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http://us.ft.com/ftgateway/superpage.ft?news_id=fto102120081531357607 Biofuels: From hope to husk
Tuesday Oct 21 2008 14:20
It was an American dream that has failed to become a reality. For much of the last decade, enthusiasts from President George W. Bush down have touted corn-based ethanol as something approaching a superfuel, a home-grown alternative to foreign oil that would help cut smog and bring hope to struggling farmers.
It has not worked out that way. Instead, the ethanol industry has undergone a great boom and bust in which a Financial Times analysis has found investors as savvy as Bill Gates, Microsoft's founder, have collectively lost billions of dollars.
Despite the billions more in taxpayers' dollars that was spent to subsidise it, ethanol now eats up nearly one-quarter of the US corn crop without so far fulfilling the hopes held for its beneficial effect either on the environment or US dependence on foreign energy.
It may have helped keep gasoline prices lower in the world's wealthiest nation, but a growing band of influential critics say it has also contributed to higher food prices in the world's poorest countries. So far, the only sure beneficiaries from the ethanol promise have been the investors clever enough to get into the industry early and the corn farmers who have enjoyed a lucrative new market for their grain.
In short, the story of ethanol is a cautionary tale of the unintended and costly consequences that can arise when the interests of politicians and influential industries collide.
Today, ethanol is a $32.5bn (£19.1bn, €24.6bn) a year business in the US. But for nearly three decades it was an obscure cottage industry run by farmers trying to scratch out a living in the corn belt in the country's Midwest. Americans had been making bourbon, a drinkable form of ethanol, from corn for centuries. But ethanol got its start as a fuel around the time of the 1970s Arab oil embargo, when a handful of early adherents started to argue that it could lower dependence on energy imports as well as help farmers.
Among these pioneers was a gangly, soft-spoken Minnesotan named Jeff Broin. In 1983, Mr Broin and his father set up an ethanol still on their farm, hoping to sell corn-based fuel to the few companies then operating that had begun blending ethanol into gasoline. Three years later, the Broins bought a disused ethanol plant in nearby South Dakota and went into commercial production. The younger Mr Broin, then just 22, could scarcely have imagined that the family company, known today as Poet, would become an ethanol powerhouse.
"We were simply trying to add value to grain," he says. "If someone had suggested that we would become the largest producer of ethanol in the world, we probably would have laughed at them."
Farmers such as the Broins had powerful allies in Washington. Chief among them was a coalition of 20 Democratic and Republican "corn state" senators including Tom Daschle, the former Democratic majority leader, and Chuck Grassley, a Republican senator from Iowa. But the ethanol boosters had a powerful adversary in big oil companies, which saw ethanol as a potential rival and argued that government support would be just another farm-state giveaway.
This argument resonated in the national capital during the 1980s and 1990s. President George H.W. Bush, for example, disparagingly referred to ethanol as "Daschle gas".
But the president's son thought differently. Mr Grassley remembers taking the younger Mr Bush on a tour of Iowa's cornfields during his first presidential campaign in 2000. "I was one-on-one with him with a couple of other people in a van and I spent two days talking to him about ethanol," says Mr Grassley. Mr Bush appeared to be impressed, Mr Grassley recalls. "He said, 'It's this simple. We've only got so much petroleum and we've got to have renewables. It's got to be ethanol.'"
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Not long after Mr Bush took office in 2001, the September 11 terrorist attacks gave grim weight to the ethanol lobby's arguments. "Isn't it more sensible to spend $140 a barrel for ethanol than it is to ship $140 over to Arabia and let their Wahabis be trained to kill you and me?" asks Mr Grassley.
The economics of ethanol were also shifting as rising oil prices made ethanol and other alternative fuels more attractive. On Wall Street, clever investors began to take notice. In May 2003, Morgan Stanley Capital Partners, the private equity arm of the US investment bank, bought Aventine Renewable Energy, an ethanol producer with plants in Illinois and Indiana, for $75m. It paid itself nearly twice that in dividends only seven months later.
In 2004, lawmakers on Capitol Hill passed a law giving refiners an incentive to blend ethanol with gasoline by letting them claim a 51 cent per gallon tax benefit on each gallon of ethanol they used. By the following year, the politicians were under pressure to go even further. The price of a gallon of petrol had jumped over the $3 mark. Global warming worries were adding weight to the ethanol industry's claims that the fuel was an important source of renewable energy. Legislators began work on a law for a renewable fuel standard that would require gasoline producers to blend billions of gallons of ethanol into petrol each year.
