Week of July 27

World Bank biofuels report is a bombshell for the industry…NYMEX sets up a carbon exchange…a new synthetic jet fuel…more on miracle fuel crops

Some weeks ago we reported on an economic study sponsored by the World Bank which attempted to demonstrate that elevated food prices owed much to the expansion of the biofuels industry. That study's findings were only made public because a leaked draft copy had somehow found its way into the hands of some writers for the Guardian. Those writers, incidentally, only reported the conclusions, not the details of the analysis.

Now, however, the document has been published in final form, and is available for scrutiny. Given the prestige, power, and importance of the issuing institution and inevitable impact on the biofuels industry, I believe that it is worthy of careful perusal by all biofuels stakeholders.

The report, at just over twenty pages, is succinct, and is entitled simply "A Note on Rising Food Prices". The author is an economist named Donald Mitchell who works for the Development Prospects Group of the World Bank.

No doubt trade groups like the Renewable Fuels Association will attempt to dismiss the findings as nonsense and will probably launch fierce ad hominem attacks against the author as well as other officials of the World Bank. Still, the arguments advanced by Mitchell seem plausible if perhaps not powerfully persuasive.

Mitchell believes that biofuel production accounts for roughly 75% of the recent increases in food prices, a figure disputed by grain ethanol advocacy groups. While acknowledging correctly that volumes of crops devoted to fuel production are miniscule compared to the amounts consumed as food, he cites a number of indirect impacts from the rather sudden surge in biofuel production, including significant reallocation of land devoted to wheat farming to soy bean cultivation, the bidding up of crop prices by biofuels producers whose government subsidies enable them to pay high prices for feedstocks, an increase in the purchase of crop futures as financial hedges in the face of rising food prices and a declining dollar, and the sudden panic imposition of export restrictions on the agricultural outputs of certain developing nations and the consequent steep rise in prices as substantial producers abruptly withdraw from the world agricultural economy. Mitchell is essentially positing a trigger effect, and saying in effect that a relatively small imbalance in supply occasioned by the entry of new and well financed players into the agricultural marketplace is sufficient to create a runaway bull market for the commodities themselves to the acute disadvantage of the masses of the poor in developing countries who must inevitably lose a bidding war for agricultural commodities.

As Mitchell himself notes in his study, his conclusions are not all that controversial among economists though the latter scarcely express a consensus on the matter. Where they are controversial is among farmers. Although the demand for ethanol as a fuel additive is being satisfied, the demand for some replacement fuel for refined petroleum products isn't close to being met by the biofuels sector and may never be. Nothing can be better for a producer than serving a market marked by perpetual scarcity, and, so not surprisingly, grain farmers love ethanol.

Mitchell further states that purchases of corn by ethanol producers rose by 36% last year, while the use of corn for animal feed actually declined. Hes sees no other explanation for rising corn prices other than sharply increased ethanol production.

Interestingly, Mitchell attributes the rise in rice prices to biofuel production even though practically no rice is used as a feedstock today. His explanation is that as soy has displaced wheat, rice growers in India took their rice off the world market to protect India's own food security. This resulted in sharp increases in rice prices elsewhere, and indeed to food riots in several countries.

NYMEX Announces the Commencement of Carbon Trades

The New York Mercantile Exchange, which trades agricultural and oil futures, will now function as a carbon exchange, a seminal development in carbon finance in the U.S. NYMEX will trade carbon futures under the auspices of the Regional Greenhouse Gas Initiative, a mandatory carbon cap initiative endorsed by several states in the Northeast. This will be the first market to operate in the United States based on mandatory carbon limits and will replicate Europe's mandatory carbon market which has been operating for years.

A New Synthetic Jet Fuel

The U.S. Naval Air Warfare Center Weapons Division in China Lake, California, announced the development of an efficient process for synthesizing hydrocarbon based jet fuels from butanol, a four carbon alcohol. Butanol production technologies, particularly those utilizing cellulosic feedstocks, are being extensively researched at present, but to date no one has demonstrated a cost effective production method, and so the Naval Air Warfare Center's innovation may not be particularly significant. Butanol, incidentally, is generally thought to be an excellent substitute for gasoline, much better than ethanol, but adverse economics have so far prevented the emergence of a butanol fuel industry.

More News on Fuel Crops

Algae still seems to be getting most of the attention as a fuel crop, and a miracle fuel crop at that according to the claims of its advocates, but last week I received bulletins announcing experimental breeding programs for sweet sorghum and Miscanthus. Miscanthus, also known as elephant grass, can grow literally as high as an elephant's eye on the plains of northern India, and is the Old World's answer to switchgrass. Yields per acre would appear to be greater than for switchgrass which may spark mass defections from everyone's favorite feedstock panacea, who knows? In any event, my analysis of grasses based on published studies from agricultural colleges leads me to believe that they produce yields cellulosic biomass that are relatively paltry on a per acre basis, and that their sole advantage is their hardiness and limited water requirements.

Sweet sorghum has been the next big thing in ethanol feedstocks for several years now. Sweet sorghum is a wild grass which, like sugar cane, produces copious amounts of sugars which may be easily fermented into ethanol. Sweet sorghum is grown in many parts of the world, including the lower forty-eight states, and the plant endures cold much better than cane though it is not immune to hard frosts. Proponents like to talk about four crops per year grown on marginal land, but in most of the U.S. one or at most two crops are the limit, and total tonnage of biomass per acre per crop is apt to be under fifty per year, less than half the yield of cane in favorable tropical settings.

Harvesting sugar from sorghum is a more energy intensive process than extracting it from sugar cane, and since the yield per acre is generally less, the economics are relatively poor. Also, one faces the problem of having to process the juice immediately—it can't be stored for any length of time. To its advantage, sorghum is a tough plant which doesn't require much water and which is notably pest resistant. It grows best in sub-Saharan Africa, however, not in temperate climates.

As I have indicated elsewhere in this publication, there are no miracle crops, only miracle farmers. Some crops are certainly better than others as fuel feedstocks, but achieving long term sustainability always imposes limits on yields.