effective ethanol choices they deserve at the pump.”

The University of North Dakota Energy & Environmental Research Center (EERC) and the Minnesota Center for Automotive Research (MnCAR) conducted the research using four 2007 model vehicles: a Toyota Camry, a Ford Fusion and two Chevrolet Impalas, one flex-fuel and one non-flex-fuel. Researchers used the EPA Highway Fuel Economy Test (HWFET) to examine a range of ethanol-gasoline blends from straight Tier 2 gasoline up to 85 percent ethanol. All of the vehicles got better mileage with ethanol blends than the ethanol’s energy content would predict, and three out of four actually traveled farther on a mid-level ethanol blend than on unleaded gasoline.

“I applaud the American Coalition for Ethanol for taking action and studying the impact of intermediate blends of ethanol. I am encouraged by the findings of this study, which should benefit the federal regulatory process for approving higher blends of ethanol,” said U.S. Senator John Thune (R-SD). “Intermediate blends of ethanol will offer consumers more choices at the pump, reduce dependence on foreign oil, and benefit our domestic ethanol industry for years to come.”

In addition to the favorable fuel economy findings, the research provides strong evidence that standard, non-flexfuel vehicles can operate on ethanol blends beyond 10 percent. The three non-flex-fuel vehicles tested operated on levels as high as E65 before any engine fault codes were displayed. Emissions results for the ethanol blends were also favorable for nitrogen oxides, carbon monoxide and nonmethane organic gases, showing an especially significant reduction in CO2 emissions for each vehicle’s “optimal” ethanol blend (E20 for the flex-fuel Chevy, E30 for the Toyota and Ford, E40 for the non-flex Chevy).

“These studies show that moderate 20-30 percent ethanol blends can reduce air pollution, improve gas mileage, and save drivers money in the most popular cars on the road today,” said Brett Hulsey, president of Better Environmental Solutions, an environmental health consulting firm. “Moderate ethanol blends are homegrown in America, can be delivered with existing pumps to current vehicles, and cost less than gasoline. Ethanol lowers CO2 emissions 20 percent from gasoline, making it one of our most effective greenhouse gas reduction programs currently in place.”

KEY FINDINGS

Ethanol’s energy content was not found to be a direct predictor of fuel economy.

A fuel’s energy content in British Thermal Units (Btu) is current standard practice for estimating fuel economy, a method that, because of ethanol’s lower Btu value, leads to estimates of decreased fuel economy in proportion to the percentage of ethanol in the fuel blend.

• This research, however, did not find ethanol’s Btu content to be a direct predictor of fuel economy. All four vehicles tested exhibited better fuel economy with the ethanol blends than the Btu-value estimates predicted.

E20 and E30 ethanol blends outperformed unleaded gasoline in fuel economy tests for certain autos.

Contrary to Btu-based estimates of fuel economy for ethanol blends, three of the four vehicles tested achieved their highest fuel efficiency not on gasoline, but on an ethanol blend. Mid-level blends of ethanol E20 (20% ethanol, 80% gasoline) and E30 (30% ethanol, 70% gasoline) offered the best fuel economy in these tests.

• E30 offered better fuel economy than gasoline (a 1% increase) in both the Toyota and the Ford.

• E20 offered better fuel economy than gasoline (a 15% increase) in the flex-fuel Chevrolet.

• The non-flex-fuel Chevrolet more closely followed the Btu-calculated trend for fuel economy, but did experience a significant improvement over the trend line with E40 (40% ethanol, 60% gasoline), indicating that this may be the “optimal” ethanol blend level for this vehicle.

Standard, non-flex-fuel vehicles operated well on ethanol blends beyond 10 percent.

All automakers currently cover the use of up to E10 (10% ethanol, 90% gasoline) by warranty for standard, non-flex-fuel vehicles. In this preliminary research, the three non-flex-fuel vehicles tested each operated successfully on ethanol blends significantly higher than this 10% ethanol level.

• The Ford Fusion operated on E45, the Toyota on E65, and the non-flex-fuel Chevy on E55. No engine fault codes were displayed until these levels were surpassed.

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

Selected Issues Related to an Expansion of the Renewable Fuel Standard

(Source: CRS Report RL34265, Selected Issues Related to an Expansion of the Renewable Fuel Standard (RFS), by Brent D. Yacobucci and Randy Schnepf, December 3, 2007)

The Energy Policy Act of 2005 established the Renewable Fuels Standard (“RFS”) which directs that gasoline sold in the U.S. contain specified minimum volumes of renewable fuel. The Energy Independence and Security Act of 2007 (“H.R. 6”), which became law on December 19, 2007, sets a new RFS that starts at 9.0 billion gallons of renewable fuel in 2008 and rises to 36 billion gallons by 2022. Of the latter total, 21 billion gallons of renewable fuel in U.S. transportation fuel is required to be obtained from advanced biofuels.

