Archives for May 2008

The New South Wales Government is proposing to mandate that all standard unleaded petrol will contain 10% of ethanol. This ethanol will mostly be sourced from grain. The main reasons we must oppose this legislation are the humanitarian effects of converting food to fuel, the lack of CO2 abatement, it’s debatable improvement of air quality and the unsuitability to operate in the variable New South Wales (NSW) climate. Other reasons include the grain ethanol industry’s mandated ability to outbid other end users for finite resources and the hindrance an established industry will provide to the development of the preferred cellulose ethanol industry.

The ethanol industry debate worldwide has been muddied by misinformation and spin doctoring, not helped by the terminology. Barrels, litres, US gallons, bushels, tonnes, millions and billions can easily be daunting. Ethanol, biofuels, grain ethanol, waste are all terms used glibly to suit the occasion. In this discussion of the proposed E10 mandate I am setting out the problems of processing ethanol from primary grain in NSW.

Number 1
Humanitarian effects — as per global debate which is hard to miss on Google News or the international media. There is now no question that world food supplies and therefore price have been influenced by the expansion of the grain ethanol industry. To meet current mandate and mandate targets for biofuels in just the USA and the EU will require 240 million tonnes of grain or about 1/8th of the world’s grain production. FAO in their latest data estimates that 100 million tonnes of grain or 1/20th of world production was converted to ethanol worldwide in 2007/2008. Given the exponential rate of expansion of this industry, subsidised and mandated by Governments, this conversion of food to fuel will have an ever increasing effect on the price of grain and consequently increasing the starvation, misery and civil unrest of many millions of the worlds poor.
With higher oil prices and without Government intervention, there is potential for the developed world to economically convert even greater tonnages of grain to ethanol. What is the limit to the developed world’s immorality?

Number 2
A question arises when we consider other industries that use grain extravagantly for the use of the relatively rich of the world such as grain fed beef, why is this grain ethanol mandate different?
There are two differences I can see. The first is that grain fed beef is not mandated or subsidized and secondly mandates and subsidies are seen as ways to establish infant industries. Cellulose ethanol certainly qualifies as an infant industry but grain ethanol does not. The technology has been around for a century.

Number 3
A NSW decision to mandate E10 will have a significant impact on the global debate now raging about the merits of grain ethanol. We are involved globally and the NSW decision will be noted.
Many are calling for the USA to back away from its mandate to convert 150million tonnes of grain to ethanol, Canada is holding back on legislating its ethanol mandate and important leading figures around the world are currently calling for caution, debate and even backing down on grain ethanol mandates.

Number 4
It is hypocritical for farmers to demand protectionist policies with respect to grain ethanol when for years we have fought tariffs and USA/EU farm subsidies. As an exporting nation, Australia must support global trade and benefit from comparative advantages between trading partners.

Number 5
Grain ethanol will never be profitable for the ethanol producers as they will be bidding for finite resources against inelastic food demands. With greater demand for grain prices will increase to erode any ethanol producer’s profitability.

Number 6
Mandated/ subsidized grain ethanol will increase the price of arable acres and so benefit rural areas. However, as in Iowa, the rest of the population will object to this transfer of wealth when it is pointed out that E10 involves a $230 million subsidy annually of Federal money to NSW. E10 nationally would cost $690 million per year. The Productivity Commission recently questioned the value of this excise rebate or subsidy for domestic ethanol.
If the Federal Government wishes to support regional and rural areas this money would be better spent directly in these areas rather than have ethanol investors ‘clip’ it on the way past.
Or better still the $230 million annually could be spent on research and the encouragement of cellulose ethanol.

Number 7
If E10 is mandated and the supply of grain is limited by drought will it be possible for the Government to let the ethanol plants continue to operate and the grain price to run to import parity, experience shortages or will they consider closure of these plants. Export industries value adding grain such as beef and dairy production and a range of food production including wheat gluten, flour and malt will all be priced out of the global market. Domestic food costs will rise.

Number 8
NSW’s variable climate is the principle factor making a grain ethanol industry impracticable. Iowa’s grain ethanol experience, with its relatively certain climate, is not admissible to the NSW E10 debate. On the other hand, Texas has a more variable climate and it is no surprise that its Governor is calling for relief for the USA ethanol mandate.

Number 9
NSW E10 translates to conversion of 1.5 million tonnes of grain to ethanol. This is about 30% of the NSW harvest in 3 of the last 7 years. E10 is not a realistic proposition.
Victoria and Queensland usually draw grain from NSW. This flow will be disrupted by the demand from ethanol production.

