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Ethanol's Future in Iowa

posted on October 30, 2007 at 11:53 AM

Monte Shaw is the Executive Director of the Iowa Renewable Fuels Association. As such he is not only the advocate for ethanol but other sources as well.

Yepsen: Monte, welcome. Thanks for being with us.

Shaw: Glad to be here.

Yepsen: John Pappajohn, when he speaks, Iowans listen. His decision not to invest in ethanol has to be a downer for you and your industry.

Shaw: Well, you know, on one hand yes but on another hand no. His decision to pull back is largely the result of the Wall Street investors pulling back. That was how -- he was going to wrap his plants together and then go public and bring Wall Street money in. A lot of Wall Street money flowed into the industry last year and kind of created the supply bubble that we’re dealing with today. Now the Wall Street money is pulling back. That’s not necessarily a bad thing for the overall competitiveness and profitability of the industry. You know, the backbone of this industry is still the locally-owned, farmer-owned ethanol plant, not what wall street does.

Yepsen: How do you deal with that supply glut?

Shaw: Unfortunately, for us, we’ve been through this before. We’ve survived a lot of ups and downs in the industry, and we’ll survive this one. It doesn’t mean there won’t be bumps in the road. Ethanol is now a dollar a gallon cheaper than gasoline, so we are moving into some new markets. What’s frustrating is there’s a lot of markets right here in the Midwest where the infrastructure is all in place. The terminals can blend it. They can store it. They have all that equipment in places like Nebraska and Missouri and Kansas, and you’re still barreling half the gasoline. So what that tells us is, while we can in essence buy our way into some markets, that federal policy that was referenced is important, because a lot of oil companies are willing to not use ethanol, even when it’s a dollar a gallon cheaper. That’s 10 cents per gallon at the pump at our 10-percent blend.

Yepsen: Let’s cut through some of the spin, Monte. Why can’t this industry make it without federal subsidies and federal mandates? At what point does the independent Iowa producer start making it on his own?

Shaw: Well, it goes back to what I just said. Right now -- they said, well, if you were just cost competitive, we’d use you. Well, right now -- now, obviously there are some government incentives involved, but right now that oil company can purchase ethanol for a dollar a gallon cheaper than they can purchase gasoline, and they still won’t use us. So we’re in a unique position where our customer is also our competitor, and in that situation, if the government wants to move in a renewable way to help our energy security, to help the environment, to help rural economic development, then it’s going to have to provide either an incentive or, like the renewable fuel standard, quite frankly, a requirement, because the oil companies have shown they will ignore bargains, they will ignore what we would think of as kind of economics 101.

Yepsen: Why can’t you make it without tariffs on foreign ethanol?

Shaw: You know, that’s an issue that gets so much attention and it’s such a small part of the marketplace. Right now there is a loophole that allows a lot of ethanol to come through the Caribbean base and then some other countries duty-free, and they don’t use it all. If there was such a demand for imported ethanol, we’d be maxing out that program. They don’t even max out the duty-free imports that are available under current law. It’s really about the taxpayer money, because that imported ethanol still gets the blender’s tax incentive. So when Exxon-Mobil brings up Brazilian ethanol and they blend it, they still get that blender’s incentive, the 51 cents, from the federal government. So in essence, you’d be exporting that 51 cents to Brazil. So the tariff is a lot more about protecting the U.S. taxpayer’s wallet than it is about the U.S. ethanol industry. We had record imports last year, and we did fine.

Yepsen: But isn’t it – isn’t the conversion rate on sugar cane from Brazil – we’ve got ethanol made from sugar cane – better than when it’s made from corn?

Shaw: We can’t grow sugar cane here. All across the world, people are going to use the crops that are the most cost effective in their environments and their climates, and for us it’s corn.

In Hawaii and some places in Louisiana, we probably will use some sugar cane. In Brazil, they can grow sugar cane. They say it’s a lot cheaper, but you have to remember now that it’s getting worldwide attention, the focus is being put on Brazil’s practices. They have basically near-slave labor to harvest the sugar cane. That’s something we certainly don’t do in the United States.

Then they burn the DDGs. On the one hand that’s good. They’re using a renewable resource to power the ethanol refineries, but if we burned the corn stove the same way they burned the DDGs, we’d never be allowed to under our clean air act.

So is it cheaper today for Brazilian ethanol? A little bit. But if you factored in some of the labor practices and environmental practices they use, we’re not allowed to do that. So it kind of depends on what you want to go with there.