Although most references to “advanced biofuels” involve cellulosic ethanol, the “advanced biofuels” component of the proposed RFS extension may be met by essentially any non-corn-starch-derived biofuel. News reports often refer to cellulosic ethanol as “nearing a break-through” or “just around the corner” but the reality is that there is considerable uncertainty about the speed with which this technology will become commercially viable (even with substantial government support). Many scientists still suggest that commercial realization of cellulosic ethanol is 5 to 15 years down the road. For example, the Department of Energy’s goal is to make cellulosic biofuels cost-competitive with corn ethanol by 2012. Other groups are less optimistic. Although research is ongoing, presently there are no commercial-scale cellulosic biofuel plants in the United States, and there is only one demonstration-scale plant in Canada. A major barrier to cellulosic fuel production is that production costs remain significantly higher than for corn ethanol or other alternative fuels. Currently, various production processes are prohibitively expensive, including physical, chemical, enzymatic, and microbial treatment and conversion of these feedstocks into motor fuel.

Cellulosic Biofuel Production Uncertainties

There are substantial uncertainties regarding both the costs of production for cellulosic feedstock as well as the costs of producing biofuel from them. Perennial crops are often slow to establish and can take several years before a marketable crop is produced. Crops heavy in cellulose tend to be bulky and represent significant problems in terms of harvesting, transporting, and storing. Seasonality issues involving the operation of a biofuel plant year-round based on a 4- or 5-month harvest period of biomass suggest that bulkiness is likely to matter a great deal. In addition, most marginal lands (i.e., the low-cost biomass production zones) are located far from major urban markets, bringing the plant location choice versus ethanol transportation issue into play.

Furthermore, increases in per-acre yields would be required to make most cellulosic energy crops for fuel production economically competitive. Questions remain whether high yields can be achieved without the use of fertilizers and pesticides. Another question is whether there is sufficient feedstock supply available. USDA estimates that, by 2030, 1.3 billion tons of biomass could be available for bioenergy production (including electricity from biomass, and fuels from corn and cellulose). From that, enough biofuels could be produced to replace roughly 70 billion gallons of gasoline per year (about 4.5 million barrels per day). However, this projection assumes significant increases in per-acre yields and, according to USDA, should be seen as an upper bound on what is possible. Further, new harvesting machinery would need to be developed to guarantee an economic supply of cellulosic feedstocks.

In addition to the above concerns, other potential environmental drawbacks associated with cellulosic fuels must be addressed, such as the potential for soil erosion, runoff, and the spread of invasive species (many potential biofuel crops are invasive species when introduced into non-native localities). In the near term, the obvious choice of using corn stover to fuel existing corn ethanol plants has its own set of environmental trade-offs, paramount of which is the dilemma of sacrificing soil fertility gains from no- or minimum-tillage corn production.

Energy Supply Issues

Biofuels are not primary energy sources. Energy stored in biological material (through photosynthesis) must be converted into a more useful, portable fuel. This conversion requires energy. The amount and types of energy used to produce biofuels, and the feedstocks for biofuel production, are of key concern. Because of the input energy requirements, the energy and environmental benefits of corn ethanol, particularly, may be limited.

Energy Balance

A frequent argument for the use of ethanol as a motor fuel is that it reduces U.S. reliance on oil imports, making the U.S. less vulnerable to a fuel embargo of the sort that occurred in the 1970s. However, while corn ethanol use displaces petroleum, its overall effect on total energy consumption is less clear. To analyze the net energy consumption of ethanol, the entire fuel cycle must be considered. The fuel cycle consists of all inputs and processes involved in the development, delivery and final use of the fuel. For corn-based ethanol, these inputs include the energy needed to produce fertilizers, operate farm equipment, transport corn, convert corn to ethanol, and distribute the final product. Some studies find a significant positive energy balance of 1.5 or greater — in other words, the energy contained in a gallon of corn ethanol is 50% higher than the amount of energy needed to produce and distribute it. However, other studies suggest that the amount of energy needed to produce ethanol is roughly equal to the amount of energy obtained from its combustion. A review of research studies on ethanol’s energy balance and greenhouse gas emissions found that most studies give corn-based ethanol a slight positive energy balance of about 1.2.

