Saturday, December 27, 2008

Fixin' Fence 12/22/08


I stand at the northwest corner of the pasture and face the rising sun. It’s cold out but the wind is light and at my back and the sun feels good on my face. As I breathe, exhalations of warm, moist air puff into momentary clouds of vapor and glow briefly in the dawn’s early light before dissipating on the breeze.

The pasture glows softly in the slanted morning sun. It’s a gorgeous panorama; ice crystals in the scattered thin snow sparkle brilliantly like diamonds as shortgrass takes on a golden illuminated glow and becomes, at least for a time, a noble carpet fit for royal feet to tread upon.

The sun comes as late this morning as it will come all year, for today marks the winter solstice. Although the Earth is as close to the sun in its elliptical orbit as it will be all year, the northern hemisphere is leaning far over in the planet’s axial tilt. From our perspective, the sun has been moving south since June’s summer solstice, days slowly getting shorter and nights longer. Finally at the end of that long southern march, today will feature the shortest period of daylight and longest night of the year. It’s the first day of winter, and tomorrow the sun will begin to move north again, promising a new spring and the return of life to this frigid landscape.

There’s still life here, of course. The cows are at the far end of the pasture, a full mile to the south. From my vantage point I see them as scattered dots, moving slowly across the prairie and casting long shadows away from the sunrise. “Pretty as a picture,” I think, so I quickly snap one with my trusty and rugged digital camera. My pictures never capture the entirety of the subject, but they catch part of it, and I keep taking them.

In a continuing morning ritual, I test the electric fence before dropping the gate. Tester terminal to wire, ground lead to steel post, and voila – five strongly flashing diodes. The fencer is sending 5,000 volt pulses around the pasture. That’ll keep ‘em in – so long as they’re finding enough to eat.

And finding enough they are. This pasture was idled during the growing season and is rank with dry, cured grass and sedge. There’s still a lot of green in the pasture too, low down and near the ground. Though we’ve had some sub-zero temperatures and it’s now winter by the calendar, the hardy shortgrass prairie is still very much alive and hale. There’ll likely be green growth here throughout the winter.

The north stock tank is frozen over with a thick rind of hard, white ice. If this pasture was larger and used more extensively in the winter, it would pay to install propane tank heaters. But it’s not, and the conservative frugality of a successful operation dictates a manual option for making water available to the cows. I take up my maul and begin chopping. Ten minutes of vigorous lumberjacking gets the job done. It’s a good workout, and the 8-inch thick ice yields only grudgingly, but eventually I manage to hack out and clear a large hole. The cows hear the commotion of my labor and begin drifting my way for a drink of cool water. They don’t use as much water in the winter, but that doesn’t mean they don’t need to drink every day. Chopping ice is a least favorite task, but it’s arguably the most important job of the cold season.

The south tank is frozen over too, of course. Axe work soon opens it for drinking as well, though I may have to do a bit more copping this evening as the cows return. This tank was a challenge last week when a stiff north wind drove minus 15 degree air down an under-tank rabbit burrow and froze the inlet pipe. Pesky (or something like that) rabbits. A propane torch eventually thawed the frozen pipe but not without a serious struggle, nor without making me wonder if the battle were a losing one.

My brother, prompted by the whining e-mail complaints I was sending out, reminded me that Thoreau (Henry David, of course) had a number of interesting things to say about winter and ice. Thumbing through my well-worn edition of “Walden,” I soon found the place, chapter 16, “The Pond in Winter.”

“…I cut my way first through a foot of snow, and then a foot of ice, and open a window under my feet, where…a perennial waveless serenity reigns as in the amber twilight sky. Heaven is under our feet as well as over our heads.”

There are moments when the realization of my immense good fortune bursts to the fore and nearly drops me to my knees with gratitude. A frigid winter solstice, a frozen stock tank, and a loving, chiding brotherly reminder provide such a moment. Here’s hoping that each of you kind readers will be similarly blessed in the coming year.

Wednesday, December 24, 2008

Revisiting the case for ethanol

One of the top themes of the 2008 election cycle was energy independence, and each major presidential candidate presented a plan to achieve that goal. The McCain and Obama plans were remarkably similar, with each candidate emphasizing the need to replace petroleum based fuels with so-called green fuels.

