The Future is Cellulosic
It is now widely accepted that
the future of ethanol is cellulosic: Rather than distilling corn for ethanol
to fuel our cars, accepted wisdom is now that we will be able to replace a large
fraction of our current fuel consumption with ethanol distilled from agricultural
and forestry
waste, as well as dedicated energy crops, such as switchgrass
and hybrid
poplar. Cellulosic ethanol also has the potential to alleviate the
greatest stumbling block of corn ethanol as a potential replacement of gasoline:
that there is simply not enough of it. Corn ethanol will only be able to
displace a small percentage of total US gas consumption. If
the entire current US corn crop were converted into ethanol, it could replace
less than 20% of current gasoline consumption. More realistically, the
National Renewable Energy Laboratory (NREL) projects
that 4% of gasoline could be replaced without overly affecting corn
prices.
Recently, cellulosic ethanol has been much in the news. POET
recently announced that they were producing cellulosic ethanol from corn cobs
and the fiber in corn kernels, while FPL
Energy LLC signed a deal with Citrus Energy to develop a biorefinery to make
ethanol from citrus waste. Both of these plants avoid one of the
biggest hurdles that cellulosic ethanol still has to overcome: the distributed
and varied nature of potential cellulosic feedstocks. POET will be working
with waste that would otherwise have to be disposed of, while the FPL/Citrus Energy plant
uses a citrus processing waste which "is available at the plant at no cost
[and] with no transportation costs."
In addition to cellulosic's transportation Achilles Heel, these two projects
also show how far we are from tackling the true scale of the problem: POET's
plant will deliver 27%
more ethanol from an acre of corn, while the "ethanol from citrus peel
could... replace about 1% of Florida's gasoline production." So if
these two technologies were to be scaled up to use the entire US corn crop and
all available citrus processing waste, we still could replace less than 6% of US
gasoline usage with ethanol from these sources.
The Size of the Problem. Source:
National Renewable Energy Laboratory
The limited supply of agricultural and forestry waste is why cellulosic visionaries often look farther a field, to other
sources of agricultural waste in addition to corn cobs and citrus, as well as to
dedicated energy crops. NREL estimates that while we can produce about 0.3
billion barrels (oil equivalent) of ethanol from corn, the biochemical
conversion of inedible carbohydrate would be able to supply 1.1 billion
barrels of oil equivalent, or about 17% of current oil consumption.
Using Non-food crops
This leads inevitably to talk of switchgrass, and other "energy
crops." If land which is not currently considered suitable for
conventional agriculture can be used to produce high-energy content feedstock
for our ethanol plants, we will have a source of supply of fuel for our vehicles
that does not impinge on our food supply. One much discussed option is using
Conservation Reserve Parcel (CRP) land to grow highly
productive perennial grasses such as switchgrass and miscanthus.
While miscanthus seems to be more productive than switchgrass, switchgrass has
the benefit of incumbency: many
of the existing CRP parcels are already planted with swithgrass, a North
American native. Another contender is a
diverse mix of native prairie plants, which has more than twice the energy yield
of any native monoculture.
Before we can move to a system of growing energy crops, and transporting
those crops to cellulosic ethanol plants, we first have to find a process of
breaking down cellulose into something that can be easily fermented into
fuel. We can already accomplish this, but the
sticking point remains cost.
DOE Cellulosic cost goals. When I first saw this
slide, I asked an NREL spokesman why they assume that the price of feed will drop
to $34 per ton. He replied that they had to in order to achieve DOE's cost
targets.
There has been considerable progress in reducing the cost of conversion and
enzymes. One interesting pathway being explored is to adapt natural
systems, such as enzymes from the guts
of termites, or to use fungi
to help break down resistant cellulosic material.
Let Cows Eat Grass
Cows evolved to eat grass, including proposed energy crops such as
switchgrass, which is already used
as forage for livestock, and the more productive mixed prairie plants
(including grasses.) We don't have to wait until the technology for
converting grass into ethanol becomes economic to use grass to increase ethanol
production: Instead, all we need to do is to supply the grass to the cattle, and
use the corn that they would have eaten instead to produce ethanol.
Feedlot operators will doubtless protest at the massive logistical problems
of bringing hay, rather than corn, to feedlots where cattle are fattened.
However, these logistical problems seem to me to be on the same order of magnitude as
supplying that same grass to cellulosic ethanol plants, if it is too much to ask
of the cattle industry to let the cattle "harvest" the grass
themselves by grazing.
How much ethanol could we gain by shifting cattle feed to ethanol
production? In
the 2005/6 season, 6.1 billion bushels of corn was used for animal feed, about
1.8 billion bushels of which went to feed cattle, compared to 1.6 billion
bushels used to make ethanol. Hence, we could double ethanol
production by using corn currently fed to cattle. And, since distiller's
grains, a byproduct of ethanol production is usually fed to cattle, not all of
the current feed corn would have to be replaced with hay to do so.
In addition to the logistical problems of getting hay to feedlots, beef
producers have other objections to "finishing" cattle on grass.