An expanded RFS would certainly displace petroleum consumption, but the overall effect on fossil fuel consumption is questionable, especially if there is a large reliance on corn-based ethanol. The mandate in H.R. 6 to require an increasing amount of “advanced biofuels” would likely result in reduced fossil fuel consumption relative to gasoline. As the share of advanced biofuels grows, this effect would increase. However, by 2022, advanced biofuels will likely represent less than 10% of gasoline energy demand, so the total amount of fossil energy displaced would be less than the expected growth in fossil energy consumption from passenger transportation over the same time period.

Natural Gas Demand

As ethanol production increases, the energy needed to process the corn into ethanol, which is derived primarily from natural gas in the United States, can be expected to increase. For example, if the entire 4.9 billion gallons of ethanol produced in 2006 used natural gas as a processing fuel, it would have required an estimated 240 to 290 billion cubic feet (cu. Ft.) of natural gas. If the entire 2006 corn crop of 10.5 billion bushels were converted into ethanol, the energy requirements would be equivalent to approximately 1.4 to 1.7 trillion cu. Ft. of natural gas. This would have represented about 6% to 8% of total U.S. natural gas consumption, which was an estimated 22.2 trillion cu. Ft. in 2005. The United States has been a net importer of natural gas since the early 1980s. A significant increase in its use as a processing fuel in the production of ethanol — and a feedstock for fertilizer production — would likely increase prices and imports of natural gas.

Energy Security

Further, expanding corn-based ethanol production to levels needed to significantly promote U.S. energy security is likely to be infeasible. If the entire 2007 U.S. corn crop of 13.2 billion bushels were used as ethanol feedstock, the resultant 35 billion gallons of ethanol (23.6 billion gasoline-equivalent gallons (GEG)) would represent about 16.7% of estimated national gasoline use of approximately 141 billion gallons. In 2007, an estimated 86 million acres of corn were harvested (largest since 1944). Nearly 137 million acres would be needed to produce enough corn (20.5 billion bushels) and resulting ethanol (56.4 billion gallons or 37.8 billion GEG) to substitute for roughly 20% of petroleum imports. Thus, barring a drastic realignment of U.S. field crop production patterns, corn-based ethanol’s potential as a petroleum import substitute appears to be limited by crop area constraints, among other factors.

By volume, ethanol accounted for approximately 3.6% of gasoline consumption in the United States in 2006, but a gallon of ethanol yields only 67% of the energy of a gallon of gasoline.

Agricultural Issues

A continued expansion of corn-based ethanol production could have significant consequences for traditional U.S. agricultural crop production and rural economies. Supporters of an expanded RFS claim that increased biofuels production and use would have enormous agricultural and rural economic benefits by increasing farm and rural incomes and generating substantial rural employment opportunities. However, large-scale shifts in agricultural production activities will likely also have important regional economic consequences that have yet to be fully explored or understood. As corn prices rise, so too does the incentive to expand corn production either by expanding onto more marginal soil environments or by altering the traditional corn-soybean rotation that dominates Corn Belt agriculture. This shift could displace other field crops, primarily soybeans, and other agricultural activities. Further, corn production is among the most energy-intensive of the major field crops. An expansion of corn area would likely have important and unwanted environmental consequences due to the increases in fertilizer and chemical use and soil erosion. The National Corn Growers Association estimates that U.S. corn-based ethanol production could expand to between 12.8 and 17.8 billion gallons by 2015 without significantly affecting agricultural markets. However, as noted below, other evidence suggests effects are already being felt in the current expansion in corn production.

Food vs. Fuel

Many critics of federal biofuels subsidies and the RFS argue that a sustained rise in grain prices driven by ethanol feedstock demand likely will lead to higher U.S. and world food prices with potentially harmful effects on consumer budgets and nutrition. As evidence they cite USDA’s estimate that the U.S. Consumer Price Index (CPI) for all food is forecast to increase 3.5% to 4.5% in 2007 compared with an increase of 2.4% in 2006 and, an average annual rate of 2.5% over the past ten years (1997-2006). However, in analyzing this critique it is important to distinguish between prices of farm-level crops and retail-level food products because most “food” prices are largely determined by costs and profits after the commodities leave the farm. Basic economics suggests that the price of a particular retail food item varies with a change in the price of an underlying ingredient in direct relation to the relative importance (in value terms) of that ingredient. For example, if the value of wheat in a $1.00 loaf of bread is about 10¢, then a 20% rise in the price of wheat translates into a 2¢ rise in a loaf of bread.