Finding a replacement for petroleum is a good idea. Eliminating American dependence on foreign oil supplies makes good strategic sense, and reducing the environmental impact of energy consumption is simply good stewardship.

At first glance, and in theory, replacing gasoline with ethanol seems a perfect solution. Unfortunately, physics – and by extension economics – gets in the way.

On the physics side, alcohols such as ethanol contain less energy per volume than petroleum distillates like gasoline. Each gallon of gasoline contains 115,000 Btu (British thermal unit) of energy, compared to 75,700 Btu for ethanol, or only about 66 percent the energy of gasoline.

The ratio of energy input to work output is more or less constant in an internal combustion engine. You can think of it as 1:1; for each energy unit you put in, you get one work unit out. Put in less energy, you get less work out.

Blending gasoline with ethanol dilutes the energy content of the fuel. A 10 percent blend has only .966 (96.6 percent) the energy as straight gasoline. That 3.4 percent reduction in energy translates directly to fuel efficiency; a 10 percent ethanol blend will deliver 3.4 percent fewer miles per gallon than straight or non-blended gasoline.

Such a relatively modest reduction in fuel efficiency would be of little concern if the cost to energy ratio were the same as the volume to energy ratio. In other words, if the price of 10 percent ethanol blends were 96.6 percent that of non-blended gasoline, the cost per unit of energy would be the same.

Unfortunately, ethanol blends are 10-20 cents per gallon higher than straight or non-blended gasoline prices. On Dec. 17 in Scottsbluff, Neb., non-blended gas was $1.41/gal, while mid-grade and premium ethanol blends, containing four and 10 percent ethanol respectively, were $1.51 and $1.61 per gallon respectively.

To deliver the same energy value as non-blended gasoline, the ethanol blends must be priced at 96.6 percent of the non-blended price, or at the same energy to volume ratio. Therefore the break even price for ethanol blends in Scottsbluff on Dec. 17 was $1.36, or 15 cents lower than the mid-grade price, and 25 cents less than the premium price.

From an energy standpoint, ethanol blends cost more and deliver less energy.

This is just one aspect of the challenge facing America in the ongoing struggle to achieve the worthy goal of energy independence.

Financial woes hit ethanol industry, too

Last week the Des Moines Register was only one of a score of corn-belt newspapers reporting in depth on the precarious financial situation of the nation’s ethanol industry. The Register’s lead with, “Experience is said to be a hard teacher, and the ethanol industry has learned some painful new lessons in the last half-year.”

The Register analysts go on to note that “…ethanol producers now know that when corn prices fall, the prices of crude oil and ethanol decline as well.”

Their observation is more or less correct, but their assignment of corn prices as the precipitating factor in oil and ethanol market adjustments is likely at least in part backward. This cart-before-the-horse outlook is probably illustrative of one of the major pitfalls the ethanol industry faces – faulty assessment of the driving factors in corn and ethanol markets.

Most ag economists agree that in the present market, corn and ethanol prices are dictated by oil prices, rather than the reverse. “Corn prices are now tied directly to oil prices,” said Paul Burgener at the Dec. 9 Colorado-Nebraska Crop Clinic in Sidney, Neb. An Ag Economics Research Analyst for the University of Nebraska, Burgener works out of the Panhandle Research and Extension Center in Scottsbluff. “Corn is no longer a food and feed commodity,” he said.In the last six months, three of Iowa's 32 ethanol plants have closed and declared bankruptcy. Across the nation, more than a dozen plants have closed and even more newly built plants have delayed opening. At the beginning of the year the industry worried about winning political debates over environmental and food-cost concerns; now as 2008 draws to a close a major issue for many ethanol companies is surviving financially.

The outlook for the industry is far less rosy than it was in January.

Monte Shaw, Director of the Iowa Renewable Fuels Association, sees the climate as “frustrating” for the industry, and admits that more plants may be closing in the near term as the market stabilizes. “The industry probably overbuilt itself,” he said.VeraSun, on Oct. 31 the first major ethanol producer to file for chapter 11 restructuring, recently closed facilities in Albert City and Dyersville, Iowa, and has closed or delayed opening of several other plants across the corn belt.

