The Economics of Corn Ethanol
Posted by Robert Rapier on February 6, 2008 - 11:30am
Topic: Alternative energy
Tags: corn prices, economics, ethanol, ethanol prices, natural gas [list all tags]
Someone e-mailed a few days ago and asked about the present economics of corn ethanol. I did a few calculations, and thought the results were interesting enough to share. This exercise should make it clear which factors have the biggest impact on corn ethanol profitability – and why corn ethanol producers are presently struggling.
Consider this a supplement to Stuart Staniford’s comprehensive essay Fermenting the Food Supply. Stuart’s essay goes into great detail on the factors underlying the economics. In my essay, I take a snapshot of a corn ethanol plant based on current prices for corn, natural gas, and by-products. (Note that because this is a snapshot, the numbers will change over time. But you should be able to use the methodology here to roughly calculate the economics at any point in time.)
I found multiple references for all of the numbers I am going to use, but I will only reference a single source. According to Ethanol Reshapes the Corn Market, one 56-pound bushel of corn will yield up to 2.7 gallons of ethanol and 17.4 pounds of distiller’s dried grains with solubles (DDGS).
The current spot price of corn as of this writing is about $5/bushel, so each gallon of ethanol contains $5/2.7, or $1.85 of corn per gallon of ethanol (or if you prefer, 21 pounds of corn per gallon of ethanol). However, the DDGS can be sold, so a credit is applied for that. The current price of DDGS as of this writing is $170/ton, which is $0.085/lb. Given that a bushel of corn yields 17.4 pounds of DDGS, there is then a $1.48 credit, which spread over 2.7 gallons is equal to $0.55 gallon. This reduces our cost per gallon to $1.85 minus $0.55, or $1.30 for just the corn input. This also reduces our net corn input down to 14 pounds per gallon of ethanol produced. (Note that there is sometimes a credit for carbon dioxide sales, but it is very small relative to the other costs and credits).
I still have to consider utilities (natural gas is a major cost), labor, enzyme and yeast costs, and depreciation. I have a spreadsheet from an actual ethanol plant, but there isn't much in the public domain that I could find on this. The closest thing to a source on these is the spreadsheet in the presentation Fossil Fuels and Ethanol Plant Economics (for a standard dry mill process). If you look at Page 16 of the presentation, you can see that all of the miscellaneous costs together total approximately as much as the corn inputs. If you take the spreadsheet on Page 24 and change the natural gas price to the current price of $8/MMBTU, you get an overall energy cost of $0.33/gal of ethanol [Note: Some have pointed out that the energy usage in that spreadsheet looks pretty low, and that the average energy usage for a plant is probably higher than that]. The sum of enzymes, yeast, and other chemicals comes out to be $0.14/gal, and labor, maintenance, and various miscellaneous expenses add another $0.23/gal.
On depreciation, I have several sources for capital costs that are pretty consistent. In the EIA's Energy Outlook 2006, capital costs per daily barrel of corn ethanol ranged from $20,000 to $30,000, depending on the size of the plant. This breaks down to between $1.30 and $1.95 per gallon of installed capacity. This is also consistent with A Guide for Evaluating the Requirements of Ethanol Plants, which states "Current capital cost per annual gallon of installed capacity for an ethanol plant ranges from $1.25 to $2.00." So let's be conservative and say that we want to build a big plant, so the capital costs are on the low end at $1.30/gallon. Depreciate that over 15 years and this portion amounts to about $0.08 per gallon (but is captured above already).
However, for biomass to liquids facilities - which would include the biomass gasification to ethanol that some are calling cellulosic ethanol - the capital costs in the EIA's Energy Outlook 2006 are listed at around 5 times that of a conventional corn ethanol plant. Thus, the capital depreciation portion is going to be around $0.40 per gallon of ethanol. (On the other hand, the feed costs should be much lower).
Summary
Times are tough for ethanol producers. They are in the same boat right now as refiners - enduring very poor margins. This is what the economics roughly look like at $5 per bushel of corn and $8/MMBTU of natural gas. To produce 1 gallon of ethanol today requires:
- $1.85 of corn
- $0.33 of energy
- $0.14 of enzymes, yeast, etc.
- $0.23 of labor, maintenance, and various miscellaneous expenses
There is a DDGS credit per gallon of ethanol of $0.55. Thus, the total cost to produce a gallon of ethanol today is $1.85 + $0.33 + $0.14 + $0.23 - $0.55, or exactly $2/gallon of ethanol. For reference, the February contract for ethanol in the Midwest as of this writing is $2.15. And $2/gallon is merely cost of production. It doesn't take into account any return on investment.
