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Study outlines pros, cons of ethanol

By: James Trahan, The Daily Advertiser

8-7-2006

Because of the increasing costs of gasoline, the subject of ethanol has been in the news and of interest to all of us.
A recent study was done concerning the economic feasibility of ethanol production from sugar in the United States. The interest in this largely was because Brazil utilizes sugar and molasses from sugarcane as a primary feedstock for their ethanol production.

The study was done as a cooperative agreement among the offices of Energy Policy and New Uses, Office of the Chief Economist, U.S. Department of Agriculture and LSU. Principal authors of the report are Dr. Hossein Shapouri, USDA and Dr. Michael Salassi, LSU AgCenter. I will share some of the significant findings of the study.

First, ethanol is a high-octane fuel which is primarily used as a gasoline additive and extender. The reduction in use of methyl tertiary butyl ether (MTBE) because of environmental problems caused by ground water contamination and surging prices for petroleum based fuels dramatically are increasing the demand for ethanol and the interest in ethanol production in the United States. Ethanol can be produced from carbohydrates such as sugar, starch, and cellulose by fermentation using yeast or other organisms.

The United States produced 3.9 billion gallons of ethanol utilizing sugar and molasses from sugarcane as a primary feedstock and, thus, demonstrated the technical feasibility of sugar-to-ethanol production. Corn-based ethanol accounts for approximately 97 percent of the total ethanol produced in this country.

The study looked at the conversion rate of corn as compared with sucrose and/ or molasses. The cost of the different crops, as well as the conversion or production costs also were studied.

For the 2003-05 period, net feedstock corn costs for a wet mill plant are estimated at about 40 cents per gallon with total ethanol production costs estimated at $1.03 per gallon. Net feedstock costs for a dry mill plant are estimated at 53 cents per gallon with total ethanol production costs at $1.05 per gallon.

On the other hand, the cost of converting sugarcane into ethanol was estimated to be approximately $2.40 per gallon based on 2003-04 sugarcane market prices and estimated sugarcane processing costs. Feedstock cost was estimated at $1.48 per gallon of ethanol produced, representing 62 percent of the total ethanol production cost. The cost of converting sugar beets into ethanol was estimated to be approximately $2.35 per gallon based on 2003-04 sugar beet market prices and estimated sugar beet processing costs.

Molasses, from either sugarcane or sugar beets was found to be the most competitive feedstock. Challenges may involve having a large enough supply at a give location. The second conclusion is that the estimated ethanol production costs using sugarcane, sugar beets, raw sugar and refined sugar as feedstock are more than twice the production cost of converting corn into ethanol.

While it is more profitable to produce ethanol from corn in the United States, the price of ethanol is determined by the price of gasoline and other factors, rather than the cost of producing ethanol from corn. With recent spot market prices for ethanol near $4 per gallon, it is profitable to produce ethanol from sugarcane.

Over time, the profitability of producing ethanol for sugarcane and sugar beets depends on the prices of those two crops, the cost of conversion an the price of gasoline.

A moderation in the price of gasoline and a return in ethanol prices to their historic relationship with gasoline prices could push the price of ethanol well below break-even levels for converting sugarcane and sugar beets into ethanol.

However, the crude oil market remains very volatile and highly sensitive to events in the Middle East, making it very difficult to forecast future trends in crude oil and gasoline prices.