Shaw is optimistic, however, and cites the federally mandated one-and-a-half billion gallon increase for ethanol production in 2009.

Only time will tell whether that mandate is realistic or even achievable.

Perhaps the largest challenge facing the industry is that, at least in some sense, the numbers don’t add up.At first glance, falling corn prices should mean increased profits for ethanol producers. With oil prices driving the first iteration of a so-called “new energy economy,” however, ethanol prices have plunged along with oil and corn, stripping hoped-for profits from ethanol. As oil plunged from near $150 per barrel in July to less than $40 in December, corn fell from more than $8 per bushel to near $3 while ethanol plunged to $1.50 per gallon from a summer peak of $2.90.

The crude oil price dive reflects a demand falloff coincident with the worldwide economic downturn which followed the sharp downward adjustment of speculative hedge funds which had become such a major market player in recent years. Unfortunately for the ethanol – and nearly all aspects of the ag sector – speculation and hedging were rife in ag and energy markets as well.

Ethanol companies bought corn feedstock at high futures prices last summer, when it seemed high ethanol prices and a federal production mandate would make their business models cash flow. Now they find themselves in the unenviable position of trying to produce a less valuable product with comparatively hyper-costly corn, or as Shaw puts it, “…the (ethanol) plants are having to sell lower-priced ethanol while using more expensive corn.”

Ethanol profit margins plunged from 31 cents to 3 cents per gallon in only about 120 days, according to Iowa State University Extension research.

As some ethanol plants close their doors and others turn away previously contracted corn shipments, Chapter 11 safeguards are beginning to look less than safe. A Wichita facility which recently filed bankruptcy found only one auction bidder last month, and that bidder was the bank holding the plant’s note. On the block in Ohio, a multi-million gallon capacity plant didn’t draw a single bid. The ethanol industry has joined the long line of troubled enterprises seeking government bailout. The Renewable Fuels Association (RFA) has been floating bailout proposals to lawmakers and President-elect Barack Obama's transition in recent weeks, asking $1 billion in short-term credit and $50 billion in loan guarantees to pay for industry expansion.

RFA and other industry groups are also asking the federal government to up the allowable percentage of ethanol in gasoline formulations. The current limit is pegged at 10 percent by the Environmental Protection Agency. The industry as asking for an increase to 15 percent initially, and to perhaps as high as 30 percent.
EPA and other regulatory agencies seem to be wary of increasing ethanol percentage in gasoline blend formulations. More study is needed, they say, not the least of which is an assessment of potential damages to current automobile engines at higher ethanol concentrations in pump fuel.

In addition, the ethanol industry, already receiving the benefit of a growing federal usage mandate, a significant tax subsidy and tariffs on imported ethanol, will likely face a serious fight from livestock interests and environmental groups before it receives any additional federal aid. Iowa’s Senator Charles Grassley recently opined that the industry must concentrate on preserving the incentives it presently enjoys.
Even though the new Obama administration, as well as a new congress heavily in favor of alternative energy, will soon be in place, executive and congressional support for the ethanol industry is unlikely to overcome all the problems facing ethanol plants.

With VeraSun recently allowed by a Delaware court to unilaterally void previously agreed to corn contracts, ethanol plants may now find it hard to purchase corn from skeptical farmers concerned that their delivery contracts might be voided as well.

Leaving aside the industries new credibility gap with farmers, low corn prices will make it difficult for many farmers to justify planting corn at last year’s record levels. The projected breakeven corn price for farmers is about $4 per bushel. Facing projected $3.50/ bu. prices, many farmers are already looking to alternatives.Nor can ethanol plants look to distiller’s grains to prop up their operations. Once a tidy chunk of industry profit, prices for the livestock feed – a by- or co-product of ethanol production, have plunged in recent months also. Summer prices neared $190 per ton for distiller’s grains, but have fallen off to about $100 per ton this month.

What does the future hold for the ethanol industry? Only time will tell, but in December, 2008 the ethanol boom seems to have gone at least slightly bust.