ROME — Cheer up. The market crunch has produced some good news too. Here’s one: The ethanol producers’ lush, green fields are turning into Death Valley. An industry that should never have thrived is getting its comeuppance.
The scientific, environmental and fuel-security arguments made by the ethanol industry were always, at best, dubious, at worst, wildly and dangerously exaggerated.
But Big Ethanol had one thing going for it – a torrent of cash from taxpayers and investors that proved irresistible to Bill Gates and other high-profile investors and funds.
The economics were simple. As long as fuel prices were high and corn prices low, ethanol at least made financial sense (for the investors, if not the taxpayer).
Initial public offerings abounded. The government loot kept coming. Detroit rolled out cars that could run on ethanol-gasoline blends. Far cheaper Brazilian sugarcane ethanol was shut out of the import market. Corn farmers beamed, which helped to capture the rural vote in the United States, Canada and parts of Europe.
Inevitably ethanol went from fringe employer to mainstream corn-belt industry to bubble.
That bubble has burst. The share prices tell the story.
In mid-2006 (in retrospect, the peak of the ethanol market) VeraSun Energy listed in New York at $23 (U.S.) a share. The shares this year have gone from a high of $17.75 a share to 40 cents and last traded at about 50 cents.
Pacific Ethanol is a disaster of similar proportions. In late 2005, Mr. Gates’s Cascade Investments paid $84-million for 27 per cent of Pacific. At the time, the shares traded at about $9. They went to a high of $42 and are now a little less than a buck. Cascade had lost tens of millions of dollars on the investment, which it began to unload last spring. While it may have been pocket change for the Microsoft billionaire, it showed that even the savviest investors got taken in by the ethanol industry’s hype.
What went wrong? At its most basic level, the corn-oil bet that underpinned the industry’s economics went horribly askew. Corn prices went through the barn roof in 2007 and early 2008, in good part because of the ethanol industry’s voracious demand for corn; about one-third of the American crop went to biofuels.
In the first half of this year, corn futures went from a bit more than $4 a bushel to $7.50. Fearing the price would go even higher, many ethanol producers bought corn at the high price. The futures price is now $4. Meanwhile, oil prices have plunged, pushing down ethanol prices and destroying ethanol-refinery margins. Ethanol economics no longer work.
The industry is also losing the political and moral battle. After years of dithering, the United Nations Food and Agriculture Organization (FAO) this year admitted the obvious. “Rapidly growing demand for biofuel feedstocks has contributed to higher food prices, threatening the food security of poor net food buyers in both urban and rural areas,” it said in a recent report. Meanwhile, lower oil prices have taken the edge off the “fuel security” argument cherished by the OPEC haters.
The environmental case began to turn against corn-based ethanol some time ago. The industry claimed that burning ethanol was better for the planet than burning oil, because ethanol’s carbon output was lower. The research of some independent scientists could support no such claim when full-cycle accounting – from seed planting to refined product delivery – was employed. And mowing down green space to make room for more corn fields was clearly an un-green exercise.
While the stock market collapse of ethanol companies like VeraSun seems to signal the end of the ethanol industry, its death, like that of an opera singer’s, could be long and agonizing. The first-generation ethanol plants, the ones built before the bubble years, have already paid for themselves and should be able to endure low ethanol prices for a while. The U.S. Energy Policy Act of 2005, which requires refiners to blend certain amounts of ethanol with gasoline, is still on the books. John McCain is not in favour of ethanol subsidies, which amount to $3.5-billion a year, but the poll leader, Barack Obama, is.
The ethanol industry’s most powerful weapon, its slick lobbying machine, has never met an obstacle it couldn’t flatten. It should come as no surprise that it has persuaded the U.S. Department of Agriculture to include ethanol makers in the rural businesses eligible for $25-million loan guarantees. The government finds it hard to say no to any beggar in the new era of bailouts for everyone, from banks to car companies, no matter how severe their past sins.
The good news is that no amount of subsidies can disguise the fact ethanol is the wrong fuel at the wrong time. There may be good biofuels; corn-based ethanol is not one of them. Some clean fuels and technologies are worthy of taxpayer funding, but not the one that raises food prices and has no proven environmental advantage. Investors have fled the ethanol industry. It’s time governments around the world did the same so ethanol can go quietly to the grave.