Also note that due to the lower energy content, this production cost is equivalent to a $3 per gallon production cost for gasoline - and that this production cost is a moving target: As long as the ethanol mandates are driving up the price of corn and increasing the demand for and cost of natural gas, corn ethanol producers must chase their tails in a vicious cycle. Producers are going to be hard-pressed to ever match the 2006 windfall that was given to them when the MTBE phaseout drove ethanol prices sky-high.
Anyway, this was a useful exercise for me to understand the magnitude of the various inputs (and the DDGS offset) in corn ethanol production. I hope you found it of some value. If you see errors or have suggestions, please let me know.
This simply confirms the dead-end nature of a corn-for-fuel approach. Caught in a trap of their own making, ethanol producers have the choice now to reduce production to lower corn prices (unlikely due to grain shortages), or continue uneconomic production at current (and expanding) rates.
At least in the context of market capitalism.
Well, yes. In the alternative context of Communism, no one had the slightest idea how much anything cost. That inured almost exclusively to the benefit of those sponging off of boondoggles - at the expense of everyone and everything else, including even the environment. Here, at least, we can get a rough idea of the costs and benefits.
No offense, intended, but if you are suggesting that the only options available are capitalism or communism, then that is really rather simple minded.
What I was referring to is an argument made by some here that while we should not pursue ethanol on a commercial level, their may be role for it in keeping farm equipment running. This would likely be done under some gov't sponsored program, or perhaps some sort of guild type arrangement where financial returns are secondary.
Although I tend to side with Rapier, Patzek, Hall, Pimentel et al. on the economics (and EROI) of ethanol as a large-scale replacement for petroleum, I think biofuels may have a very long future ahead of them on a small scale, even centuries longer than petroleum. It doesn't take any special government sponsorship or control to let a farmer grow his own fuel; indeed, that was the entire point of Rudolf Diesel's engine, and the reason that it ran on peanut oil.
BTW, Patzek also believes that a farmer growing his own fuel, on a micro scale, IS sustainable and appropriate...as long as it never leaves the immediate locality where it came from.
I believe that biodiesel and ethanol, at a small scale, will be with us for a very long time. They just won't help much with peak oil. For now though, they can give us a little more time to transition to an all-electric transportation regime.
I wonder how much of your land you would need to set aside to grow enough of your own ethanol or biodiesel. that would cut a lot of oil needed to farm. you take your corn to the local ethanol plant and next year you don't need oil for your tractors.
"I wonder how much of your land you would need to set aside to grow enough of your own ethanol or biodiesel. that would cut a lot of oil needed to farm. you take your corn to the local ethanol plant and next year you don't need oil for your tractors."
We currently "hobby farm" about 60 acres. I could provide a good years supply of bio-diesel for our needs with 10-15 acres of rape seed. However if you have a bad year, drought, locusts or whatever; you may not get that harvest and be in a bind for the following season.
If it where so easy...
How about supplying the fuel for the fertilizer production, transportation, herbicides, insecticides, miners for the steel on your tractor, Oil production for your tires etc, etc, etc...
Once you really crunch the numbers you would have to devote your whole farm plus 20%...
Ethanol is a bad joke.
If you used a horse instead of a tractor you would only require 1/3rd of your farm..
We cannot go back to horses there is no way we can go to ethanol...
> If you used a horse instead of a tractor you would only require 1/3rd of your farm..
Do you have a substantive reference for this data point?
I can't say when, but we will go back to using horses eventually, especially if we don't conserve fuel sources by planning the weaning away from the ridiculous squandering due to automobility, which is a twentieth century historical flash in the plan. The way things are going, I foresee a terrible crash with respect to work and transportation needs currently subsidized by oil and other energy resources.
We probably should be Planning the conservation and population growth of draft animals so that we will not be left stranded with only human power to run our farms and deliver our goods. Such planning should be in the context of a larger plan that will make demand-side management the keystone, that is rebuilding our 20th century suburbs to make them walkable. We need to build and stock economic/community centers in all neighborhoods where all residents can get the things we need within walking distance. Let's bring the goods and services to the people rather than all this wasteful shopping behavior.
The assumption of automobility is absurd within a historical perspective.
Corn is a great converter of sunlight that is being grown on some of the best land in the world and in some of the best weather. It is the grain of N. America.
On a small scale a farmer would never make ethanol to run his tractor.
Show me a link to a small farmer raising and making his tractor fuel.
Why would anyone believe that small-scale alcohol production would somehow be more efficient than large-scale, when all industrial wisdom teaches us the opposite?
who said efficiency was the concern?