As a result of corn’s relatively small value-share in most retail food product prices, it is unlikely that the ethanol-driven corn price surge is a major factor in current food price inflation estimates. Furthermore, economists generally agree that most retail food price increases are not due to ethanol-driven demand increases, but rather are the result of two major factors — a sharp increase in energy prices which ripples through all phases of marketing and processing channels, and the strong increase in demand for agricultural products in the international marketplace from China and India (a product of their large populations and rapid economic growth).

Feed Markets

Most corn grown in the United States is used for animal feed. From 1995 through 2005, domestic feed use accounted for 58% of U.S. corn use. As corn-based ethanol production increases, so do total corn demand and corn prices. As a result, prolonged higher corn prices likely will have significant consequences for traditional feed markets and the livestock industries — hog, cattle, dairy, and poultry — that depend on those feed markets. Corn traditionally has represented about 57% of feed concentrates and processed feedstuffs fed to animals in the United States. Persistently high feed costs will tighten profit margins and likely squeeze out marginal livestock producers. Because economies of scale tend to favor larger producers, persistently tighter profit margins suggest a potential for increased concentration in the livestock sector. The National Cattlemen’s Beef Association (NCBA) has been one of the foremost critics of an expanded RFS. Instead, the NCBA argues for a phase out of current ethanol subsidies and a more market-based approach to renewable fuels policy.

The price of corn also is linked to the price of other grains, including those destined for food markets, through competition in the feed marketplace and in the producer’s planting choices for limited acreage. The price runup in the U.S. corn market has already spilled over into price increases in the markets for soybeans and soybean oil. Supply distortions also are likely to develop in protein-meal markets related to expanded production of the ethanol processing by-product distiller’s dried grains with solubles (DDGS), which averages about 30% protein content and can substitute in certain feed and meal markets.

While DDGS use would substitute for some of the lost feed value of corn used in ethanol processing, about 66% of the original weight of corn is consumed in producing ethanol and is no longer available for feed. Furthermore, not all livestock species are well adapted to dramatically increased consumption of DDGS in their rations — dairy cattle appear to be best suited to expanding DDGS’s share in feed rations; poultry and pork are much less able to adapt. Also, DDGS must be dried before it can be transported long distances, adding to feed costs. There may be some potential for large-scale livestock producers to relocate near new feed sources, but such relocation likely would have important regional economic effects.

Domestic Food Prices

Although corn primarily is used as a livestock feed or for ethanol production, corn also is used widely as an ingredient (albeit minor) in many processed foods, e.g., soft drinks, snack foods, and baked goods. Since corn prices are a relatively small share of the price of most retail food products, their price impact is concomitantly small. Higher corn prices have their largest impact on meat prices. The feed-price effect will first translate into higher prices for poultry and hogs, which are less able to use alternate feedstuffs. Dairy and beef cattle are more versatile in their ability to shift to alternate feed sources, but eventually a sustained rise in corn prices will push their feed costs upward as well. A recent economic study estimated that a 30% increase in the price of corn, and associated increases in the prices of wheat and soybeans, would increase egg prices by 8.1%, poultry prices by 5.1%, pork prices by 4.5%, beef prices by 4.1%, and milk prices by 2.7%. The effect on all food consumed was a 1.1% increase (0.9% on at-home food and 1.3% on away-from-home food consumption). Thus, the price impact of higher corn prices is small but important for most livestock products, and probably much smaller for most other retail food products.

The overall impact to consumers from higher food prices depends on the proportion of income that is spent on food. Since food costs represent a relatively small share of consumer spending for most U.S. households (about 10%), food price increases (from whatever source) are absorbed relatively easily in the short run. However, low-income consumers spend a much greater proportion of their income on food than do high-income consumers. Their larger share combined with less flexibility to adjust expenditures in other budget areas means that any increase in food prices potentially could cause hardship. In addition, higher commodity prices combined with shrinking inventories mean that local school districts and the U.S. government will be forced to pay higher market prices for food for school lunch programs. And the automatic food price escalators built into the food stamp program mean rising expenditures as well.

