Demand, meet supply

Ethanol demand is spurring big corn planting
CNet News (Reuters): Ethanol fuels huge corn planting

Crop report came out today. Lots of new corn plantings. LOTS more.

Iowa, traditionally the No. 1 corn state, would plant 13.9 million acres this year, up 1.3 million acres from 2006, USDA said. Illinois would plant a record 12.9 million acres of corn, up 1.6 million acres, while cutting soybean plantings by 1.4 million acres, the largest decline in the country.

Some points from the Reuter’s article:

At the Chicago Board of Trade, corn futures prices plunged the daily trading limit of 20 cents a bushel on prospects for a huge crop. Prices for this year’s soybean crop fell as much as 33 cents a bushel, and wheat was down 27 cents a bushel.

This is textbook economics. This is a good development from the farmers’ standpoint. Farmers lead a fairly embattled lifestyle. So, market disruption aside, farmers are finally in growth mode – even if it’s short-lived.

Another point:

Farmers could collect nearly $46 billion with a mammoth corn crop, said Ann Duignan, an analyst at Bear Stearns, “which in our view is positive” for sales of farm equipment.

The chairman of farm equipment maker Agco, Martin Richenhagen, said when farmers are flush with cash, “they often then invest in equipment.”

The Renewable Fuels Association, a trade group for alternative fuels, said with high yields the U.S. corn crop could hit 13 billion bushels. “Such a harvest would meet the needs of all the sectors that rely on it,” said RFA.

The difficulty here is following the growth of the ethanol industry. If E85 doesn’t catch on and we keep bringing new ethanol plants online, then we run the risk of keeping this market out-of-balance. The risk in this industry is the level of fragmentation that exists among producers. The list of corn producers on the RFA web site show a lot of small mom & pop producers. This level of fragmentation could distort the market demand and perhaps induce over planting.

Let’s see what happens.

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Soy Beef

Brazil and Argentina have beef (dispute) over soy beans.

U.S. corn producers aren’t the only one creating enemies over their biofuels aspirations. Brazil and Argentina, both large soy bean producers, are conflicting with each other to discredit their soy bean industries. Argentina is the second largest soy bean exporter behind the U.S. They are low cost and have strong government support (via Tax subsidies). Brazil’s emerging biodiesel industry could sure use some of that soy goodness. According to this article, however, Brazil’s not happy about it:

Brazil soy oil is the number one ingredient used in making biodiesel. Soy oil companies think Argentina’s cheaper costs will cut them out of the market, especially the export markets.

“We’re going to convince the government that they have to gun for Argentina on this issue, play tough,” said Carlo Lovatelli, president of the Brazilian Vegetable Oils Industry Association, or Abiove.

“Biodiesel investments are heading to Argentina and not Brazil because it makes more sense to produce it there than here because of tax and trade incentives. We can be importing biodiesel from Argentina very soon,” Lovatelli said.

While a fair playing field is good for consumers (even the poor ones that Brazil purports to support), this type of market-distorting behavior will create more problems in trying to get these industries off the ground. The reality is that the world needs more biodiesel than either country can produce. So it makes sense to create synergies rather than disputes. Brazil’s higher soy bean oil prices can serve as a measure by which Argentina can (should) raise their prices. The increased profits can better finance further economic development. This seems to be the impetus behind Bush’s latest visit to Brazil.

This is all pretty benign at the moment. It won’t really get exciting until someone is caught steeling or spying. No politician or executive has been arrested or fired. So we’ll see if this heats up.

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More on Butanol

Technology Review: BP’s Bet on Butanol
http://technologyreview.com/Energy/18443/

This is another good interview with BP Biofuels head on Butanol.

A key point:

TR: So how is butanol better?

PN: The key way is higher energy density. Whereas ethanol is around about two-thirds the energy density [of gasoline], with butanol we’re in the high eighties [in terms of percent].

It’s less volatile [than ethanol]. It isn’t as corrosive, so we don’t have issues with it at higher concentrations beginning to eat at aluminum or polymer components in fuel systems and dispensing systems. And it’s not as hydroscopic–it doesn’t pick up water, which is what ethanol can do if you put it in relatively low concentrations. So we can put it through pipelines.