You are right - as long as transportation costs are a relatively minor factor. Once motor fuel becomes really expensive, subtracting out the round trip from farm to processing plant to farm might be enough to offset those economies of scale.
Unless I am very much mis-informed, most tractors run on diesel, not gasoline. Thus, it would be biodiesel, not ethanol, that farmers would need to produce to fuel their equipment. If they do have any gasoline-powered equipment, I am pretty sure that diesel-powered alternatives exist. Farmers would be well advised to ditch their gasoline-powered equipment and switch to diesel, as they will undoubtedly realize some fuel economies, and leave better options open for themselves in the future.
I think because of the high octane content of ethanol it could be used as a diesel engine fuel with some modifications.
"I wonder how much of your land you would need to set aside to grow enough of your own ethanol or biodiesel."
Less than the land needed to feed oxen or horses for the same work.
We worked through this on a series of posts last summer. The best I could determine, working with sunflowers one could probably produce enough biodiesel to power typical temperate-zone farm machinery with possibly around 5-10% of total cultivated acreage. I selected sunflowers because they have better oil yield than soybeans; while they yield a little lower than rapeseed, they are much easier for farmers across a broader area without previous experience with them to start growing. If need be, sunflowers could even be planted and harvested by hand, and the seeds could be pressed by hand. To my way of thinking, sunflowers thus are a good candidate for low-tech, alternative technology applications. To me, they were an answer to the question: How will the farmers keep their tractors running if there is no more oil? It is not the only possible answer, perhaps not even the best one. But I am reasonably satisfied that it is a feasible answer, and good enough of an answer that I need not stay awake at night worrying about how the tractors will stay fueled and running.
Obviously, we need a new economic paradigm other than the so-called free market Capitalism and the Communism of the so-called Soviet Union.
It is my considered opinion that we need a Planned Economy, peacefully arisng from the bottom up, to succesfully transition to a sustainable, equitable, peaceful world. To implement such an economic democracy, we need to get consensus on the basic principles that would guide our efforts.
I have identified the following principles as an effort to reach such consensus:
-ecology
-sustainability
-cooperation (economic democracy)
-equity
-community stewardship
-neighborhood improvement
-quality of life
-conservation
-peace and tranquility
-sufficiency
-production and access to essential goods and services (moving toward relocalization)
-primacy of the pedestrian/walkability/new urbanism
-economy and humanity of scale
-risk diversification
-life long education.
I invite questions and discussion.
Let me offer the following perspective with respect to ethanol (and Biodiesel):
Bio-fuels are a limited alternative and only within the context of a much less energy intensive civilization, and much better if we could produce it with byproducts and waste products. And there are opportunity costs associated with liquors and soft drinks. Dealing directly with such issues would also go a long way toward reducing health and waste problems. And there are the opportunity costs associated with food (and byproduct) production relative to the tobacco industry.
Would like to get your feedback.
Mike Morin
katerimarie@netzero.net
Wouldn't one of your principles be "no waste". Waste is a human invented term. Consequently, there should be no waste products, with which to produce ethanol. Doing so, implies that there are some local products that can be considered expendable, in the context of local sustainability (i.e, it is not necessary to recycle those products to maintain the local eco-system). Local, micro, ethanol production can only be considered sustainable if the external inputs equal the "waste" heat from producing and using the ethanol.
I would put your concern with waste streams and all attempts to minimize such under the consideration "ecology".
Thanks for your response.
Mike - while your set of goals are (to me) laudable. You have skipped over the single step that prevents all such imagined worlds from coming in to being. Your statement that "we need to get consensus on the basic principles" is precisely where the problem comes in. Saying we need consensus is exactly right, but you skip over how that consensus is to be reached and launch into the goals you want as part of the solution.
The reality is that all of your goals are already extant in the world. We don't need to decide upon them. What is needed is for them to become more important that the goals for which there is already a consensus. The current economic system is the consensus or else it would not be in place. Yes, you can argue about individuals, corporations, governments, etc. having more say in defining that consensus, but isn't that just part of the way of how people work in groups?
Thanks Shaman for your feedback.
Aye, how to get consensus is the rub. I'm trying to start by writing on these website forums and e-mailing folks that have similar perspective with regards to the supply side (peak oil) and the demand side (smart "growth", new urbanism).
Of course, my work is building on the work of others. It is hard to find people with similar viewpoints that understand what I am writing. Everyone specializes and builds upon their unique knowledge base. Most people on this website are specialists related to the supply side issues. People on planning websites tend to be locked into status quo positions and don't see the big picture.
