The Magazine

Synfuels II

The ethanol numbers don't add up.

Nov 13, 2006, Vol. 12, No. 09 • By DAVE JUDAY
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That brings us to switchgrass, the most touted alternative to corn in the making of ethanol. Ironically, one of the most prominent arguments that folks in federally supported laboratories and at newspaper editorial pages use to promote switchgrass is that it is so much cheaper than corn. The implication is, since there is no market for switchgrass now, ethanol mills could get it for a song. The fact that switchgrass has no market, however, is exactly why farmers won't like it. Why would a farmer want to grow a crop that gives him a lower return than the corn he's already growing? In fact, corn enjoys a generous subsidy--about $10 billion in 2005--and yet, because of the cost of production and despite the new ethanol demand that came on line via federal mandate in 2006, farmers planted fewer acres of corn this year than last. Corn must compete with other crops and uses for farmland that may produce higher returns.

Making matters worse, switchgrass requires a long-term commitment for a farmer. Because of its root structure, switchgrass can't be harvested the year it is seeded; then it is best managed as a 10-year stand. That is a practical impediment for farmers looking to produce for a market that fluctuates from year to year. The only way ethanol distillers will get a steady supply of cellulosic feedstock is if the return is equal or better for the farmer than the return on other commodities. So much for the cheaper feedstock theory.

In short, cellulosic biomass presents what economists call significant "opportunity costs." Farmers aren't going to grow switchgrass if they have to forgo income opportunities from growing crops like corn, where they know there is a major commercial infrastructure--physical and financial--supporting the demand for its use. Likewise, lawsuits and environmental policy aside, no one is going to glean their way through forests, curbside tree and shrub trimmings, and used furniture stores to generate enough wood to replace significant amounts of the U.S. motor fuel supply. To believe otherwise shows a profound misunderstanding of commodity economics.

The view that biomass straw can be spun into gold without fundamental shifts in economic incentives, or can be mandated without dire consequences, is the modern-day version of Rumpelstiltskin.

Dave Juday is an agricultural commodity market analyst.