Butanol doesn’t have the political backing that ethanol has (remember, farmers aren’t all chemists). But BP’s interest on it legitimizes it as a viable alternative.

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Detroit goes to Washington

Yahoo!Finance Article: Bush, Auto Execs to Talk Flex-Fuel Cars

Another good step for the U.S. Automakers:

Bush scheduled a White House meeting Monday with General Motors Corp. chairman and chief executive Rick Wagoner, Ford Motor Co. chief executive Alan Mulally and DaimlerChrysler AG’s Chrysler Group chief executive Tom LaSorda.

The focus is on Bush’s support for flexible-fuel vehicles, which are capable of using gasoline and ethanol blends, and his administration’s plan to cut gas consumption by 20 percent in 10 years.

The three auto leaders have pledged to double their production of flexible fuel vehicles to about 2 million a year by 2010.

I’m still waiting on my E85 ethanol station.

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Biofuels Essay part 2: The dirty little secret about petroleum

Much of the broader debate about oil understandably focuses on the current political upheaval (i.e. the Iraq War) and future political conflicts (fighting over oil with China). But it doesn’t address the question as to why we just don’t change to something else. The answer is almost always left out of this discussion: technically speaking, there is no better liquid fuel than petroleum. It’s a small point, admittedly, but it bears discussion.

Discussions on getting off oil inevitably degrade into “yeah, but” statements without a real viable alternative solution.The fact of the matter is that oil is a great fuel and energy source. This discussion would benefit from understanding why this is the case. In discussing alternatives, it would help to understand why we use what we have now. And again, I’d like to take credit for much of these thoughts, but there are some really great thought-leaders out there that have, in some form or fashion, spoken to these points in the media. But none in this kind of a pro-petrol context (which I think is important).

So what makes oil a good fuel source?
There are some very specific reasons why petroleum is a great source of energy for transportation and other processes.

Extremely high energy density
If you look at any material as a provider of energy, then oil is one of the best of them. By comparison, there aren’t many materials that have the amount of energy contained in oil distillates that exist in natural abundance.

Relative Abundance (i.e. cheap)
Aside from recent speculation on the amount of oil left on earth, there has been until recently an abundance of oil on earth. All of the supply shocks in the 70s and recently have never been due to the oil not being present – only our ability to supply it. Mostly, however, crude oil has always been extremely cheap. The oil industry emerged at the beginning of the 20^th century due to its relatively low capital costs involved with extracting it (Jed Clampett just shot at a duck in his backyard and oil shot out of the ground). The 1990’s saw $10/barrel oil and, with it, massive consolidations of big oil companies – Chevron/Texaco, BP/Amaco/Arco, Exxon/Mobil.

The notion of abundance is being challenged as of late mostly because of doubts regarding existing deposits and skyrocketing demand from emerging economies (China). This not withstanding, oil in most of the world remains around the $5/gallon range. While high compared to historical prices, this price is not particularly unaffordable given the impact that transportation has on our daily lives (this is a worthy point for debate).

Easy to extract and transport
While Oil is a great commodity, what keeps it valuable is the transportation and refining network that has been created for it. Oil can affordably be extracted Egypt and sent to California for refining, and sent to Europe. Within the U.S., oil can be transported through thousands of miles via pipelines – in fact you don’t even have to wait for “your” oil to come out; just pull from the other end what you put in. Only in America. Only sometimes in Canada.

Jed Clampett aside, putting an oil platform in the middle of the ocean is still a relatively cheap and easy venture compared to the oil underneath it. If we could spend $100MM for a machine that sat in the middle of Iowa and could extract all the corn from the entire state than that would be a great deal.

Cheap to refine into many different products
Oil refining has become a very efficient and mature process through decades of refinement. Very little oil is wasted and many different products can be created from its processes. The cost of oil refining has decreased significantly in the last 75 years and currently only accounts for a small % of the price of gasoline. This is great from a technology standpoint, but it also means that any competitor has to be well-positioned in its processing cost structure. Wind and solar are doing a good job in getting scale to compete with coal. But something like hydrogen is a long way away from competing as a liquid fuel source (still too expensive to make). This underscores how hard it will be to beat oil. But we will.