First, corn-fed cattle can be fattened much more quickly than grass fed cattle
(by as much as a year.) In addition, corn
feeding produces a juicer steak with more marbling than grass feeding.
Offsetting these advantages of grain fed cattle are the health advantages of
grass fed cattle. Grass fed cattle have much higher concentrations of CLA and Omega-3 fatty
acids. While the health benefits of CLA have only been demonstrated
in animals to date, the American Heart Association says Omega-3 fatty acids benefit
the heart of healthy people, and those at high risk of — or who have — cardiovascular
disease. These are the fatty acids for which wild fish
are prized, and which some believe may
be able to cure a wide variety of ills.
Finally, the same arguments
that are made against corn based ethanol apply equally well to corn-fed
beef, because they are essentially arguments against using corn, rather than
against making ethanol. For instance, the fossil energy used to grow corn
is the same, regardless of use, and so this fossil energy is consumed equally if
it goes into our cars or into our cows. I have not done the calculations,
but I expect that much of the benefit
in terms of our personal carbon footprint which might be gained by giving up
beef altogether might also be gained by eating grass-fed beef.
According to a recent
Japanese study, over two-thirds of the energy in beef production goes
towards producing and transporting the animals' feed. Just as the
feedstock for ethanol has a large effect on its energy balance, so does the feed
of the cattle we eat.
There may be other benefits as well, such as fewer
dangerous E-Coli outbreaks. The strain of E-Coli which put most of us
off spinach last year only
grows in the guts of grain-fed cattle, not grass fed ones.
How it Might Happen
Rising corn prices are already making
it less economical to feed corn to cattle. Clearly, we are not going
to see 1.8 billion bushels of corn a year diverted from cattle feed to ethanol
overnight, but the changing economics are likely already having an effect.
As it becomes more expensive to feed cattle, a rational owner will look for
alternatives, and grass will surely be one of these alternatives. Over
time, I expect to see cattle spending more of their lives
grazing, and less at the feedlot. I would not be surprised if this trend
has already begun, and recent
statistics show that new cattle placed in feedlots are down 15% from 2006
and 6% from 2005 for the month of June.
Over the longer term, some feedlots and dairies will close as they are used
less intensively, while others will shift to feeds which contain more
distiller's grains and, eventually, hay. Other potential substitutes
for corn in feed include some of the other options which are being considered
for cellulosic ethanol, such as corn cobs (which have long been fed to cattle)
and stover.
All this will come at the price of more expensive beef and milk, but it will be
less expensive than it would have been if methods remained unchanged, as well as
healthier to eat. We will probably eat less beef overall, and be healthier
for it.
Investments
Companies hoping to use grasses as a feedstock for cellulosic ethanol plants
may find themselves in unexpected competition with cattle, and so excitement
around companies such as BlueFire
Ethanol Inc. (OTCPK: BFRE) may
be overblown. However, to the extent that they plan to use feedstock which
cannot be fed to cattle, a shift in cattle feeding should not effect them
much. BlueFire is currently focusing
on urban landfill waste, something I hope no one is contemplating feeding to
cows. I do not know of any public companies that are currently focusing on
grasses as a feedstock.
Conversely, the opportunity to double the amount of corn available to ethanol
production may confound analysts who expect the ethanol boom to end due to
rising corn prices. I admit that I have also worried publicly about a
commodity squeeze in corn (here
and here).
Considering the recent gloom about ethanol producers due to rising corn prices,
now may be a good time to make a contrarian bet on conventional ethanol
producers such as Archers Daniels Midland (ADM),
Green Plains Renewable Energy, Inc. (Nasdaq:
GPRE), US
BioEnergy Corporation (NASDAQ:USBE),
VeraSun Energy Corp (NYSE: VSE),
and Pacific
Ethanol (PEIX).
Corn ethanol is certainly not going to bring the United States anywhere near
energy independence, and it does little or nothing for the fight against global
warming. It has, however, provided a relatively harmless use for the
massive glut of corn created by US agricultural policy, at least in comparison
to feeding ever greater amounts of corn to cattle and high-fructose
corn syrup to humans.
DISCLOSURE: Tom
Konrad and/or his clients have positions in the following stocks mentioned
here: ADM.
DISCLAIMER: The information and trades provided here are for informational
purposes only and are not a solicitation to buy or sell any of these securities.
Investing involves substantial risk and you should evaluate your own risk levels
before you make any investment. Past results are not an indication of future
performance. Please take the time to read the full disclaimer here.
The
only sure winners from limited and increasingly valuable biomass will be the people
who produce it: farmers, foresters, and (perhaps) trash haulers and
recyclers. What do farmers do when they have spare cash? They buy
farm equipment, quite often from Deere & Co.
(NYSE:DE) Few stock have
ridden the biofuel boom as well as Deere, with the stock rising 400% in the
last four years in a nearly uninterrupted uptrend, without the thrills and
spills that have turned so many investors off of corn ethanol. 
Our final stock is getting its first mention on Gold Stock Bull today. Despite being the darling of the ethanol investment community and attracting funding from none other than Bill Gates, we have been hesitant to recommend Pacific Ethanol (
