Ethanol industry in sunset? Not so fast

Russell Blinch and Ayesha Rascoe, Reuters 13 Mar 08;

WASHINGTON (Reuters) - With soaring food prices and mounting criticism, it might seem the nascent U.S. biofuel industry has seen its best days. But don't underestimate the determination of Washington, the farm lobby and science to keep it alive.

The corn-gobbling ethanol industry is under fire from all sides, blamed for everything from rising food prices to environmental damage.

Ethanol is also driving a wedge in the farm community with grain farmers celebrating record prices while livestock producers and bakers grumble about rising costs due to the green fuel craze.

The ethanol industry itself is struggling to maintain profitability in the face of record corn prices, while fighting to win back its street cred as producer of a miracle green fuel.

"People are sort of desperate for something that will ease our dependence on foreign volatile countries, but unfortunately ethanol from food is not the answer," said Janet Larsen, director of research at Earth Policy Institute in Washington.

Larsen said that when consumers realize they are being squeezed at both the pump and the grocery store, they will quickly sour on Washington's policy that calls for billions of dollars to be invested in ethanol.

"If they begin to make the connection that these higher food prices are the result of a misguided U.S. policy to turn more corn into ethanol, I think ethanol's popularity is likely to drop dramatically," she said.

FOOD, FUEL, FOLLY?

It is unlikely the Bush administration or even the next government will move quickly to spoil the party for the sector.

Providing home-grown fuels to wean the United States off Middle Eastern oil supplies is key to U.S. policy at present -- much to the delight of the Corn Belt in the American Midwest.

"Renewable energy presents a fantastic opportunity for agriculture, and we are already seeing the benefits of renewables here in the United States," U.S. Agriculture Secretary Ed Schafer told a high-profile renewable energy conference in Washington this month.

The U.S. Department of Agriculture is predicting that net cash farm income will reach $96 billion this year, fueled by the record prices for everything from corn to soybeans.

"Renewables have clearly boosted our farm economy and have spread positive effects across our broader economy as well," Schafer said.

The new U.S. energy bill signed into law in December calls for the production of 9 billion gallons of renewable fuel this year, up from 5 billion gallons in 2005, and quadrupling to 36 billion gallons in 14 years.

Corn use for ethanol tripled from 2001 to 2006 and the U.S. government estimates this year that one out of every four bushels of corn produced from the massive U.S. harvest will be diverted to the ethanol industry.

While many argue it is folly to use food for fuel with world food prices on the rise and millions threatened with starvation, ethanol proponents argue that using corn is only a first step in creating a green industry that will eventually include a variety of feedstocks.

"Ethanol demand is absolutely having an effect on corn prices around the country," said Bob Dinneen, president of the Renewable Fuels Association.

But he said a host of other issues is also causing prices to rise, such as high fuel prices, growing economies, and changes in diet. He maintains that less than 4 percent of the increase in food prices can be traced to ethanol.

BACKLASH NOW

He said his group has been arguing for years that innovations in corn ethanol will help spur cellulosic fuel, which involves using a variety of non-food feedstocks.

"It's not going to happen tomorrow," he said, but "it will absolutely happen."

Several international reports have cast doubts on the environmental benefits of biofuel, taking into account the energy and chemicals spent to grow the plants, and the water they consume.

Lester Brown of the Earth Policy Institute maintains the grain required for a one-time fill-up of a tank of a Sport Utility Vehicle with ethanol would be enough to feed a person for an entire year.

But Brent Erickson, executive vice president of the Biotechnology Industry Organization in Washington, said companies are developing a range of technologies, including techniques to grind the corn into finer particles to make it more efficient to use.

Besides cellulosic research, companies have also developed new enzymes that convert corn starch to sugar without using heat, which reduces energy costs and increases efficiency processing each bushel of corn.

With these advances and more in the offing, Erickson also sees the criticisms against the industry as misguided.

"I don't know why people have chosen to pick on biofuels right now. But I guess with every technology you go through the honeymoon phase, and you go through the backlash phase. We're kind of in the backlash phase right now."

(Editing by Matthew Lewis)