Is Ethanol a Con Job On a Massive Scale? Greater Society Is Skeptical

First of all let’s get the big gorilla out of the way.  For the non-farm media it’s almost like its Canada Day in September.  The loonie actually hit “par” today with the US greenback.  If you had told me that in January when the loonie dipped under 85 cents US while I was giving a speech on exchange rates, you would have knocked me over with a spoon.  We are no longer farming in our “62 cent” world, which I wrote about in 2002.

In many ways that 16% surge in the loonie since January 2007 has taken the icing off the cake.  The cake if you have forgotten was the ethanol gold rush.  If you forgot about the cake before that it was how agricultural biotechnology was going to pave our streets with gold and line our farm lanes with palm trees.  And along comes the loonie to spoil the party.

Hopefully we’ll find our way in this brave new world and hopefully biofuel and ethanol will become an even more important part of that journey.  However, its pretty clear to me that our biofuel future is becoming a little cloudier.  In fact it’s like your driving a combine down the field and a hydraulic line lets go and showers your cab window with hydraulic fluid.  No matter how much you clean it up, dirt adheres everywhere and you are left squinting to get to your truck.

The hydraulic fluid which hit my windshield came out of the September 12th USDA report which said corn for ethanol usage had actually decreased 100 million bushels from the August report.  When I read that it was like my combine burped, like I was still in my old Massey.  My question was is this only a burp or will it become a trend which ethanol boosters would like to overlook.  Worst still, will it manifest itself in lower prices for corn?  Worst still is this ethanol thing a “con job” of epic proportions?

Remember, I’m preaching to the converted here.  Some of you I know, some of you I’ve met, some of you read me regularly, and some of you have turned to this page for the first time.  However, for the most part you are either farmers or agribusiness professionals who have heard the gospel according to ethanol or any other type of biofuel.  The road to price heaven we’ve been told has a lot to do with “fueling” and not necessarily “feeding cities.”

The problem is our world is not full of “the converted.”  In fact it’s just the opposite and some of those people don’t like the path their politicians and their farmer friends are taking them.  Biofuel is more akin to bio-fraud in their eyes.  The debate in the non-farm world is “food versus fuel.”  Increasingly the argument is gaining pitch to a point where some in society think we have it all wrong.

A good example of this was an article written in the September 14th Globe and Mail newspaper by Eric Reguly entitled “Is It Too Late To Stop The Ethanol Con Job?”  In it Reguly quotes an OECD report published last week, which says biofuels aren’t the panacea many farmers think they are.  Quoting from that article the OECD report said

Biofuels may “offer a cure that is worse than the disease they seek to heal.” It said the vast amounts of land devoted to biofuel production harms biodiversity and pollutes the environment with herbicides and pesticides.
The OECD recommended that governments “cease to create new mandates for biofuels and investigate ways to phase them out.” It recommended oil conservation instead of “subsidizing inefficient new sources of [biofuels] supply.”

You can huff and puff all you want.  However, the reality on the ground is not everybody is buying into biofuel and the ethanol gold rush.  In fact many will agree with the OECD and some writers like Eric Reguly will tell it their way.  In fact in his piece he muses the OECD may think ethanol to be a “con job on a massive scale.”  That’s completely different than what you and I hear everyday from the hype machine, which is the “ethanol gold rush.”

So we see a 100 million bushel decline in ethanol usage in the September 12th crop report.  So how much is that?  Give or take a few thousand bushels that’s half the Ontario crop this year, gone from the ethanol gold rush.  Of course the question is why?

Is it because ethanol prices have tanked down to historical lows?  Is it because present US capacity has produced so much ethanol that low prices are just getting lower.  Is it because corn is priced too high for profitable ethanol production?  Or is it because our greater society, which doesn’t care about farmers and agriculture, are making the choice that they aren’t buying in?  Clues will surely come in future months.  However, in my mind this is more than a hiccup or burp.  It would seem to me the “food versus fuel” debate is catching some wind among the great unwashed.

Of course the debate is different in the US versus Canada.  In the US ethanol and US agriculture are like a religion.  In Canada ethanol and Canadian agriculture are more akin to a cult following.  Mandated ethanol requirements are so different.  The key to calm this debate may lie in the reduction of greenhouse gases.  With that ethanol holds the high-hallowed ground.

Having said all this grain and oilseed prices are on the move up.  The corn crop is the biggest ever, ending stocks are growing, short term commercial spreads are bearish, but corn continues up, in fact some analysts think the sky is the limit.  This is a warning.  There has got to be something wrong when futures are so divergent from basis.  There is something to corn ethanol usage going down.  I’m not saying it’s a con job.  I’m only repeating what some in greater society are saying.

The tough part is our non-farm people aren’t singing out of the same songbook as the farm ethanol/biofuel choir.   It’s not that they don’t like to sing; it’s just that they don’t like the song.  The faster we recognize that in Canadian agriculture the better.  In our new “loonie at par” world the time will come when this new reality will surely force our hand.