Ethanol exerting pressure on food prices

The rise of ethanol as a fuel is exerting pressure on food prices around the world.
But it's not the only factor to cause the increase in food prices.

Have a look to this article from the Economist:
Food Prices: cheap no more

Ethanol craze is cooling in the USA

Interesting article from WSJ worth a reading:

Wall Street Journal - Ethanol Craze Cools
As Doubts Multiply by LAUREN ETTER

But one should keep in mind that this article mostly focus on the USA.
A broader analysis would be more valuable.
Besides even if corn should not be considered as the ultimate feedstock, it's a useful commodity to kick off the industry.

From farm to Indy Car fuel

Here below an interesting video from the Ethanol Promotion and Information Council (EPIC). Well, one should not take all their affirmations at face value - this video is quite biased indeed - but it's nevertheless interesting:




As mentionned in the video ethanol is being adopted in IndyCar racing:

IndyCar Series - Tech: Ethanol (Source: IndyCar Series)
[...]The IndyCar Series, which has been recognized for its technical leadership in automobile racing, is now the motorsports leader in renewable and environmentally responsible fuel produced in America.
The IndyCar Series’ groundbreaking use 100 percent fuel-grade ethanol in its Honda Indy V-8 engines will have an impact on motorists for years. Ethanol, which can be manufactured from a variety of homegrown grains, is biodegradable, renewable and ecologically friendly. No wonder it is at the forefront of discussions about oil dependence and America’s economy.[..]

Cleaner Burning Ethanol on Display with Team Ethanol Indy Car (Source: EPIC)
[...]The Renewable Fuels Association (RFA), the Ethanol Promotion and Information Council (EPIC) and the IndyCar® Series, home to the Indianapolis 500, are bringing the full-sized Team Ethanol Indy car to Capitol Hill to celebrate the IndyCar® Series switch to 100 percent fuel-grade ethanol as its fuel of choice. [..]
“The use of 100 percent fuel-grade ethanol in the IndyCar Series is a powerful demonstration of the performance and environmental benefits of this homegrown, renewable fuel,” said Tom Slunecka, executive director of the Ethanol Promotion and Information Council (EPIC). “Ethanol is available now to consumers to address the clean air challenges of present and future generations, as well as a critical component of a more secure energy future in America.” [...]

Ethanol production: cost structure and margin per gallon

In a recent article, The profitability of ethanol production, A. Hoffmann tries to put clearly the cost structure of ethanol production per gallon. He states a gallon at $1.99 (ethanol price minus tax break per gallon of ethanol). But he integrates the cost of corn transport which makes sense I think.
A reader strongly reacts to its conclusion of a 30% contribution margin in the comments.

Unsatisfied with both their conclusions I try to recalculate this structure.
I prefer to keep the tax benefit because I don't think the current strong political support for ethanol is going to wane in a near future. Here below my results:

A margin between 10 and 15% seems more likely to my view point.

Sources:
SeekingAlpha- The profitability of ethanol production by Alexander Hoffmann (April 2007)
Determining the Cost of Producing Ethanol from Corn Starch and Lignocellulosic Feedstocks by the National Renewable Energy Laboratory (October 2000)
Fuel Ethanol: A Technological Evolution, page 8 by Novozymes and BBI International (June 2005)

Ethanol: interesting graphics.

Sugar, India, Jonathan Kingsman

‘India has a future in ethanol’ (Source: Nidhi Nath Srinivas, Columnist, The Economic Times)
[...] If sugar is the new Internet, India may well be its Silicon Valley. As the second largest producer in an increasingly sucrose-deficit global market, India is the new star on the commodity investment horizon. Leading analyst and Paris-based broker Jonathan Kingsman tells Nidhi Nath Srinivas why foreign investors are making a beeline for the new honey pot [...]
Would you say that the risks in being import dependent in bio-fuels is larger than those associated with crude oil?
Undoubtedly. Oil is fungible. It can come from any origin and the only risk is price. Bio-fuels are agri-produce, dictated by weather and crop cycles. So the risks of short supply and price swings are much higher. Yet so many countries are now pushing bio-fuels! (Jonathan Kingsman)
[...]

More information about Jonathan Kingsman:

Jonathan Kingsman,
Chief Executive Officer,
Société J Kingsman

After graduating from Cambridge in 1978 with a Master's degree in Economics, Jonathan began his career in the sugar business with Cargill Inc, working both in London and Minneapolis. He started his own sugar brokerage company (Société J Kingsman) in France in 1990 and soon developed a reputation as a market analyst and report writer.