Wikipedia Entry on oil refining: http://en.wikipedia.org/wiki/Oil_refining

Great MIT Talk on energy (particularly prof. Daniel Nocera’s discussion on energy solutions).

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Venture Ready?

RedHerring Article on water technology investment:
Parched for VC Funding
Water-treatment technologies are hot, but VC investment is cold

This article speaks of a lacking in the investment in water technologies in the VC industry. It cites some of the following reasons:

It wasn’t supposed to be this way. A Progressive Investor report titled “Investing in Water” released Monday estimated the world market for water-related businesses at roughly $400 billion. And even that amount is not enough to save the 1.6 million people that the World Health Organization estimates die every year from drinking contaminated water.

Even with this large market potential, they claim three primary reasons why investments have been sparse (abriged):

1) Dearth of breakthrough tech and management teams: Technology Partners’ Mr. Ehrenpreis said most of the business plans he’s seen so far don’t meet two key criteria he looks for: a significant innovation or technology breakthrough, and a stellar entrepreneurial management team.

2) Economic factors: The biggest water treatment opportunities are in developing countries, which have the least money to buy innovative technologies, said Joel Makower, a principal at research firm Clean Edge. “There’s a bit of a disconnect there,” he said. “It’s a financial-resource issue as much as a natural-resource issue.”

3) Longer return times: The likely water-industry growth path is slow and steady, and that kind of growth—about 4 to 6 percent per year—is hardly what industry investors “go gaga for,” Ms. Fried said. ATV’s Mr. Wiberg agreed, pointing out that VCs seek out companies that pioneer disruptive technologies, not incremental improvements.

It begs the question as to weather these types of industry/infrastructure clean tech plays are really venturable. VCs generally only invest in businesses predicated on some technology advantage. Most VCs make their homes near large universities for this reason. But most importantly, they invest in businesses that will create a specialty product, not a commodity. Water is almost the definition of a commodity. So it is difficult to legitimize large VC investments that do not generate a huge valuation for the company. Water projects are usually handled by municipalities for this reason – governments don’t really need an ROI. VCs stay as far away from governments in their business dealings as possible. But it begs the question as to who should make these investments. VCs know how to manage the development, but governments have a vested interest in their development.

So after all that, it makes sense to me that there aren’t very many VC-backed water technology companies.

But another question arises: do biofuels meet the VC investment model? I think the answer is “barely”. There are many technologies that provide a proprietary means of processing biomass into ethanol. But remember, VCs make their money by improving the company valuation and then selling/dumping the company on a second buyer. This second buyer is usually another company that could create some value by having the technology in-house, or the public markets via an IPO. But if you look at ethanol producers’ financial statements, these are typical commodity businesses. Low gross margins. Commodity pricing predicated on long-term contracts. High operations and logistics requirements. This sounds like the airline industry. But it’s going forward regardless.

We’ll look at this some more….

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Montana Coal

CNBC Video on Montana’s Coal initiatives

Montana is positioning itself to be a leader in coal gasification and liquefaction processes. This is an interesting video interview of the state’s Governor.

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Power from Biodiesel

Article on CNet: Texas Power Plant Runs on Biodiesel

Using Biodiesel for power generation is an interesting option. Biodiesel has some drawbacks in its physical properties – particularly its freezing point. But these are limitations mostly in usage as an automotive fuel. But in power generation, there are more controls that can be engineered into the generation system to mitigate these limitations.

It doesn’t seem that this is a sustainable, scalable solution for power generation. Seeing it in niche applications such as suggested hear is encouraging. 5 MW is no small feet. 10MW will be something good.

Biodiesel from waste products won’t solve the U.S. dependency on oil. The U.S. generates about 2.7 billion pounds of waste vegetable grease a year. If all of it were harvested and converted to biodiesel, it would produce about 350 million gallons of fuel. If half of the inedible tallow and animal fat from slaughterhouses were harvested, another 500 million gallons would be produced, according to figures from Eidman.

Normally, biodiesel is more expensive (made from pure triglyceride sources). But having access to cheap feedstocks like animal fat and having a narrow supply chain (just trucks to the plant), change the overall economics to something more tenable. These are great options for keeping energy in small communities close by and still being ecologically responsible.