Number 10
Localised shortages occur in NSW, both in grain quantity and starch quantity when grain is pinched from drought. Domestic ’import parity’ pricing occurs with local grain end users disadvantaged. A local grain ethanol plant would increase the occurrence and severity of these domestic ‘import parity’ situations. Other end users will shift their operations to ports where they can have access to imported grain in response to this more commonly occurring event of import parity pricing. This has the potential of tearing the fabric of NSW agriculture apart.
Localised ‘import parity’ will mean greater movement of grain across the established transport routes which stretch from production areas to the ports. The infrastructure for this freight movement does not exist.

Number 11
Increased acres sown to grain will not translate into greater local tonnage in drought years and so will not overcome the problem of a variable climate.

Number 12
The 1.5 million tonnes of grain required for the E10 mandate will come from decreasing exports, or from increased production.
Any decrease in exports will contribute to humanitarian problems in some countries. They will have to increase their production from marginal or new land, both environmentally damaging. Any CO2 release from this must be billed to the grain ethanol industry here in NSW.
Increased acres sown to grain will be from dryland acres prone to drought so the harvest tonnage spread between good and bad years will increase. The risks and costs of this greater variability of production must be accounted for by both growers and the industry.

Number 13
For a grain ethanol industry, grain shortages would mean closures and loss of profits. Imports but this may not be possible if countries convert their exportable grain surplus to ethanol and the cost of relying on oil refineries having spare capacity should be billed to the grain ethanol industry.
To overcome grain shortages grain would have to be stored for up to two years or transported long distances. The provision of infrastructure to store or transport grain would be a significant cost to the grain ethanol plant making it uneconomic compared to sugar ethanol in a more certain climate.

Number 14
Climate change experts are predicting a hotter, dryer NSW with even greater variability of harvests.
It is strange that the NSW Government is on one hand building a desalination plant in response to these climatic predictions while on the other proposing a grain ethanol industry whose operation under the same climatic predictions will be even more unworkable.

Number 15
Grain ethanol plants need water for operation and irrigation water to grow grain with some certainty of supply. This water availability is also becoming more variable, ask a rice grower. Water buybacks for environmental flows, minimum tillage decreasing runoff and again climate change all make a grain ethanol industry impracticable.

Number 16
This need for water would mean that grain ethanol plants would be placed on the inland river valleys. The mandate would enable the operator to outbid existing irrigators for the scarce water.

Number 17
Grain ethanol is seen as a stepping stone to the eventual implemenation of cellulose ethanol. It would be better to import the sugar cane ethanol from Brazil and sell our grain.
Currently Brazilian ethanol futures are priced at about A$0.30 / litre delivered Paulinia, San Paulo.
Carbon credits could make ethanol made from sugar and ‘true’ waste economical.
This combination of imported, sugar and waste ethanol would offer much better GHG abatement, less humanitarian effect and nil distortion of NSW agriculture.

Number 18
The economics and GHG emissions of a grain ethanol plant are much better if the distillers grain protein byproduct can be used wet nearby in livestock rations. Because of this a grain ethanol plant will be associated with an intensive livestock operation nearby.
However cellulose ethanol does not have this protein byproduct and so a change to the preferred cellulose ethanol will compromise the economics of the grain ethanol/livestock complex.
Also, bearing in mind that the transporting of cellulose feedstock to a plant is a major cost, these grain ethanol plants may not be sited favorably for cellulose ethanol production.

Number 19
Monoculture of corn in Iowa and the high price of N fertiliser have seen a swing back to a legume based rotation. Irrigated monoculture of our river valleys would likewise be ill-advised.

Number 20
A grain ethanol industry will take the limited resources of arable acres and water from existing industries so any jobs lost must be deducted from those created by this new industry. As well there will be few jobs created as grain ethanol production is capital intensive.

Number 21
With urban encroachment of arable acres, climate change and increasing demand for grain protein, grain farmers will enjoy moderate increases in grain prices. By increasing demand for grain, the grain ethanol industry has added to the rapidity of these price increases to a level beyond the capacity of agriculture around the world to respond.

Number 22
Use of special high starch wheats for ethanol could contaminate our protein bread wheats. Use of such wheats were outlawed in the past for this reason.

Number 23
With the variable climate and grain production in NSW grain ethanol offers little in terms of fuel security.
The Victorian Parliamentary Report Feb.2008 www.parliament.vic.gov.au/edic/inquiries/biofuels/ concluded that the use of compressed natural gas offered much greater transport fuel security.
This excellent report found against mandating ethanol in Victoria.

Number 24
A mandate is the Rolls Royce of subsidies, a carrot for any investor, a situation to carefully consider. We may be looking at a scenario of robbing Tom and Harry to pay Dick.