Barack Obama, as a freshman Democratic senator from Illinois, a leading corn-producing state, was a big supporter. "If a terrorist hijacked a plane in Kuwait and crashed it into an oil complex in Saudi Arabia, it could take enough oil off the market and cause more economic damage in the United States than if a dirty nuclear weapon exploded in downtown Manhattan," he said in a Senate speech. "Instead of continuing to link our energy policy to foreign fields of oil, it should be linked to farm fields of corn."
Not everyone agreed. New York's Senator Chuck Schumer called the proposal a "boondoggle" and said: "There is no sound public policy reason for mandating the use of ethanol - other than the political might of the ethanol lobby." Big users of corn, such as meat processor Tyson Foods, worried it would lead to higher corn prices.
But ethanol supporters found an important, if unexpected, ally: their old rivals in the US oil industry. That was largely due to a fuel additive known as methyl tert-butyl ether (MTBE), which helped petrol burn more fully and thus lower smog emissions. Oil refiners had been using the additive for years, especially since clean air requirements were enacted in the 1990s.
By the early 2000s, however, MTBE had become a liability after scientists discovered that it lingered in ground water and polluted aquifers. California and other states banned it, leaving the oil industry searching for a substitute that would allow it to comply with environmental regulations and avoid billions of dollars in MTBE-related liabilities. Ethanol fitted the bill. "We saw ethanol as a viable product - it was a product that we knew," says Al Mannato, fuels issues manager at the American Petroleum Institute, the oil industry's leading lobby group.
The support of the API "significantly changed the political calculation on Capitol Hill", says Bob Dinneen, president of the Renewable Fuels Association, the ethanol industry grouping.
This was a turning point. That summer, Congress passed, and Mr Bush signed, the Energy Policy Act of 2005, which required refiners to blend 7.5bn gallons of biofuels into gasoline by 2012. Congress and the president created a multi-billion dollar market for corn-based ethanol virtually overnight. "Wall Street loved it," says Kevin Book, an analyst at Friedman, Billings, Ramsey & Co, an investment bank. "Suddenly, wingtips were covered in corn dust in every state."
Speculators poured into the industry. In November 2005, an investment company owned by Microsoft's Mr Gates struck a deal to pay $84m for a 27 per cent stake in Pacific Ethanol, a California group whose shares had begun trading on the Nasdaq stock market that year but had yet to produce a single drop of fuel.
Not long afterwards, two New York hedge funds - Greenlight Capital, headed by David Einhorn, and Third Point, managed by Daniel Loeb - invested nearly $75m in BioFuel Energy, a Colorado ethanol producer. Thomas Edelman, a Wall Street banker and oil and gas executive, chipped in $8.75m and was appointed chairman.
Ethanol futures prices shot up almost fourfold in the 12 months after the energy bill was signed. Meanwhile, the price of corn required to make a gallon of ethanol continued to languish thanks to surplus stores of the grain. The result was a bonanza for ethanol producers. Ethanol companies whose plants were up and running in time to catch this wave made fat profits for themselves and their investors.
In 1999, there were 50 ethanol plants in the US. By January 2007, there were 110, with 76 more under construction. Most early ethanol plants probably paid for themselves within one or two years, according to Ray Goldberg, a professor of agribusiness at Harvard Business School.
Ethanol's potential as an oil alternative had also begun to take hold in the popular imagination. Advertisements appeared on billboards alongside highways in Missouri showed a Missouri farmer standing next to a cornfield. Opposite him was a picture of the late King Fahd, the former ruler of Saudi Arabia, dressed in traditional Arab robes. Between the two men, in large block letters, was a question: "Who would you rather buy your gas from?"
The growing cost of ethanol production to US taxpayers went largely unnoticed, amid a hype that was reminiscent of the dotcom boom of a few years earlier. As several big ethanol producers announced plans to go public, ordinary investors, largely shut out from ethanol's early years, jumped at the chance to buy into the industry.