Doug

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The Brazilian Ethanol Affair

Good article on Bush’s trip to Brazil:
RedHerring: Fueling the Ethanol Trade.

This is an interesting overview of Bush’s trip to Brazil. Essentially Bush & Brazil agreed to some common research goals, common commercialization practices and more.

The Farmer’s apparently don’t like it:

“Transferring the United States’ addiction on foreign oil to foreign biofuels doesn’t make sense,” said Tom Buis, president of the U.S. National Farmers Union, in a statement. “This agreement is the wrong step in the wrong direction at the wrong time.”

But this sounds like more of a partisan opinion. More ethanol at lower prices is better for consumers (albeit, not so much for suppliers). The problem here is that the U.S. is incurring many difficulties in developing the ethanol market.

First, expensive corn is disrupting many parts of our economy including food. That means that no matter how cheap the ethanol is, it can’t get cheaper with corn. And as much as we don’t like high fuel prices, we don’t like high steak or bacon prices either. Not going to fly.

Second, Brazil is a fast growing economy and they’re going to be buying more cars. They’re probably going to need more ethanol than they can produce. So they may need ours (the U.S. produces nearly the amount of ethanol as Brazil – even with the industry in its infancy – and you thought U.S. manufacturing was dead).

Third, the U.S. needs to eventually start exporting ethanol and need to extend its market reach throughout the region. If cellulosic ethanol can get down to $1-$2/gal from $3-$4/gal, then U.S. producers have the opportunity to export to Brazil according to their marginal costs that may be comparable to Brazil’s production costs. Creating some market commonalities will make it easy for the U.S. to accept Brazilian ethanol and vice versa.

But there’s two items to note about Brazil:

First is that tariff:

Sugarcane ethanol from Brazil costs about $0.80 per gallon to manufacture, less than half the price of U.S.-made corn-based ethanol, which costs about $1.74 per gallon, according to analysts. The U.S. did not agree to drop its $0.54-per-gallon tariff on Brazilian ethanol imports, but the National Farmers Union still worried the pact could undermine U.S. corn growers and increase the country’s dependence on foreign biofuels producers.

Second, Brazil has oil. Opening up the U.S. to their ethanol exports might be a bargaining chip to getting more of said oil (or drilling rights, etc). You can see PetroBras’ reserves below:

So it is conceivable that this “deal” is merely the start of a broader trade deal that will take place in the coming years.

We’ll keep watch on this soap opera.

Doug

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I want to say "Duh"…

TechnologyReview article: Hell and Hydrogen

This purports to be an introspective article about Hydrogen. But it’s main point is that Hydrogen production causes carbon dioxide.

Duh.

That’s the primary problem with hydrogen. It’s too difficult to make. I thought everybody knew that. Why would we even mess around with biodiesel if we could just make the hydrogen?

Here’s what it says:

The reason hydrogen-powered cars would produce more carbon dioxide emissions than regular cars starts with the fact that it takes energy to create hydrogen. One way to produce hydrogen is to extract it directly from fossil fuels; indeed, a 2004 National Academy of Sciences study predicted that fossil fuels would be the main source of hydrogen for “several decades.” The other way is to split water molecules using electricity. Naturally, BMW talks up this approach, envisioning electricity that would ultimately be supplied by renewable sources. BMW brochures feature the Hydrogen 7 parked in front of wind turbines and shiny photovoltaic arrays. But renewable sources furnish only 2 percent of the world’s electricity (not counting hydropower’s 16 percent). Coal, by contrast, supplies 39 percent–and is the worst emitter of carbon dioxide, watt for watt. Clearly, a great use for renewable power is to replace coal power. But is it worthwhile to divert even a small part of it to the task of manufacturing hydrogen?

Hydrogen is not an energy source. It’s an energy carrier. We need to make it from a better source than electricity (another carrier). Ultimately, we need to make hydrogen from solar (wind counts as solar too – solar causes wind). Solar is a free renewable source. Hydrogen is a good carrier.

Biofuels, however, is a good intermediate step. They claim to be nearly carbon neutral – meaning they emit as much CO2 as they absorb themselves (so it should be a wash).

So while this article makes a point, it’s just not a terribly interesting one.

Doug

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