Yepsen: Monte, I’ve got to tell you, that sounds protectionist. I mean it just sounds like you’re using taxpayer and these labor standards as just something to quit being a free trader.

Shaw: Well, like I said, there is a loophole that would allow up to 7 percent of our consumption to come in duty-free from the Caribbean based countries, and they’re not importing 7 percent today. So I don’t think it’s limiting supply in the United States.

Yepsen: All right. What about cellulosic ethanol? We keep hearing that the great saving thing is going to be when we can make this stuff from something other than corn. How long is that going to be.

Shaw: You know, there’s a lot of people that think it’s right around the corner, two to three years. I tend to think it might be eight to ten years apart. Ask me in a couple of decades, and I’ll tell you the right answer. But it is coming and there’s two reasons it’s coming.

The cost to produce -- we can do it. I mean we know how to do it. The question is can we do it cost effectively, and the cost to produce cellulosic ethanol from, like, a perennial grass or a fast growing tree or even corn stalks, that cost is coming down. There have been a lot of advances.

At the same time we’re also not trying to compete with $20-a-barrel oil anymore. I mean we’re talking about $90-a-barrel oil, so that makes the cost competitiveness a little bit closer than it would have a few years ago.

I think it will happen. I think it will be a great boon and will allow for a lot more geographic disbursement. But I also think you have to remember that in Iowa, we're not going to stop planting row crops, which provide both food and fuel, to put in switch grass.

We may do it on CRP acres or in southern Iowa where you have some land that isn't as good for corn or things like that. But corn is still going to be the backbone of the ethanol industry here for a long time.

Yepsen: It may be $100 barrel oil before long.

Shaw: By the time this airs, it might be.

Yepsen: What is all this ethanol production doing to our water supplies? I hear a lot of Iowans are concerned -- we've got a pretty good water supply and the ethanol industry is just sucking those aquifers dry.

Shaw: You know, you hear that and you hear that and you read stories about it, and yet go ask Bob Libra, the state geologist who says we need to get better handle on our aquifers. And I say is ethanol causing the aquifers to go dry, and he'll say no. Consider this, the DNR -- we all have to get a permit to suck water out of an aquifer.

Out of all the water uses that are permitted in the state of Iowa, industrial groundwater permits make up only 4 percent of the total gallons, and the ethanol plants are a subset of that, because there's lots of other industries that also suck water of the aquifers. So if we're less than 4 percent of all the water use in Iowa, it's awful hard to blame -- to blame us -- there's not been a single proven case where we've hurt an aquifer.

Let me add one more thing. No one wants to site a plant more carefully than we do. A hundred million gallon a year ethanol plant today will cost over $200 million to build, and you have to have water to turn a solid into a liquid.

If three years after we build that plant your well goes dry, you've lost $200 million. You're probably going to be sued by your stockholders and go to jail. So no one wants to make sure we're in a sustainable water situation more so than the people who are putting that $200 million on the line.

Yepsen: What about the argument that these plants that are being built in Iowa are too small, that they're really dinky and that in the future we're going to have bigger plants?

Shaw: You know, we've looked at that and actually most of the people agree with current technology, that somewhere between 100- and 150 million gallons a year, the benefits you get from the economies of scale start to be offset by the increased cost of pulling corn in from wider and wider areas or, if you buy it all locally, the price escalating more. So actually there's a balancing act there that I think will make it so that we don't need these bigger and bigger plants.

The difference is two decades from now, because of the projection in core yields per acre, maybe you can double that hundred million gallon a year plant to 200 million gallons a year and you'd still be pulling from the same acres because we'll be growing twice as much corn.

Yepsen: Why don't you build ethanol plants closer to where people want to use them? One of the big problems with your industry – the ethanol industry is that this stuff evaporates, it corrodes, it's hard to transport. So if the markets are elsewhere, why aren't you building these plants closer to the marketplace and shipping the corn to them?

Shaw: You know, some plants are now doing that. They're called destination plants and there's a couple of them being built in California. There's one being built in New York. They really haven't been up long enough for us to know.

And in that theory, you ship the corn and you process it there to create the ethanol and the distillers' grains. And really for those to be successful, people think you have to be -- the three C's of ethanol: corn, cars, and cows. You need to be near either corn or, in theory, cars and cows. So we'll see if that makes sense.

