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Ethanol Production Soared, But U.S. Federal Subsidy Expires, Business and Industry Trends Analysis

High gasoline prices, effective lobbying by agricultural and industrial interests, and a growing interest in cutting reliance on imported oil put a high national focus on bioethanol in America in recent years.  Corn and other organic materials, including agricultural waste, can be converted into ethanol through the use of engineered bacteria and superenzymes manufactured by biotechnology firms.  This trend gave a boost to the biotech, agriculture and alternative energy sectors.  At present, corn is almost the exclusive source for bioethanol in America.  This is a shift of a crop from use in the food chain to use in the energy chain that is unprecedented in all of agricultural history—a shift that had profound effects on prices of corn for consumers, livestock growers (where corn has long been a traditional animal feed) and food processors.
Ethanol is an alcohol produced by a distilling process similar to that used to produce liquors.  A small amount of ethanol is added to much of the gasoline sold in America, and most U.S. autos are capable of burning “E10,” a gasoline blend that contains 10% ethanol. E85 is an 85% ethanol blend that may grow in popularity due to a shift in automotive manufacturing.
Yet, despite the millions of vehicles on the road that can run on E85 and billions of dollars in federal subsidies to participating refiners, many oil companies seem unenthusiastic about the adoption of the higher ethanol mix.  E85 requires separate gasoline pumps, trucks and storage tanks, as well as substantial cost to the oil companies (the pumps alone cost about $200,000 per gas station to install).  The plants needed to create ethanol cost $500 million or more to build.  Many drivers who have tried filling up with E85 once revert to regular unleaded when they find as much as a 25% loss in fuel economy when burning the blend.
Ethanol is a very popular fuel source in Brazil.  In fact, Brazil is one of the world’s largest producers of ethanol, which provides a significant amount of the fuel used in Brazil’s cars.  This is due to a concerted effort by the government to reduce dependency on petroleum product imports.  After getting an initial boost due to government subsidies and fuel tax strategies beginning in 1975, Brazilian producers developed methods (typically using sugar cane) that enable them to produce ethanol at moderate cost.  The fact that Brazil’s climate is ideally suited for sugarcane is a great asset.  Also, sugar cane can be converted with one less step than corn, which is the primary source for American ethanol.  Brazilian automobiles are typically equipped with engines that can burn pure ethanol or a blend of gasoline and ethanol.  Brazilian car manufacturing plants operated by Ford, GM and Volkswagen all make such cars.
In America, partly in response to the energy crisis of the 1970s, Congress instituted federal ethanol production subsidies in 1979.  Corn-based grain ethanol production picked up quickly, and federal subsidies amounted to several billion dollars.  The size of these subsidies and environmental concerns about the production of grain ethanol produced a steady howl of protest from observers through the years.  Nonetheless, the Clean Air Act of 1990 further boosted ethanol production by increasing the use of ethanol as an additive to gasoline.  Meanwhile, the largest producers of ethanol, such as Archer Daniels Midland (ADM), have reaped significant subsidies from Washington for their output.  However, Congress allowed the subsidy to expire on December 31, 2011.
In March 2014, the United Nations Intergovernmental Panel on Climate Change released two Working Group reports that questioned biofuels’ cost to the environment, the food chain and ultimately their direct and indirect production of harmful emissions.  Ethanol production requires enormous amounts of water.  To produce one gallon of ethanol, up to four gallons of water are consumed by ethanol refineries.  Add in the water needed to grow the corn in the first place, and the number grows to as much as 1,700 gallons of water for each gallon of ethanol.  Meanwhile, Brazil has clear-cut as much as 1 million acres of tropical forest per year to produce sugarcane for ethanol.
A bright note for ethanol proponents is an increase in production efficiency, due to improvements in process technology (such as finer corn grinding to release more starch) and improved temperature control of fermentation to optimize yeast productivity.  Better enzymes and yeast strains are also boosting output per bushel of corn.
On the negative side, other concerns regarding the use of corn to manufacture ethanol include the fact that a great deal of energy is consumed in planting, reaping and transporting the corn in trucks.  In Brazil alone, the devastation of the rainforest and the need to ship ethanol to other countries emits about 50% more carbon than using petroleum fuels, according to agricultural nonprofit Food First.


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