Number 25
The Victorian Parliamentary report was told at an interview in 2007 that about 50% of the NSW ethanol produced at that time came from waste.
This means that there only 200000 tonnes of grain was processed in such a way as to leave a starch waste byproduct. Some ethanol may be produced from sugar waste at Harwood.
It is clear that 1.3 million tonnes of grain would be used as primary ethanol feedstock.

Number 26
Various studies show that the CO2 abatement claimed for grain ethanol has been shown to be low or negative. I await the spin and bull**** when the level of carbon credits a grain ethanol plant is entitled to is being decided. My money says the investor in a grain ethanol plant will receive favorable treatment.

Number 27 This one for the economists among you.
EU and USA farm subsidies are decreased with higher grain prices. This is balanced within their economies by resulting higher prices for their domestic food.
Australia has no farm subsidies on the scale of the EU or USA so with no decrease in subsidies there is a net increase in cost to this economy from higher food prices.

Number 28
Not all in agriculture gain from higher grain prices. For example coastal beef producers are receiving less for their store steers to the feedlot while paying more for fertilizers pushed higher in part by increased demand from grain growers around the world.

Number 29
While biodiesel may burn cleaner than diesel, it has not been clearly demonstrated that ethanol has much advantage over petrol with regards to air quality. It is suggested by the Victorian Parliamentary Report Feb 2008 that with E10 carbon monoxide emissions are decreased but emissions of nitrous oxide and particulate matter are increased.

Number 30
The expected global supply response to higher prices may not eventuate as price signals are not reaching farmers in many countries due to export bans and import subsidies to keep the populations from rioting over food prices.
As well as not seeing higher prices these farmers have to pay higher prices for inputs.
Note that the recent FAO report indicated only a 2.6% increase in world grain production this coming year. In fact Low Income Food Deficient Countries have reduced production. This is in response to predicted good seasons and high prices. It would seem that worldwide production is constrained by more factors than price.

Number 31
In the last 5 years more information has emerged about grain ethanol and it is showing on many fronts that the conversion of grain to ethanol does not look as good now as then.
Politicians from both Labor and the Coalition parties are taking the head in sand approach in the face of these new facts and world debate, perhaps simply because it entails admitting they were wrong.

Number 32
Public acceptance of ethanol appears weak. E10 would be easier to ‘sell’ politically if we imported the more environmentally friendly sugar cane ethanol and avoided the baggage of a disastrous adventure attempting to convert up to one third of the NSW harvest into ethanol in a poor year.
The NSW mandate will add ethanol to all standard unleaded petrol. This will take away the rights of those people not happy with ‘taking food from a starving family to fuel my car’. Their alternative will only be to buy the more expensive premium grade which will not contain ethanol.

Number 33
An established grain ethanol industry will be a hindrance to the development of the preferred cellulose ethanol. This industry will have no incentive to change to cellulose and in fact, if sited in the wrong location and faced with possible cheaper ethanol production they would actively campaign against it. Politicians, faced with compensation for encouraging the grain ethanol industry, will likewise have little incentive to get behind a cellulose ethanol industry.

Put another way, cellulose ethanol feedstock will probably be sourced between the tropics where there is greater photosynthetic activity. The grain ethanol industry now developing in temperate areas will not be advocates of this competition. This will be a very unfortunate as cellulose ethanol could be the real replacement for transport fossil fuel we are all hoping for. Australia is fortunate in having millions of acres undeveloped in our tropics which would be ideal for large scale cellulose ethanol production to supply both domestic and export markets.

Number 34
There are lingering doubts about the feasibility of cellulose ethanol production and an increasing realization of the overwhelming humanitarian limitation on significant grain ethanol replacement of fossil transport fuels.
Australia has vast resources of natural gas, more GHG friendly than grain ethanol which could be used as transport fuel.

Once again I ask you, why are we supporting a grain ethanol industry in NSW?

Geoff Ward
April 27, 2008

Grain prices have suddenly doubled worldwide and are expected to remain at these levels. For the billions of people who spend a large percentage of their income on food, mostly the urban poor in developing countries, this is and will be a disaster. Starvation and misery, civil unrest, wars spilling across borders and environmental degradation as marginal land is forced into food production will result from this increase in grain prices.

This escalation in grain prices is a result of an imbalance between supply of and the demand for the world’s grain stocks caused by,
• increased demand for grain-fed protein as Asian countries increase their standard of living and aspire to the standard of living enjoyed in the developed countries;
• increased demand from an increasing world population;
• decreased supply as higher oil prices increase the cost of growing grain;
• decreased supply of grain due to a series of droughts; and
• decreased supply resulting from a rapid increase in the percentage of arable land used to produce biofuels.
Other than biofuel production, we do not have much control over these factors imposing on the grain supply-demand equation.

