Will Rising Food Prices Limit Ethanol's Role as an Alternative Fuel?
We have all heard the adage: “You're damned if you do and damned if you don't.” This certainly applies to the present ethanol situation.

The world, and particularly the United States , is trying to address the issue of energy dependence. Developing alternative energy sources is one of the hottest topics, and our leaders have strived to initiate energy policies for the present and future. Historically, ethanol has been one of their sweethearts as a potential solution to foreign oil dependence. But that has changed.

Brief History of Ethanol
First used as a fuel in 1908 in Ford's Model T, corn-based ethanol filled a niche market for decades in the Midwest . Never as energy-dense as petroleum gasoline, ethanol also languished due to the difficulty of transporting it from Midwest production facilities to the dense coastal population centers, as ethanol cannot use the same pipelines as gasoline.

Ethanol caught widespread attention in the 1970s, however, during the Arab Oil Embargo. To bulk up fuel supplies, Congress allowed fuel manufacturers to blend in 10 percent ethanol—and gain an exemption to the federal fuel excise tax in the bargain.

Over time, ethanol has accumulated incentives and tax credits, particularly after Congress in 1990 required gasoline to be blended with fuel oxygenates to reduce emissions. Ethanol was already on the list of approved oxygenates, and it assumed even more importance when it became the substitute for methyl tertiary butyl ether ( MTBE), the octane-enhancing gasoline additive whose popularity has since waned so dramatically due to associated environmental and health concerns.

High-Priced Oil
As oil became more expensive in recent years, gasoline followed suit, and ethanol became more and more competitive due to its relatively minimal production costs. In the search for alternative energy sources, corn-based ethanol soon became the highest-profile candidate, so much so that it is currently mandated into U.S. energy policy. The ethanol industry basked in the attention, raising funding for ambitious expansion and new construction, enough to raise current production by almost 50 percent.

Then commodities came under pressure. First, wheat suddenly became scarcer, a spiral that started with a drought in Australia . Grains in general began to feel the strain. Corn and soybeans gained price momentum due to increasing ethanol and biodiesel demand. Then Mother Nature hit with full force, recently causing floods in the U.S. Grain Belt and creating price havoc in the grains complex. Most grains have tripled in price in recent months. Corn, once thought to be among the most viable feedstocks for alternative fuels, has now become an expensive raw material.

What's Ahead for Ethanol?
Ethanol costing models never anticipated the current situation. Now, ethanol's profitability for producers and viability for users have become major issues, not to mention the additional strain ethanol production has put on U.S. corn stocks—and, consequently, on the world food supply.

As the food versus fuel debate intensifies, world organizations are vociferously calling for an energy policy change, excluding the use of food for fuel. There are also calls for an end to the subsidies the U.S. ethanol industry receives. And amidst the furor, many are wondering how it came to this. Speculators distorting the commodities market? A devalued dollar luring in foreign investors?

For practical, long-term manufacturing, ethanol will eventually have to be produced from raw materials other than foodstuffs. Research is full force into finding these other raw materials, from algae to switchgrass to waste materials. With alternative feedstocks in place, corn demand will revert to its previous roles as a foodstuff and animal feed only. The question is not if but when.

When corn does revert, it will have tremendous ramifications, specifically on the corn market and generally on the grain and food markets. Anticipating these changes and being knowledgeable about the industry will be critical. For more information or to discuss how we may help you weather this volatile corn market, please contact us.

McKEANY-FLAVELL COMPANY, INC.