The problems with ethanol

The New South Wales Government is proposing to mandate that all standard unleaded petrol in NSW will contain 10 per cent ethanol. This ethanol will mostly be sourced from grain. We must oppose this grain ethanol industry because of the humanitarian effects of converting food to fuel, the lack of CO2 abatement ,its unsuitability to operate in the variable NSW climate and the hindrance an established industry will provide to the development of the preferred cellulose ethanol industry.

The ethanol industry debate worldwide has been muddied by misinformation and spin doctoring, not helped by the terminology. Barrels, litres, US gallons, bushels, tonnes, millions and billions can easily be daunting. Ethanol, biofuels, grain ethanol, waste are all terms used glibly to suit the occasion. In this discussion of the proposed E10 mandate I am setting out the problems of processing ethanol from primary grain in NSW.

The global debate about the humanitarian effects is hard to miss in the media. There is now no question that world food supplies, and therefore price, have been influenced by the expansion of the grain ethanol industry. The Food and Agricultural Organization (FAO) in their latest data estimates that 100 million tonnes of grain or 1/20th of world production was converted to ethanol worldwide in 2007-2008. The USDA predicts that 100 million tonnes of just the United States’ corn will be converted to ethanol in 2008-09.

Given the exponential rate of expansion of this industry, subsidised and mandated by governments, this conversion of food to fuel will have an ever increasing effect on the price of grain and consequently there will be increased starvation, misery and civil unrest for many millions of the world’s poor. At what level of grain conversion will the developed world call a halt?

A NSW decision to mandate E10 will have a significant impact on this global debate now raging about the merits of grain ethanol. The decision will be noted and be used to support debate by on side or the other.

It is hypocritical for farmers to demand protectionist policies with respect to grain ethanol when for years we have fought tariffs and USA-EU farm subsidies. As an exporting nation, Australia must support global trade and benefit from comparative advantages between trading partners.

Mandated and subsidised grain ethanol will increase the price of grain and arable acres worldwide and so will benefit rural areas. However, as in Iowa, the rest of the population will object to this transfer of wealth when it is pointed out that the NSW E10 involves a $230 million annual subsidy of federal money to NSW. The Productivity Commission recently questioned the value of this excise rebate.

If the Federal Government wishes to support regional and rural areas this money would be better spent directly in these areas rather than have ethanol investors “clip” it on the way past. Better still the annual $230 million could be spent on research and the encouragement of cellulose ethanol.

If E10 is mandated, and the supply of grain is limited by drought, grain prices will run to “import parity” (a higher price reflecting the cost of importing grain). Under “export parity” conditions the ethanol plant will only pay the export price for grain. The only way a farmer will benefit is from the increased occurrence of import parity situations that the increased demand for grain will bring about.

Export industries that value-add grain, such as beef and dairy and a range of food production including wheat gluten, flour and malt, will all be priced out of the global market. Domestic food costs will rise.

Localised shortages occur in NSW, both in grain and starch quantity when grain is pinched from drought. A local grain ethanol plant would increase the occurrence and severity of these domestic “import parity” situations. Other end users will shift their operations to ports where they can have access to imported grain in response to this more commonly occurring event of import parity pricing. This has the potential of tearing the fabric of NSW agriculture apart.

Will it be possible for the government to let the ethanol plants continue to operate under import parity pricing?