Supply Excellence — The Ethanol Debate: A Supply Management View

The Ethanol Debate: A Supply Management View

March 16th, 2007 · by Tim Minahan · No Comments · enviro/social sustainability, supply management, supply risk

I recently had the opportunity to sit down with Julie Murphree, founder and former editor-in-chief at Supply and Demand Chain Executive magazine (and current PR Director for the Arizona Farm Bureua and author of the Fresh Air blog) to discuss one of her favorite topics: ethanol. With her supply management roots and insider status in the farming community, Julie brings a unique perspective that balances the hopes of a viable alternative fuel source with the practical business sense of the supply management professional.

In the following Q&A, Juile shares the latest news on ethanol production and delivery. She also provides some practical recommendations for how the alternative fuels movement will impact energy costs and supply constraints — particularly for those of you buying corn-based ingredients and products.

Supply Excellence: You recently attended the National Ethanol Conference. What was the big news at the conference that supply managers should be aware of?

That the ethanol industry has a significant stake in the energy business and should be taken more seriously today.

SE: Take a moment to describe the primary benefits of ethanol versus oil-based fuel.

Beyond the environmental green-house gas emission reduction advantage, ethanol brings diversity into the energy portfolio and supply chain. Plus, it’s renewable and can be produced domestically. The other exciting consideration is that we’re developing and advancing a new industry.

But let’s just focus on the environmental considerations for a bit. Core findings from an analysis by researchers at the University of California, Berkeley, suggest that filling up with ethanol instead of gasoline saves oil and is no worse for the environment than burning gasoline. The findings, which originally appeared in a January 2006 Science magazine, helped settle the ongoing debate over whether ethanol is a good substitute for gasoline and thus can help lessen the country’s reliance on foreign oil and also support agriculture.

The UC Berkeley analysis is fascinating because the research team weighed these arguments against other studies claiming that it takes more energy to grow the corn to make ethanol than we get out of ethanol when we burn it. Ethanol critics continually expound on the amount of energy expended just to grow corn, in addition to the energy use and costs during refining. The UC Berkeley researchers even had to correct errors and assumptions from the other studies in order for fair evaluations to be made in regards to actual energy use. Their conclusions show that producing corn ethanol uses much less petroleum than producing gasoline.

Ethanol will not replace oil-based fuel. It simply allows us to add a product option and supplement to the supply chain portfolio. I personally believe it also gives us more leverage with other countries when they see that we’re creating alternatives and our dependency is not so exclusive to the oil-based fuels. I am so bold as to predict that the oil industry will probable become a dominant player in the ethanol game. In fact, you regularly hear of oil companies extending their opportunities into alternative fuels. Chevron announced last year that it had formed an entire division on biofuels.

SE: As the founder and former editor-in-chief of Supply and Demand Chain Executive magazine, you have a unique perspective on the ethanol debate. Some supply managers push back on ethanol usage, fearing that it will drive up prices and raise supply issues for other corn-based commodities and ingredients. Is ethanol fueling a supply crunch for corn-based products? Or are these fears over-rated?

They’re correct to be concerned about the higher price of corn, but not so much the supply. Coca Cola is feeling the squeeze of higher corn prices, for example, but the impact on its soda formulations - largely sweetened with high fructose corn syrup in the US - remains unclear.

According to the National Corn Growers Association and some of the information I’ve even looked at from the U.S. Department of Agriculture indicate that the supply of corn for both food, feed and fuel will not be the problem. By all indications corn prices should remain high for a while, however, with cellulosic ethanol coming online down the road and other feedstock options for ethanol plants I could foresee prices moving down.

In Arizona, research scientists are even field testing sweet sorghum and algae as alternative feedstocks to ethanol plants. The research in this area is fascinating. These supply chain issues where a raw commodity is concerned happens to be the supply and demand chain professional’s sweet spot (no pun intended). I see them adjusting to the market and substituting and/or re-negotiating long-term contracts where needed. Making market adjustments and applying all the skill sets required of today’s leading-edge supply and demand chain professionals only means more creative tactics are applied to adjust to whatever is going on.

SE: We’ve heard a lot about cellulosic ethanol recently. Give us a tutorial on this new ethanol-generating technique. And how it might allay concerns that increased ethanol use will have on corn-based supply?

This technology is so encouraging and fascinating to the renewable energy industry that the recent National Ethanol Conference devoted the last day of the conference to this topic. Most experts suggest that it will take five years for cellulosic plants to come online. In pilot, a few plants are already experimenting with it. But for cellulosic feedstock plants to take off they must be profitable and that’s where the research and pilot efforts are focused.

Researchers have already calculated that between switchgrass, biomass trash, wood fiber trash and other sources, that the country has enough available feedstock for plants. Then our dependence on corn would not be so great. For a journalist, it a great time to track this issue because so much exciting research and business innovation is in operation. I believe because of business innovators the renewable energy industry is the best place to be to discover what’s new and profitable in business.

SE: The innovations around cellulosic ethanol are encouraging. But when will we realistically see cellulosic ethanol available in considerable volumes?

Most experts tacking and researching cellulosic ethanol say the next five years. To be full ramped up and taken seriously in the industry the timeframe may be a bit longer.

SE: Ethanol generation is only one end of the equation. What is the current status of ethanol delivery infrastructure here in North America? And what are the plans to improve it?

There are transportation concerns, but not insurmountable. Relating to pipeline issues, ethanol must be pumped in different pipelines from oil-based fuels. So beyond building pipelines exclusively for ethanol delivery, trucking is seen as a major mode of transportation for ethanol. But most transportation experts – and leaders from trucking, barge and rail were at the conference to speak on this – believe that their current infrastructure plans with a bit of a ramp up can accommodate future requirements.

In rail, the gentleman that spoke on this at the conference suggested that in the next 5 years they would not need to grow rail capacity to more than 3 to 4 percent of what’s already planned. Updating transportation infrastructure is an issue in the transportation industry anyway, especially in barge or waterway transportation. Ethanol may spur this, which is considered a good thing by many in the industry anyway.

Thanks, Julie. You’ve given Supply Excellence readers valuable insight into the reality of ethanol as a widespread alternative fuel source. You’ve also given us food for thought on how ethanol success may help (and hinder) supply strategies.

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