The company began covering the ethanol and biofuels markets in 2000 and is now among the leaders in terms of brokerage, price reporting and analysis with representative offices in Australia, Brazil and the USA.

Jonathan is editor of the Sugar Trading Manual - now in it's third edition - and is a regular speaker at international conferences. He can be contacted on Jonathan@Kingsman.com
(Source: Commodity Investment World)

From J Kingsman's website:

Ethanol
Our research analysts have always followed ethanol because of its interplay with sugar. In 2001 we decided to devote more resources to the commodity and began a Weekly Ethanol Report, published each Tuesday. As part of our subscription package, clients have access to the ethanol pages of our website – updated daily with any important breaking stories. We now include nearly all of the main oil companies among our subscribers as well as banks, producers and industrialists. Our objective is to become a primary source of research and analysis on the world ethanol and bio-fuel markets.

Ethanol expansion remains robust

Ethanol expansion remains robust: Growing skepticism fails to derail boom (Source: Greg Burns, Chicago Tribune)
[...]Once the darling of the heartland, ethanol has acquired a dangerous reputation these days, amid warnings of a "gasohol glut," a "dot-corn bust" and an angry backlash from rural communities once expected to applaud the arrival of jumbo distilleries for turning grain into motor fuel.

Yet for all the ill tidings, the ethanol boom remains surprisingly robust and only moderately sobered by the outpouring of worry aimed at it in recent months. In fact, 2007 promises to be a year of historic expansion, with production soaring as scores of new and enlarged ethanol factories come on line.
[...]

A Superfluous Subsidy

A Superfluous Subsidy (Source: Geoffrey Styles, Energy Outlook)
[...] As I described last week, the new national RFS sets an annual quantity of alternative fuel--which today means principally ethanol--that must be blended into gasoline, starting with 4 billion gallons in 2006 and rising each year. Anyone caught short must buy credits from another blender who used more ethanol than required. At the same time, however, most of the present ethanol supply is used to satisfy the oxygenate specification under EPA and state reformulated gasoline (RFG) regulations. So ethanol producers have a guaranteed market on two levels: the amount required for RFG and an overlapping and steadily increasing quantity set by the RFS. And that is now in addition to the 51 cent per gallon Volumetric Ethanol Excise Tax Credit, which effectively subsidizes production of fuel ethanol by enabling refiners and blenders to pay more for it than it is worth as a gasoline extender. How many other businesses would like to have the government pay them to make something, and then force their customers to buy it? [...]


An interesting point of view that is worth a reading.

There is no ethanol without water...

Water is a key issue in ethanol production. Not only water is needed to grow feedstock crops
but it is also needed in the plant:

Water Use by ethanol plants(agobservatory.org)
[...]one of the most important emerging concerns is the consumptive use of water. Consumptive use of water is broadly defined as any use of water that reduces the supply from which it is withdrawn or diverted.
As would be expected, most ethanol plants are being sited in the Corn Belt. Many of these regions are also experiencing significant water supply concerns, particularly in the western portion of the region. Minimal data is available on groundwater depletion, and
the scope of future water availability is not clear. It will be to the benefit of the ethanol industry, and rural development initiatives in general, to get more clarity on the relationship between ethanol production, water consumption, and impacts on water supplies.
Otherwise, shortage of water could be the Achilles heel of corn-based and perhaps cellulose-based ethanol [...]

UI investigators evaluate ways for ethanol plants to recycle more water (jg-tc.com)
[...] Ethanol plants use about three gallons of water for every gallon of ethanol they make, using the dry grind process. [...]

Opportunities to conserve Water(ethanolproducer.com)

U.S. Corn Farmers Hear a Call for Ethanol

Corn Farmers Respond to Market Signals (Source: RFA)
"The U.S. Department of Agriculture (USDA) has confirmed in March that American corn farmers are responding to the price signals from the marketplace to produce more corn. The USDA’s annual report detailing farmers’ crop planting intentions estimates that corn acres will increase to more than 90.5 million, a jump of 15% over last year. Assuming corn yields stay on their historic upward trend, America’s farmers will produce a corn crop in excess of 13 billion bushels. Such a harvest would produce ample corn supplies to economically meet the needs of all the sectors that rely on it. "


As a result there is less pressure on the corn market: above US$4 two months ago, the bushel is at US$3.7 today.

Let's listen to a farmer's point of view:

NPR interview