Ethanol Round II: The Glut.

Today the New York times has an article on the collapse in Ethanol prices. The article is a well written overview of the industry and the current impact and reasons for a collapse in the prices. I’m not going to go through all the points the article makes, go read it here — its really worth it. I’m going to talk about what I think is the most important challenge facing the ethanol industry, the federal government and the farmers who are growing the corn and producing the ethanol.

First off most people don’t understand how fragmented the industry is. Most ethanol producing plants, or at least a good majority of them, are owned and operated by farmer cooperatives. This means that the industry has a lot of room to consolidate which will lead to larger margins and less volatility. In the past 2 years, ethanol plants have sprouted (pun) up in hundreds of places throughout the midwest — these plants are relatively inexpensive to build and the technology is well tested. The real issue however is one of transportation. As you can see production is not a problem — there is lots of corn out there for ethanol and there are lots of people turning it into ethanol, but there are not a lot of people getting it from point a to point b. Ethanol, unlike oil and Natural Gas, is difficult to transport — its an organic good and has a sort of sell by date by which it has to be blended into oil if that is the final destination.

Interestingly this transport issue is a common one in the Energy industry. The electrical grid is suffering from the same lack of underinvestment. Why does this dilemna exist? Well most transport networks — for ethanol (pipelines), for electricity (transmission lines), require massive amounts of capital expenditure, with a lot of sunk costs. I’m not sure about this, but as we saw with the bridge collapse this summer in Minnesota, the federal government has stepped back on its responsibility to build and maintain our networks (roads, grids…).

The article makes an interesting point about the likelihood of the federal government having to expand its subsidies to ethanol farmers to protect them during this glut in the market — maybe instead of funding the expansion of an industry already in an overproduction stage, maybe they could pour that money into getting rid of the transport bottleneck. This will allow ethanol to reach end users for its traditional uses of being blended into oil or as a substitute for MBTE, and potentially allow for continued expansion of our inclusion of ethanol into other energy systems.

Ah but what about the effects of increased ethanol production of food prices? on the environment? I’ve already written about my dislike of ethanol as the ’solution’. I don’t think its a solution, i think its a delay mechanisms, but I also see that if we can leverage ethanol through an improved transportation network then people can be allowed to be more creative with the uses and applications of ethanol. Its a complicated situation for sure, but the federal government will continue to be involved and I just hope its in a more constructive way then just giving farmers a check because the market for their product isn’t strong.

Michigan isn’t all that boring.

I’m back!

I’ve finally managed to get my head around all the work that will be due on a weekly and semester basis here back at school. It took me three weeks, due in part to a few weekend trips that took me away from my homework.

This post is going to be about a conference that I attend in early September in Michigan at U of M in Ann Arbor. It was hosted by the William Davidson Institute and the Cornell Center for Sustainable Enterprise.  My dear friend Rich was my fellow Fletcherite to attend and my sounding board for all the thoughts and ideas that attending this conference generated.

The objective of the conference was to get people from academia, professional private sector, public and non-profit sector to come together and talk about strategies to alleviate poverty for the world’s poorest through business. It was interesting to me because it spoke to my thesis interests, and I learned a lot. Probably the most interesting speakers were PK Prahalad, the author of the Fortune-at-the-bottom-of-the-Pyramid, Stuart Hall his co-author on that book and author of Capitalism at a Crossroads, and finally Luis Moreno, the head of the IDB.

The two first, Prahalad and Hart, are the gurus of this concept — they’ve devised and in some cases applied (but always rather limited in scale) strategies that bring business to the poor, creating profit well bringing social and economic good to people who have historically always been excluded. Luis Moreno was the only speaker to really deal with what role governments can take in this sphere, especially as it relates to “basic necessities” –i.e. electricity, water treatment, sewers and interestingly (at least for me) transportation. This is where my interest lies. These services, public goods in a sense, require huge capital expenditures and very high sunk costs, with traditionally very low rate of return.

I’m interested in electricity in this economic strata, electricity distributed and generated by the private sector (which complicates things a bunch).

I’m also taking a course on micro-finance this semester, which is really the perfect class to take at Fletcher.

Okay speaking of class, I need to get back to work, but I wanted my left-over readers to realise that I hadn’t forgotten about the blog.