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DAVID KRUSE

By Staff | Dec 4, 2009

While there is lots of hype about the bright future of cellulosic ethanol, unless the Federal government finances the industry, it is just all talk. Corn-based ethanol has become politically incorrect. Even President Obama, who supported corn-based ethanol as an Illinois senator and when winning the Iowa presidential primary, makes a distinction today when talking ethanol that he supports second generation, or cellulosic ethanol. Obama purposefully omitting any mention of the corn-based kind.

As Ethanol Monitor editor, Tom Waterman put it, “It’s not politically correct for mainstream politicians outside of the Midwest to defend corn-based ethanol anymore. This is a result of public relations war waged against the ethanol industry – a war that was lost about a year ago.

It began with outdated studies, followed up with more outdated studies and the invention of indirect land use changes, publicized by the Grocery Manufacturers Association, in league with major oil companies – all of whom have a horse in the race.

Ethanol threatens gasoline demand and corn prices that have the audacity to move above production costs trim the profits of big food suppliers – particularly those that raise chickens.”

That’s why POET’s CEO Jeff Broin formed Growth Energy, to fight back. However, if someone announced to the world that you were a pedophile, even after you were proven totally innocent of all the charges, no politician is going to stand next to you.

The corn-based ethanol industry will have great difficulty getting its reputation back. Cellulosic ethanol is their imaginary green friend whom they talk about like it really exists. While a few cellulosic projects are producing small amounts, the cellulosic ethanol industry is a concept and that’s all.

The idea that all the farmers in surrounding counties will harvest and deliver all their corn cobs to POET for $55/ton is part of the illusion. Now I get it.

I was wondering how POET was ever going to get farmers to bring them corn cobs necessary for cellulosic ethanol feedstock for $55/ton. At 1 ton/per acre, the cost of separating and delivering cobs didn’t look profitable to me. Now I read where USDA would co-pay farmers up to $45/ton for cobs going to cellulosic ethanol production.

At $100/ton, then it starts to get interesting. How sure is that $45/ton from USDA? The government will have to subsidize the cost of the cob harvest to acquire any substantial supply from farmers.

I’ve strongly maintained that if the corn-based ethanol industry was not financially successful, there would never be a successful cellulosic industry. Too many politicians and “experts” think they can trash the corn-based ethanol industry and somehow still see a cellulosic industry develop. That’s delusional.

Government policy detracting from the success of the corn-based ethanol industry will abort the development of the cellulosic industry, unless of course, the government plans to entirely capitalize it.

Investors burnt by corn-based ethanol investment will not capitalize the cellulosic industry. If the government fails to keep promises to the corn-based ethanol industry, why would anyone believe anything they say when claiming to support cellulosic ethanol?

Start up cellulosic companies asking for loan guarantees so far haven’t gotten them. Industry officials say, “The department’s rules make it almost impossible for biofuels producers to qualify. For example, they say applicants need to have long-term contracts in hand from a buyer for their fuel. They’re looking for long-term contracts, which do not exist.”

The Environmental Protection Agency mandate for cellulosic fuel is soft. There is a 100 million gallon mandate next year and 20 million gallons may be produced. The 250 mg in 2011 and 500 mg in 2012 mandates are optimistic relative to the slow development occurring today. The only ones attempting to develop cellulosic ethanol today are companies looking to cash the government’s grant checks.

If a significant cellulosic industry really did begin to develop, the pass that is now being given it by oil companies, would come to an end. The petroleum industry doesn’t want that much ethanol production in this country cutting into their market share. Right now they have both barrels of their misinformation artillery pointed at corn based ethanol. At some point if the cellulosic ethanol industry looks like it will actually grow into something meaningful the petroleum industry will see it as a threat to their market share and attack. They won’t waste ammunition on it yet.

The right way to develop the cellulosic ethanol industry was to fully support the corn-based ethanol industry so those plants and companies would be profitable enough reaching the 15 billion gallon corn-based ethanol standard to have the cash to invest in the cellulosic ethanol industry.

POET’s concept of producing both corn and cellulosic ethanol from the same plant is the right model. I believe they have likely killed the cellulosic industry when the support for corn-based ethanol faded away. The strength of the commitment made to the ethanol industry by the Obama administration will come in the EPA’s decision whether to raise the blend limits from 10 percent to 15 percent, expected soon.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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