The current economic system is not a consensus system. It is a system favored by an elite who manipulate the thinking (i.e. dumbing down) of the majority. We have a Capitalist "democracy" where we have choices to vote for a Capitalist elite with or without abortions for gay couples. Seriously, although I am a green socialist, I strongly favor the Democrats.
Seven years ago there was a lot of good discussion on the Internet from socialists and greens. For whatever reason, these people have moved on to other things. Of course, even at its peak, these folks were a tiny minority.
Take a look at www.culturechange.org/Morin.html
My goals are a starting point. I'd love to see feedback on the priciples underlying a Plan for a sustainable and equitable world, especially from those who share my values (Earth Charter, Ten Key Values of the Green Party, Declaration of Interdependence, Principles of the International Cooperative Alliance, eight-fold path of Buddhism, etc.)
Help me get the word out. I certainly invite and welcome discussion about how we can move the agenda forward.
Thanks.
Mike
katerimarie@netzero.net
To me, the most amazing number was that after applying the DDGS credit, 14 pounds of corn is still consumed (as in "poof", gone) when producing a gallon of ethanol. That's just stunning.
The loss of mass could be CO2 released by the yeast during fermentation.
I am not so amazed to find that industrial monoculture corn would give these results. However, what could help the result might be to have an integrated farm. That way you could use the DDGS to feed your aquaculture fish. Then sell the fish to local restaurants or in a farmers market. Take the pond water that has a significant anount of fish fertilizer in it an irrigate your fields. If you don´t like aquaculture, then how about pigs. Screen the wet distillers grains ( save that drying cost ) and feed this at 20 to 30% ration to your pigs. Sell the pigs but use their manure to produce methane to fire your alcohol still. Use the waste heat from the still to warm your brewing mash. Then there is the wet side from your screened distillers grain. Take some of your corn stover and soak it in the hot solubles and grow mushrooms. Cut and sell the mushrooms and feed the mycelial mats to your pigs. At the end, take the digester solids and compost them into a nice slow release fertilizer to use on your fields. There is actually a lot more that you can do but I think you get the idea. This is just with corn. Imagine what you could do with fodder beets, sweet sorghum, or jerusalem artichokes on marginal land. Industrial monoculture cropping was invented to minimize labor not maximize total farm output.
Yes, I agree that number is a stunner. Imagine you have a car that gets 20 miles per gallon on ethanol (probably a car above current gasoline CAFE average). You drive 1 hour at 60 miles per hour and you just went thru 56 lbs of corn.
Drive all day for 10 hours and you've gone thru 560 lbs of corn.
Once Peak Oil hits I think the giant sucking sound of corn into ethanol is going to seriously deplete food supplies.
Here in Minnesota, most ethanol plants are farmer-owned cooperatives, so the farmer members are benefiting from the higher corn prices. When grain prices drop, then they benefit from higher margins on ethanol. And unlike oil, this money stays local and gets plowed back into the local economy. The 10% ethanol that is in my Minnesota gas mix is going into the local economy, the other 90% leaves. If tight profit margins were a justification for quitting the business, then oil refiners should quit also. Their economics are even worse now than ethanol plants. But don't worry, gas will be $4.00 a gallon this summer, and profitability will return.
Please note that spot prices are not local prices. Local prices are always lower, since cost of shipping to a major port is deducted from the Chicago Board of Trade price. Ethanol plants also contract for grain ahead of time and are not dependent on the spot market.
I don't think any commercial operation with such a small margin would be able to survive long term - a slight upward movement of input costs and they are broke. I am also doubtful whether ethanol refiners are able to receive NG at wholesale prices ($8 MMBTU) or they need to pay premiums to the NG distributors - generally ethanol refineries are in remote places.
But you are not correct with coming up with $3/gallon gasoline reference cost - blenders are receiving 51c/gallon subsidy for ethanol, which reduces the cost down to $2.25/gallon ($3 - 0.51/0.68). Incidently the spot price of gasoline in this very moment is $2.24... explaining what exactly is it that makes corn ethanol afloat (though barely).
But you are not correct with coming up with $3/gallon gasoline reference cost - blenders are receiving 51c/gallon subsidy for ethanol
I am looking at true production costs - not the government adjusted cost. But that does highlight exactly why the subsidies won't be going away any time soon. I can't see an end to this subsidized nightmare.
This is of course the direct cost of ethanol.
As Stuart points out, the pressure of increased corn production drives food prices up. Because of the inelasticity of food demand, I would expect that the true cost of ethanol would be more than double, if we could capture the change in food prices resulting from the increased production of corn, and add it to the ethanol cost. This is just a guess though - I haven't done the exercise.
