The corn used for ethanol production is field corn typically used to feed livestock, not the sweet corn marketed for human consumption. Nearly 40% of the nation’s ethanol production capacity is farmer-owned

Dry-mill production also results in solid byproducts known as distillers grains and solubles (DGS), which can be dried and used to feed livestock. In some plants close to cattle feedlots, the grains can be fed wet to livestock, avoiding the need for drying and saving both energy and money. The wet-mill process, which begins by soaking the grain in water and acid, generally produces corn oil, corn gluten meal (to feed poultry), and sweeteners in addition to ethanol. Wet mills tend to be much larger than dry mills.

The two largest variables in the cost of ethanol are the cost of corn and the cost of natural gas or other sources of heat needed to process the mixture. When corn costs $2 a bushel, it costs between $1 and $1.20 to make a gallon of ethanol. Because ethanol has only two-thirds the energy content of gasoline, that’s equivalent to $1.50-$1.80 per gallon of gasoline (wholesale), or $50-$60 per barrel of oil. At that price of corn, ethanol is competitive with gasoline with the current subsidy for gasoline blenders when oil costs $30 a barrel or more. It is economically competitive with gasoline without a subsidy when oil costs $50 a barrel or more.

The federal government provides a tax incentive to gasoline blenders (not ethanol producers) to encourage the use of ethanol. This subsidy affects how ethanol’s competitiveness with gasoline. For example, gasoline blends containing 10% ethanol earn a tax credit of 5.1 cents per gallon. In effect, the blenders can pay up to 51 cents more for a gallon of ethanol than the equivalent amount of gasoline and still break even. This tax break is called the Volumetric Ethanol Excise Tax Credit. Its cost to the government ($2.5 billion in 2006) is offset by savings in crop payments to farmers. In 2006 high corn prices caused by ethanol demand reduced farm support payments by roughly $6 billion.

Corn growers receive government support if the price of corn falls below a certain level, which encourages production. High levels of production keep the market price low, making ethanol more economically competitive by reducing the cost of corn. On the other hand, ethanol production reduces farm payments because the increased demand for corn causes its price to rise. (It also increases taxable farm income.)

For every unit of energy delivered at the pump, corn ethanol requires 0.76 units of fossil energy, and gasoline requires 1.22 units. The use of ethanol thus results in the consumption of 40% less fossil energy than the gasoline it replaces. Papers by a Cornell entomologist and a Berkeley petroleum geologist have asserted a more negative view of ethanol and have received much attention – but their methodology has been disputed by their peers

Most of the fossil energy consumed in making corn ethanol goes to processing the feedstock – from cooking and distilling to drying the distillers grains. Very little fossil energy is needed to make ethanol if renewable energy is used for processing. For example, in Brazil, sugar cane waste, known as “bagasse,” is used for boiler fuel. Thus Brazilian ethanol contains eight times more energy than was required to make it. Ethanol from cellulose is expected to have a similar fossil energy balance (and therefore greenhouse gas balance). In one assessment, cellulosic ethanol from wood residue required 0.16 units of fossil energy per unit of delivered energy; corn stover required just 0.09 units. The fossil energy balance of corn ethanol would improve if corn stalks, wood waste, or methane from cattle manure were used for its process heat, as a couple of U.S. facilities already do