In May 2006, Thomas H. Lee Partners, a Boston private equity group, bought an 80 per cent stake in Hawkeye Renewables in a deal that valued the company at $1bn. THL almost immediately announced plans for an initial public offering. Morgan Stanley Capital Partners, which had been spun out of its parent bank and renamed Metalmark, reaped a tenfold return on its 2003 investment in Aventine Renewable Energy when Aventine became one of several biofuel producers to float on the New York Stock Exchange in June. The biggest star was VeraSun of South Dakota, whose shares immediately jumped 34 per cent on their debut.
But the excitement proved to be short-lived. Investors had ignored some glaring warning signs. Few recognised it at the time, but the previous year's boom had also set the stage for a shift in the economics of the industry that would prove disastrous for those who came late to the game. In the same month as VeraSun's IPO, ethanol futures prices fell sharply, reversing the historical correlation between the price of ethanol and the price of a gallon of gasoline. By September, ethanol that had sold for $4 a gallon in June was trading at $1.75, according to DTN, a commodities research group.
The problem was one of oversupply. Dozens of ethanol plants had come online trying to capitalise on the boom, creating a glut that pushed down prices. Corn prices, meanwhile, were rising sharply, driven by increased demand for the crop for use in ethanol production and the rising cost of oil. In the space of just three months, ethanol had moved from boom to bust.
Some of the world's best-known investors were burnt. When Mr Gates' investment fund started disposing of its shares in Pacific Ethanol this April, it sold them at a steep loss. Deals such as the one Thomas H. Lee did with Iowa's Hawkeye Renewables in 2006, which valued Hawkeye's two ethanol plants at $1bn, began to look less wise. Some analysts say the plants could have been built for closer to $400m. When Colorado's BioFuel Energy finally went public in June 2007, it was forced to cut its offer price twice in one week. It eventually raised $101m after expenses in a combined public offering and private placement.
Even Mr Dinneen, the face of the ethanol industry in Washington, admits that, in hindsight, ethanol investors were suffering from "overblown exuberance". "There was a period of growth in the industry, and the economics were uncharacteristically favourable," he says. "People invested thinking every year was going to be like 2006, when history would tell you that was an anomaly. Clearly there was a lot of Wall Street money coming in - and I think it was with unrealistic expectations."
If ethanol were any other industry, it might be on its last legs today. But the dream of turning cornfields into car fuel refuses to die.
ETHANOL INVESTORS: EARNINGS STREAM BECOMES A TRICKLE
LOSERSBill Gates:
Best known of the investors to lose money in the ethanol frenzy. Cascade Investments, the Microsoft founder's private investment company, paid $84m (£49m, €64m) for a 27 per cent stake in Pacific Ethanol in November 2005. The California company had a profitable business marketing ethanol made by other producers but had yet to produce a drop of the fuel itself.
By the time its first plant came online in October 2006, plunging ethanol prices and the rising cost of corn had squeezed the industry. When Cascade began divesting its stake in April this year, Pacific shares sold for less than $4 - compared with $9 when it announced plans to invest and a $42 boom-time high. As of this summer, Mr Gates had lost at least $37.9m on the investment.Thomas H. Lee Partners:
When the Boston private equity group took its 80 per cent stake in Hawkeye Renewables in May 2006 - a deal that valued the company at $1bn - a fundamental shift in the economics of ethanol was already under way. THL was forced to pull its planned flotation of Hawkeye in September that year and the company has yet to go public.
WINNERSEarly investors:
Those who got in to ethanol before the spike in prices in 2005-06 made fat returns. They include Don Endres (right) who in 2001 founded VeraSun Energy, a leading US producer whose hugely successful June 2006 IPO marked the peak of the ethanol boom.
Farmers: Benefited from the surge in corn and land prices created in the boom. In addition, most ethanol plants are controlled by farmer-owned co-operatives. Those built before the end of 2005 are likely to have made a return. Associated industries such as tractor makers and seeds suppliers have also profited.
Tomorrow: The end that never came
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http://us.ft.com/ftgateway/superpage.ft?news_id=fto102120081832107651 Investors suffer as US ethanol boom dries up
Tuesday Oct 21 2008 17:25
Investors, such as Microsoft's Bill Gates, are sitting on billions of dollars in losses after buying into the corn-based ethanol industry that George W. Bush embraced as the ans wer to US energy woes.
Six of the biggest publicly traded US ethanol producers have lost more than $8.7bn in market value since the peak of the boom in mid-2006 and the beginning of this month, according to an analysis by the Financial Times. The boom followed a 2005 law requiring refiners to mix billions of gallons of the biofuel with petrol.