As in the past we are relying on increasing agricultural productivity to balance this equation. Greater worldwide investment in agriculture science and infrastructure, together with moderate price increases, should ensure success in meeting this uncontrollable demand.
It is the supply impost and rapid increase of the food to fuel industry, namely the use of arable acres for first generation biofuels; the one factor we can control, that agriculture is struggling to come to terms with.

This food to fuel industry is being driven by the mandates and subsidies put in place by governments of the developed world.

About 2000 million tonnes of grain are produced annually in the world. The USA has mandated that 150 million tonnes of corn be turned into ethanol each year. Add similar mandates across the developed world and we can see that at least 10 percent of the world’s grain is mandated for ethanol production.

Further add the acres of sugar beet, sugarcane and cassava used for ethanol, the acres of canola, soybean and palm oil used for biodiesel and we can clearly see that the percentage of arable land taken from grain production by first generation biofuels is a very significant factor in the doubling of grain prices.

With oil currently at about US$100 per barrel there is the real possibility that it will be economically advantageous for the developed world to outbid the poorer countries for the world’s grain and so lead to the greatest disaster yet known to mankind.

The advertised benefits of first generation biofuels, namely the food to fuel industry, can be largely discredited.

• The increase in fuel security is insignificant as just a 5-10 percent replacement of fossil fuel would require the conversion of much of a countries grain production;
• The CO2 reduction benefits of first generation biofuels have been shown to be negligible to negative (Searchinger, et.al., 2008, Science 319,1238);
• Owners of arable acres and investment landlords may gain but some in agriculture will lose. For example, to meet a price point in Asia, higher grain prices for a feedlot will mean that the operator can only pay lower prices for the store steers that are to be fattened;
• Food price inflation resulting from high grain prices may be manageable in the developed countries but in the developing countries it will tear them apart both economically and politically;
• Higher prices for grain may not in fact lead to the expected worldwide supply response and the modernisation of agriculture in developing countries. This is because to avoid political unrest, riots and worse, many developing countries must hold their domestic grain prices down by taxing, limiting exports and subsidising imports. This means that their farmers do not receive the price signals to increase production nor the increased income to purchase the higher priced fertiliser and other inputs;
• Suggestions that grain ethanol production is necessary as a stepping stone to the introduction of cellulose ethanol appear unfounded. The grain ethanol infrastructure will not be located where needed for the production of cellulose ethanol. With cellulose ethanol potentially a significant player in combating climate change, public acceptance is a given, with no need of a grain ethanol stepping stone.

In summary, the potential disaster of food shortages for the world’s poorest far outweigh the marginal benefits of converting food to fuel.

Governments of the developed world, that’s you and me, are fully liable for this immoral situation we find ourselves confronting.

Rust disease may take out Pakistan’s wheat crop, China may have a drought and Egypt may not be able to afford to buy grain. Will the developed world continue to grind grain for ethanol in the face of the resultant mass starvation? If the answer is yes, then our civilisation must be judged unethical and selfish, lacking any respect for our fellow human beings. If no, then the food to fuel industry is an uneconomic nonsense as the plants cannot afford to be shutdown. Either way, Governments should not be supporting but indeed should be discouraging this industry.

Alternative fuel sources are still required.

Second generation ethanol produced from cellulose or other photosynthetic biomass holds some promise. Utilising marginal acres this biomass production need not encroach on arable land to the same extent as food to fuel biofuels and the CO2 reduction from cellulose ethanol is much greater than that from corn ethanol.
This is one of the alternate fuel source industries that governments should be mandating and subsidising. To be fair to the USA, they have taken steps along this road with their recent Energy Bill but too late, the damage has been done.

It is a matter of urgency that you or your organisation familiarise yourself with the details of first generation biofuels and its contribution to the disaster of high grain prices. Information is readily accessed by Google. A Victorian Parliament Committee released in Feb. 2008 the ‘Inquiry into Mandatory Ethanol and Biofuels Targets in Victoria’. This is essential reading to further your knowledge of biofuels from a domestic Australian viewpoint. Note their recommendation that Victoria does not mandate ethanol as proposed.

If you come to the similar conclusion as I have, then please act to at least discourage governments from mandating and subsidising the production of biofuels from grain and vegetable oils. Better still, encourage governments to limit commercial food to fuel production in sympathy with the needs of the worlds poor and to promote second generation biofuels. Taking one further step, suggest governments ensure that scientists in agriculture are encouraged and funded to increase sustainable grain production worldwide.

Geoff Ward
April 10, 2008