Exports

The United States is the world’s leading exporter of corn. In the past decade (1997 to 2006), the United States has exported about 20% of its corn production, accounting for nearly 66% of world corn trade. Increased use of corn for ethanol production could diminish U.S. capacity for exports. In 2006, the volume of corn used for ethanol equaled exports, with a 20% share of total use. By the 2009/10 marketing year (September-August), ethanol’s share of U.S. corn production is expected to reach nearly 36%, while the export share falls to 13%. FAPRI projections clearly suggest that higher corn prices will result in lost export sales. It is unclear what type of market adjustments will occur in global feed markets, since several different grains and feedstuffs are relatively close substitutes. Price-sensitive corn importers may quickly switch to alternative, cheaper sources of feed, depending on the availability of supplies and the adaptability of animal rations. In contrast, less price-sensitive corn importers, such as Japan and Taiwan, may choose to pay a higher price in an attempt to bid the corn away from ethanol plants. There could be significant economic effects to U.S. grain companies and to the U.S. agricultural sector if ethanol-induced higher corn prices led to a sustained reshaping of international grain trade.

Distribution Issues

Ethanol-blended gasoline tends to separate in pipelines. Further, ethanol is corrosive and may damage existing pipelines. Therefore, unlike petroleum products, ethanol and ethanol blended gasoline cannot be shipped by pipeline in the United States. Another issue with pipeline transportation is that corn ethanol must be moved from rural areas in the Midwest to more populated areas, which are often located along the coasts. This shipment is in the opposite direction of existing pipeline transportation, which moves gasoline from refiners along the coast to other coastal cities and into the interior of the country. While some studies have concluded that shipping ethanol or ethanol-blended gasoline via pipeline could be feasible, no major U.S. pipeline has made the investments to allow such shipments.

There is also interest in expanding the use of E85 (85% ethanol, 15% gasoline). Current E85 consumption represents only about 1% of ethanol consumption in the United States. A key reason for the relatively low consumption of E85 is that relatively few vehicles operate on E85. The National Ethanol Vehicle Coalition estimates that there are approximately six million E85-capable vehicles on U.S. roads, as compared to approximately 230 million gasoline- and diesel-fueled vehicles. Most E85-capable vehicles are “flexible fuel vehicles” or FFVs. An FFV can operate on any mixture of gasoline and between 0% and 85% ethanol. However, owners of a large majority of the FFVs on U.S. roads choose to fuel them exclusively with gasoline, largely due to higher per-mile fuel cost and lower availability of E85.

E85 capacity is expanding rapidly, with the number of E85 stations roughly doubling between February 2006 and February 2007. But those stations still represent less than 1% of U.S. gasoline retailers. Further expansion will require significant investments, especially at the retail level. If a new E85 pump and underground tank are necessary, they can cost as much as $100,000 to $200,000 to install. However, if existing equipment can be used with little modification, the cost could be less than $10,000.

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.

News Media Contact(s):
Jennifer Scoggins, (202) 586-4940
For Immediate Release
October 7, 2008

Fact Sheet: Effects of Intermediate Ethanol Blends

In August 2007, the U.S. Department of Energy (DOE) initiated a test program to assess the potential impacts of higher intermediate ethanol blends on conventional vehicles and other engines that rely on gasoline. The test program focuses specifically on the effects of intermediate blends of E15 and  E20—gasoline blended with 15 and 20 percent ethanol, respectively—on emissions, catalyst and engine durability, drivability or operability, and materials associated with these vehicles and engines.   This DOE test program includes technical expertise from DOE’s National Renewable Energy Laboratory (NREL) and Oak Ridge National Laboratory.This preliminary report, the first in a series of peer-reviewed reports that will summarize the results of intermediate ethanol blends, provides results from testing E15 and E20 on 13 popular late-model vehicles and 28 small non-road engines, including lawn equipment and generators.Vehicle results include the following when E15 and E20 were compared with traditional gasoline:

• Tailpipe emissions were similar;
• Under normal operations, catalyst temperatures in the 13 cars were largely unchanged;
• When tested under full-throttle conditions, about half of the cars exhibited slightly increased catalyst temperatures with E15 and E20, compared to traditional gasoline; and,
• Based on informal observations during testing, drivability was unchanged.

Small non-road engine results include the following when E15 and E20 were compared with traditional gasoline:

• As ethanol content increased:
  • Regulated emissions generally stayed within allowed limits,
  • Engine and exhaust temperatures increased;
• Commercial engines, as well as larger non-handheld residential engines in this limited study, exhibited no particular sensitivity to ethanol from a durability perspective; and,
• The effect of E15 and E20 on the durability of smaller, less-expensive handheld residential engines was not clear.

The full intermediate blend report is now available.

U.S. Department of Energy, Office of Public Affairs, Washington, D.C.

About Renergie

Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita.  Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol.  Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program.  Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On  April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector.  On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline.  Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.