I would also note that at this point, in the US ethanol mostly replaces MTBE, at least in terms of quantity. MTBE was about 300,000 barrels per day in 2000; ethanol was about 100,000 barrels per day. Now, with the big ramp-up of ethanol, US ethanol is a little over 400,000 barrels per day. MTBE is way down, or nil.
MTBE was made from natural gas, and was relatively cheap. We are replacing one relatively cheap US made product (MTBE) with a much more expensive US produced product (ethanol). The more expensive one requires imports of fertilizer and oil. At least so far, it is hard to see much of an economic benefit from this arrangement.
We have only begun to count the indirect costs and unintended consequences of corn ethanol:
http://www.sciencedaily.com/releases/2008/01/080122102428.htm
"Distillers' Grain In Cattle Feed May Contribute To E. Coli Infection"
Feeding cattle distiller's grain might seem like a great idea, but so did putting sheep offal in the feed back in the eighties.
I wonder if the same thing would happen if you feed the cattle grass or some other cellulosic material and then supplimented with DDGS. This study seems to be feed the cattle corn, then more corn then yeast digested corn. After all of that I would expect to see problems if not with e coli then with bloat.
E. coli O157:H7 is endemic in ruminants, which tolerate it without negative impacts to themselves. This form of E. coli is a serious problem for humans and is not limited to distillers grains fed cattle. Ironically, a straight corn diet reduces the concentration of E. coli O157:H7 in feedlot cattle guts, however, since cattle have an abysmal grain-to-meat EROI, not feeding distillers grains, which produce more unit weight gain than grain corn, would result in a higher corn consumption for feed than ethanol production.
The answer to E. coli O157:H7 contamination appears to lie in handling of carcases during processing, and especially the use of steam treatment which will not cook the meat, but kill the bacteria.
Another problem is the spreading of untreated manure on fields. E. coli O157:H7 can survive long periods under extreme climate conditions. Running all manure through anaerobic methane digestion would be a solution.
Wasn't the move away from MTBE driven by environmental concerns? So maybe the economic benefits of ethanol are secondary.
For example, see this rather old EPA infosheet: http://www.epa.gov/mtbe/water.htm
I find it interesting that we used 300,000 barrels/day of a chemical, but still hadn't done the research to find out what it would do to the environment.
Call me old fashioned, but I think "pure" ground water is important.
MTBE made the groundwater taste bad and attracted lawsuits, since it seems to be carcinogenic. Ethanol biodegrades, but doesn't seem to be as good as MTBE in some other respects.
It is not clear that an oxygenate is need any more. This is a link Robert Rapier posted in a comment to one of my articles, indicating that it is likely not needed.
One function of an oxygenate is to reduce tailpipe emissions. Cars built since 1994 are very good in this regard, and it is not clear that an oxygenate does much.
The other function is to increase octane. There are other ways to increase octane. It might be that they are more expensive, though.
The changed price of food is not IMO a legitimate systems level cost. The higher cost means that more money from consumers is going to farmers, i.e. it is a transfer of wealth, as opposed to a destruction of wealth.
I thought MTBE was being phased out because it had destructive (toxic?) effects on groundwater. Ethanol replacing an relatively low volume additive may make sense, whereas using it for its energy content does not.
MTBE is a teratogen. It causes cancer. It doesn't matter how cheap it was to produce. It's social costs in time would exceed its utility.
Corn ethanol's role right now is as an oxygenator for gasoline, a federally mandated requirement. You're all welcome to put your heads together and come up with a better oxygenator, one that isn't cancer causing. In the meantime, corn ethanol will continue to fill that function.
It's probably worth mentioning again, that if you want ethanol and have a supply of petroleum, the simplest route is to crack the petroleum to ethylene and then hydrate the ethylene. It saves all those messy fermentation and distillation steps, and I'm not so sure the biological route gives any better yield per barrel of oil.
I don't a see a line on page 16 for ethanol collection. As there are currently no ethanol-collection pipes running from the distilleries the finished product must be trucked to the distribution system at a cost in fuel, equipment, and amortized maintenance. I don't believe I've ever seen this important infrastructure cost itemized in various energy accounting (i.e.Pimentel,Shapouri). I've also never seen more than a cursory recognition that DDGS handling also cost money and fuel. Is it any wonder that the dog has come home to bite us?
Thermodynamics does trump economics every time. It should be very apparent now why the American farmer, the richest and smartest in the world, had not previous