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Challenges Facing Ethanol During 2008

Commodities / Ethanol Dec 28, 2007 - 05:05 PM GMT

By: David_Urban

Commodities Ethanol has been beaten down in the press lately as firms that rushed into the market are faced with high raw material prices and low market acceptance. Early on in the boom farmers who invested in ethanol plants reaped enough profits to pay off their investments in just a few years. As speculators saw the profit potential; they rushed in hoping for massive gains and created an inflationary spiral in the corn market. Corn prices more than doubled; causing riots in Mexico where corn is a basic foodstuff and creating a situation where farmers stopped producing other crops and switched to corn. In the last year, cotton has lost 30% of its acreage as farmers switched from cotton to corn.


The biggest challenge facing corn based ethanol plants going forward will be the potential for water shortages as water use in making corn based ethanol is significant. While the total water usage may not rise by a large amount, the long-term effects could be severe.

In the Gulf of Mexico there is a 7,900 square mile area known as the dead zone. The area is so depleted of oxygen that plants and fish cannot survive within the area. There are worries about a possible rapid increase in the dead zone due to nitrogen runoff in the water supply from the planting of corn in the Mississippi River basin . Environmentalists fear that a continued increase of nitrogen runoff will set off a chain reaction in the Gulf of Mexico and Mississippi River basin .

30 years ago the Brazilian government put its weight behind ethanol as an alternative fuel. Now as we see oil prices continuing to show strength at the $90 level, Brazil has declared independence from imported oil. This will provide a significant boost going forward for the world's 10th largest economy as few global economies can make that claim.

As long as the US and Europe continue to block attempts by Brazil to slash ethanol tariffs in the WTO, Brazil will continue to gain a competitive advantage with the world. Lowering tariffs would create a more competitive environment globally where low cost ethanol producers will be forced to either become cost competitive or exit the sector.

At the present time, sugar based ethanol is the price leader at the present time with prices approaching $1.25 per gallon. The markets are beginning to realize sugars price advantage and have bid the price up over 10 cents.

In the next few years, if cellulosic ethanol can become viable at levels approaching sugar based ethanol than the US will be able to make a transition from oil to ethanol based fuels. The problem with including cellulosic ethanol in any discussion is that the final costs in producing a gallon are not yet known.

If cellulosic ethanol (especially those made from forms of invasive weeds like Johnsongrass) can come with costs of $1.25 a gallon, challenging sugar based ethanol, versus corn based ethanol at $3 then marginal producers will exit the sector causing a fall in corn prices tumbling down the ladder to tortilla, feedstock, and eventually meat prices. Prices will rise for cellulosic ethanol as farmers switch to cellulosic ethanol plants, causing pain for investors who were late to the boom as they will be met with rising prices and low margins. Eventually the system will move to a point of balance between various types of ethanol.

One of the risks of cellulosic ethanol is that some of the plants used to create ethanol are known as aggressive weeds which may cause long-term damage to surrounding farms and areas.

With the 2007 energy bill is now complete the push towards alternative fuel sources will begin in earnest. The rise in national fuel economy standards is a start as is the mandatory use of biofuel but the long lead time before meeting the standard does not impose a sense of urgency which is needed.

Even with an increase in the mandate, the automobile industry has to be ready to meet the increasing and changing demand. This transition period can take years as evidenced by Brazil but will pay dividends in the long run

By David Urban

http://blog.myspace.com/global112

Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This blog and the author is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

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Comments

Ty Cambell
29 Dec 07, 15:12
First Generation Ethanol Still Evolving and Viable

The corn ethanol water use issue will be solved by filtration and recycling technology which is being put in place… The Dead Zone is not all caused by corn ethanol. 80% of corn is grown for livestock feed, human consumption, and export. Nitrogen-phosphorous fertilizers run-off many other types of crops – not just corn.

There is also widespread septic run-off, livestock-poultry-dairy manure run-off, etc. – Why do you blame everything on corn ethanol?...

Americans importing ethanol from Brazil would be dependant on Brazil. That would subject Americans to more of the same Trade Deficit Debt Consumption, whereby they would continue to buy fuel with debt instruments. The whole purpose of the American drive to domestic renewables is the quest for Energy Indendence, which all countries should strive to achieve… We’re already in transition with first generation ethanol and biodiesel. It doesn’t depend entirely on cellulose fuels becoming viable. What we have now is viable. Ask the people in the corn belt who are filling-up on E-20, E-30, and E-85 at prices much cheaper than gasoline. Ethanol is fast becoming regionalized and localized – look for cheap ethanol coming to your city soon…Our energy transition, from oil to whatever, is being influenced by many other factors.

For example:

(1) Cost effective biodiesel and synthetic diesel from biomass will cut into crude oil use. Look for the new high mileage next generation diesel engines. Ethanol and biodiesel are symbiotic industries. They are often extracted as co-products from the same feedstock, such as corn or algae. And algae will be a much bigger factor than sugar.

(2) Cheap electricity from the grid and the dropping cost of wind, wave, solar power, methane to electric, and biomass to electric – These will power electric and plug-in hybrid vehicles - as a substitute for liquid fuels.

(3) The commercialization of multi-fueled engines capable of running on Bio-Crude made from biomass, using thermal depolymerization or pyrolysis, or using unrefined ultrasound fractionated algae slurry. The first example being the Cyclone Green Revolution Engine, now coming to market.

(4) The movement to equip plug-in hybrids and electric vehicles with solar-electric roof panels, including roofs on delivery vans and roofs on trailers for hybrid electric long haul trucks.

(5) Landfill and Sewage waste recycling into Biogas Electric Power;

(6) High efficiency and high miles per gallon commuter cars capable of 100 to 300 miles per gallon are coming to market, before cellulose ethanol becomes cost effective.

(7) The movement to make ethanol plants self-powered by replacing fossil fuels with renewables.

(8) The movement to replace heating oil with half price wood and biomass pellets.

(9) The developing Biomass and Biogas industry to co-fire biomass with Coal and methane with natural gas – turning recycled waste into value-added fuel and impacting electric prices lower.

(10) The integration of livestock feeding and manure waste conversion to methane with ethanol refineries.

INTEGRATION is making biofuels viable now. The best example is the XL Dairy in Vicksburg AZ, a biorefinery integrated with a dairy farm - where the cow manure is digested into methane to run the entire operation. Corn is fractionated into starch (which is made into ethanol), corn germ (which is pressed for biodiesel), and high protein distillers grains (which is fed to the cows to increase milk production).

This operation is totally self-powered and NOT connected to the grid. The company claims a 10 to 1 return, even after the corn is shipped from the Corn Belt to AZ…14 new ethanol refineries are being built in Texas. Many of them are self-powered, based on sorghum, and integrated with livestock operations - which provide manure-to-methane power and consume the distillers grains.

These will be over 3 to 1. Another example of viable first generation biofuel is “Sorganol” a 5 to 1 return, which is being developed in Oklahoma.

First generation ethanol is still evolving and is viable now. In the U.S., cheap sugar could become a factor in the production of ethanol, but the viability of the industry does NOT depend it. Sugar does not feed dairy cows, livestock and poultry. Corn does. Our transition from crude oil to biofuels does not depend entirely on cellulose ethanol. It depends on the many facets of the alternative energy movement, with a few surprises thrown-in. Ethanol is already competing with gasoline at the pump. E-20 and E-30 is next. High mileage multi-fueled plug-in hybrids, solar enhanced electric vehicles, next generation diesels, hydrogen vehicles, compressed air vehicles, vehicles powered by crude biomass-bio-oil, etc., will all chip away at crude oil. The transition is already taking place.


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