Investors who bought and held shares in hotly anticipated market listings of Aventine Renewable Energy, VeraSun Energy and other ethanol producers that have gone public since 2005, have seen the value of their holdings plummet as much as 90 per cent from their flotation price, in spite of billions of dollars of government support for the industry.
The losers in the ethanol investment frenzy, which some have compared to the dotcom mania of the late 1990s, include famous names, such as Mr Gates, Microsoft founder. His private investment firm has lost millions on its 2005 investment in a company called Pacific Ethanol. Mr Gates's firm, Cascade Investments, did not return calls seeking comment.
Other private equity firms and hedge funds that piled into the ethanol industry in the boom years of 2005 and 2006 have put in a mixed performance. Those who bought into ethanol and sold out at the earliest stages made substantial sums. Metalmark, the former private equity arm of Morgan Stanley, the US bank, reaped a 10-fold return on its 2003 purchase of Aventine when it went public in 2006.
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Meanwhile, Thomas H. Lee Partners, a Boston-based private equity group, was forced to pull its planned float of Hawkeye Renewables, an ethanol producer it bought at the height of the ethanol boom. One person close to Thomas H. Lee defended the group's investment, arguing that Hawkeye was producing strong cash flow in spite of a difficult business environment that has dragged down the share prices of publicly traded rivals.
Both Metalmark and Thomas H. Lee Partners declined to comment.
Investor losses come as taxpayers have paid billions to support the ethanol industry. More than $11.2bn has been spent since 2005 on tax breaks for companies that blend ethanol into petrol. Billions more have been spent on direct state and federal subsidies for US ethanol production.
"We're looking at an industry that's cost $80bn to get to this point," said Bob Starkey, a fuels analyst at Jim Jordan & Associates, a research group in Houston.
However, ethanol has disappointed many who saw it as a wonder product that could reduce the US's dependence on foreign oil while cutting down on pollution. Worse, a growing number of influential critics now say ethanol is helping raise the price of food.
The industry's supporters still defend ethanol. Bob Dinneen, head of the Renewable Fuels Association, the industry's main lobbying group in Washington, said the fuel represented an opportunity for Americans to invest "here at home" rather than continue to "haemorrhage money ... to the Middle East".
"I'd challenge you to find any energy resource today that isn't dependent on government support," Mr Dinneen said. "If domestically produced energy is something that you want to have, then some of these subsidies are going to be necessary."
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http://us.ft.com/ftgateway/superpage.ft?news_id=fto102220081801307856 Political pressure keeps ethanol cash flowing
Wednesday Oct 22 2008 16:50
By most rational measures, the corn-based ethanol industry should be on its knees. Its six biggest public companies have lost more than $8.7bn (€6.7bn, £5.3bn) in the past three years alone.
The fuel has had little impact on either greenhouse gases or US dependence on foreign oil, in spite of an estimated $80bn in taxpayer subsidies that were supposed to address both issues.
The global financial crisis has given fresh ammunition to critics who say the US can no longer afford such government largesse, and there is no let-up in the clamour to blame biofuels for exacerbating world hunger.
"Everybody's trying to bad-mouth ethanol," says senator Chuck Grassley, one of the strongest backers of the fuel, which accounts for enormous numbers of jobs and businesses in his corn-growing home state, Iowa.
Yet such is the enormous political and corporate weight behind the industry that only a brave gambler would bet on it fading away soon.
The candidate who polls predict most likely to win in the November 4 presidential election is Barack Obama, the Democrat and a long-time ethanol supporter from the corn-growing state of Illinois.
Although Mr Obama has paid some lip service to ethanol's critics, he continues to put the expansion of biofuels at the centre of his energy policies.
Even if he is defeated by his Republican rival, John McCain,who is a staunch critic of ethanol subsidies, the industry's opponents would still struggle to defeat it.
Ask Rick Perry, the Republican governor of Texas. Worried about the pressure corn prices were putting on livestock producers in his state, he tried to persuade the administration of President George W. Bush temporarily to waive one of the biggest planks in the ethanol edifice: the requirement introduced in 2005 for oil refiners to blend billions of gallons of ethanol with gasoline. The mandate will gradually expand from a target of 7.5bn gallons in 2012 to 36bn gallons by 2022.