For Iowa’s perspective, I’d like to see no corn leave the state without having value added to it because it's going to be better for our state. In terms of better for the overall economy, maybe it's a mixture of those two, but it's not like you don’t have to transport something. You still have to transport the corn. Right now we can continue to grow our livestock industry, we can transport the finished product, and add the value here.

Yepsen: What do you say about the question of the morality of using food to make fuel as opposed to using it as food? We know it's raised the price of food. What do you say about that? Why is this a good idea to do that?

Shaw: Well, ethanol production has absolutely raised the price -- helped raise the price of corn. There’s other factors as well. It's actually a pretty small impact on food because only about 15 to 18 percent of what you pay at the store for a food product has anything to do with what that farmer got paid for the corn. All of the packaging and processing and transportation and read that as oil, oil, oil that goes into it actually has a much bigger impact. I don't think there's a conflict here.

We're producing more ethanol than ever before with all these new plants coming on line. And yet because the American farmer stepped up and produced more corn, we're going to have more carryover, more corn left over at the end of this year than we had at the end of last year.

So the farmers are stepping up. The world marketplace is stepping up. The other thing that people forget that's very important is we only use the starch out of the corn. Let's face it, the cows don't need any more starch in their diet any more than you or I do, David. And so all the feed products still go back into the feed markets as distillers grain.

Yepsen: We'll talk about the cows for just a moment. Are there impediments to the development of the livestock industry that hurts the ability of your industry to sell this leftover fuel?

Shaw: Well, we'd like to sell more of it locally because then you don't have to dry it, which takes a lot of energy, and you can sell it – it’s called wet distillers. Iowa does have some rules limiting the size of cattle herds in one location that make it -- that do hurt it competitively versus areas like California and Texas. But we are seeing increased cattle numbers in Iowa. And in fact, Iowa State will tell you that Iowa is right now the most cost effective place to raise beef cattle, even better than Texas. Distillers grains has actually reversed that trend, so we're hoping that we will see more cattle and other livestock come into Iowa.

Yepsen: But are there impediments that the state has to the development of the beef cattle industry that need to be eliminated for your industry to do that?

Shaw: You know, I don't claim to be an expert on that. I let the livestock groups do that. But we certainly need to understand that livestock can be good neighbors and it helps create that synergy where we can make more efficient -- more energy efficient ethanol if we don't have to dry the distillers' grains, and that means more livestock in Iowa.

Yepsen: I'm told that ethanol only will ever replace about 5 percent of the gasoline used in this country; is that right?

Shaw: No, I think that's completely wrong. First of all, it takes a very static look at ethanol. Now, next year that's a different story. But if simply take the trend line for corn yield increases. And extrapolate it out to 2030 and forget the fact that pioneer and MonSanto say, hey, that yield line is going to go much higher because of the all the new genetics, but just take the ten-year average and extrapolate it out to 2030, we'll have a 20-billion bushel corn crop. That's 30 billion bushels -- excuse me, 30 billion gallons of ethanol just from cornstarch and no cellulose.

Yepsen: But with oil approaching $100 a barrel and maybe higher in ten years, wouldn't it be better for this country to put its emphasis on conservation right now rather than make this bet on cellulosic ethanol, which you just got through saying you don't know when it's going to come on line?

Shaw: I think it should be both because, think about it, if we improve our economy -- the economy, the efficiency of our transportation system, then that 30 billion gallons of starch-based ethanol plus whatever we do from cellulose is just that much bigger piece of the pie. I don't think ethanol is going to be a silver bullet, but if you start combining these things, it actually makes -- increasing the efficiency of our automobile fleet actually makes biofuels a better deal to invest in. So we shouldn't choose one or the other. We should pursue both.

Yepsen: We've only got about 30 seconds left, Monte. What do you want the governor and the legislature to do to help foster this industry?

Shaw: I think there's some things we can do to move to the next level of higher blends. We need to really put our focus on E85 on the ethanol side because we're using a lot of E10. We also need to look at intermediate blends like an E15 or E20, meaning 15 or 20 percent ethanol, for regular cars. We're going to be talking to the governor's office about going to the EPA and saying, hey, let us try this out in Iowa.

Yepsen: That's a mandate.

Shaw: It wouldn't be a mandate in this case. We'd be just saying allow it to happen, allow it to use, and then that way we can use more of the ethanol in regular cars.

Tags: biofuels ethanol future Iowa renewable fuels