The Environmental Protection Agency denied Mr Perry's request, saying there was no evidence that the ethanol mandates were hurting the economy. It is also hard to imagine that Congress would kill off the ethanol mandates at a time when popular support for alternative sources of energy ison the rise.
Lobbyists who work on the ethanol issue, such as Scott Faber of the Grocery Manufacturers Association, say that Congress is split roughly into three camps on ethanol.
Ethanol's congressional backers also insist the boost that the industry gives struggling farm towns outweighs the cost to taxpayers. "New houses are being built and the main street looks vibrant, and people are excited and they're proud of the fact they have an ethanol plant," says Tom Daschle, the former Democratic Senate majority leader.
Some, such as senator Kay Bailey Hutchinson of Texas, believe the mandates ought to be frozen and restructured. Others believe the US ought to pursue aggressively next-generation technologies, such as cellulosic ethanol, which uses grass and leaves rather than just corn kernels. A third camp of farm state representatives stand squarely behind the existing mandates.
Yet there is one significant cause for alarm in the industry: the mounting calls to lift the tariffs that have kept the world's other large producer of ethanol, Brazil, shut out of the US market.
US oil refiners who combine ethanol and petrol will shortly receive a 45 cent per gallon tax credit, down from a previous 51 cents, but foreign ethanol is subject to a 54 cent-a-gallon tariff.
Foodmakers say allowing Brazilian ethanol would help bring down US petrol prices and help the environment. Ethanol is produced by fermenting sugar into alcohol. Brazilian ethanol is derived from sugar cane, which contains more sugar per unit weight than corn. It is also easier to extract than sugar from corn kernels, making sugar ethanol more efficient.
"The rationale for the tariff has evaporated," says Mr Faber, of the grocery manufacturers' group. "Americans are paying $4 at the pump and it is ludicrous that we are not doing everything we can to bring $2 ethanol to the marketplace that is significantly better for the environment."
Proponents of ethanol say lifting the tariff on foreign sources of ethanol would, in effect, mean the US government would be subsidising other countries by allowing them to benefit from the 45 cent tax credit.
"This nation is spending $700bn on imported energy. That is an incomprehensible transfer of wealth. And ethanol is the only thing we have today that is mitigating that haemorrhaging," says Robert Dinneen of the Renewable Fuels Association.
In the longer term, ethanol proponents are hopeful that improvements in corn genetics and progress in the commercialisation of cellulosic ethanol technologies, which use waste materials rather than food stocks to produce the fuel, will render argument's about ethanol's role in rising food prices moot. Monsanto and DuPont are among the companies working on new corn variants that have the potential to ease prices by dramatically increasing the amount of corn that can be harvested from a single acre.
Meanwhile, ethanol companies and venture capitalists are pumping millions of dollars into research and development of cellulosic technologies.
Poet, one of the biggest US ethanol producers, has started building a test facility for ethanol made from discarded corn cobs - a by-product of corn processing. By 2011, the company hopes to begin industrial-scale production.
For the time being, however, cellulosic ethanol remains an unproven technology.
"Cellulosic is still behind the starting block," says Bruce Scherr, chief executive of Informa Economics, an agriculture research group. "I haven't seen evidence that it will commercialise at the rate we've been expecting."
Mr Scherr says the industry is likely to struggle to meet even the modest 0.6bn gallon cellulosic ethanol requirement set to take effect next year under a 2007 law that expanded the renewable fuel mandate.
Even if cellulosic technologies can be brought to market quickly, they could present logistic challenges. Switchgrass, one commonly floated corn alternative, is among the plants that can be most easily converted into ethanol. But to grow enough switchgrass to replace corn as a source of ethanol would require the number of acres of switchgrass under cultivation to surpass those of corn and soyabeans by a large margin, according to one analyst.
"All the alternatives to corn have individual problems," the analyst says. "For the time being we are stuck with corn ethanol - and the market knows that."
[Ends]
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Extracting energy from seaweed is a particularly efficient and reliable method of producing green energy 
Smits set up a fund that will get a stock exchange quotation, and should collect 300 million euros. The fund will also finance sugar palm forests in other countries, such as Colombia and Tanzania. Through his Washington office secretariat, Dutch World Bank Executive Director Herman Wijffels has confirmed that from November onwards he will act as Special Advisor to this fund. Mr. Wijffels has announced to leave the World Bank in November of this year.
