Muncie Star Press, IN
11-26-06
Rapid ethanol expansion questioned
An expert from Purdue and one from Massachusetts say the ethanol industry
might be headed for a bust.
By SETH SLABAUGH
seths@muncie.gannett.com
MUNCIE -- The proposed construction of nine ethanol plants in East Central
Indiana is happening at a time when the rapidly growing ethanol industry might
be headed into a bust period, some experts suggest.
"I'm not against ethanol by any means, but it can't continue to grow like this,"
says Christopher Hurt, an agricultural economist at Purdue University. "It's going
to hit constraints, one of which is the availability of corn."
Of the 18 ethanol bio-refineries either under construction or announced in
Indiana, half are in East Central Indiana communities: Alexandria, Bluffton (two
projects), Hartford City, Marion, Montpelier, Muncie, Portland and Winchester.
Hurt predicts that only seven to nine ethanol plants will be built state-wide during
the next several years, not 18.
"The current expansion rate of the ethanol industry is about 70 percent," he said
in an interview. "It's doubling every one year and five months. That is a rate that
certainly cannot be sustained for another year."
Today, there are 107 ethanol bio-refineries in the United States with the capacity
to produce more than 5 billion gallons of ethanol annually, according to the
Renewable Fuels Association. Another 56 ethanol plants are under construction
and will add another 3.8 billion gallons a year of production capacity within 18
months.
Gov. Mitch Daniels and Lt. Gov. Becky Skillman have attended ground-breaking
ceremonies recently for ethanol plants in East Central Indiana, pointing out that
when Daniels took office in January of 2005 Indiana had only one ethanol plant.
If all 18 of Indiana's announced plants are built, they would have the capacity to
produce more than 800 million gallons of ethanol a year and to consume more
than 600 million bushels of corn a year, according to a state department of
agriculture fact sheet.
Indiana produced a record 929 million bushels of corn in 2004 and is expected to
produce 856 million bushels this year.
Seventeen to 19 percent of Indiana's corn crop is fed to the Hoosier livestock
industry. That percentage will increase if Indiana achieves the governor's goal of
doubling pork production. About 30 percent of Indiana's corn crop is processed in
the state for industrial and human products, including corn starch and high
fructose corn syrup for the soft drink industry. The remaining 50 percent or so of
Indiana's corn crop is shipped to Southeastern states to feed poultry, swine and
other livestock, and to Japan, Mexico and other countries.
The weakest link
"This ethanol expansion is going to bid up the price of corn to a level where it is
simply not profitable to use corn as the raw material for ethanol, and there is no
other raw material they can use of that magnitude," Hurt said. "For ethanol to get
that corn, it has to outbid somebody else who is already using it. Who's the
weakest link?"
Will it be livestock producers? Hurt asked. Japan? Mexico? Ethanol producers?
While high corn prices will be good for Indiana corn growers, they'll be bad for
livestock producers, for whom feed is their most expensive input.
"For our hog producers, our estimates there are anything higher than $3.50 per
bushel and it's just red days at the bank, sorry, in terms of losses," Hurt said.
"We're virtually at those levels now on corn."
Cash corn prices in Indiana today are in the range of $3.50 per bushel, the
highest in years, due in part to strong demand for corn from ethanol producers.
"The corn growers will say, 'Give us a chance to increase supply,' and they will
have that opportunity, but it's a huge challenge," Hurt said. "We can grow the
total supply of corn -- by adding more acreage and kicking yields up -- but we
can't grow it at the rate of 70 percent."
Hurt has asked ethanol plant producers in East Central Indiana, the East Coast,
the West Coast and Canada where they will get their corn.
"And of course, they all say Iowa," Hurt said. "But it's not going to happen. Iowa
is not going to be a surplus corn state of any magnitude."
Boom, then bust
Hurt wouldn't be surprised to see an ethanol industry bust.
"Good old capitalism being what it is, does expansion always just stop at the
exact moment when you are going to have enough ethanol plants that are in
balance with the amount of corn we have?" Hurt asked. "And the answer to that
is no. We usually boom it and then bust it. So we probably will overbuild for what
we can really handle, and it won't be obvious until some of these plants are
halfway constructed. Most investors will finish up and see how it goes. Then you
run with excess capacity and poor margins and bankers say it stinks, don't talk to
me about ethanol."
Other potential limits to ethanol expansion include the rising cost of building
ethanol bio-refineries and the possibility of losing government support, Hurt said.
The ethanol industry is heavily subsidized, from corn crops to flex-fuel vehicles to
per-gallon tax credits. The American ethanol industry is also protected by tariffs
on imported ethanol.
But there could be attempts to remove subsidies and import tariffs.
For example, the Renewable Fuels Association (the trade association for the
ethanol industry) says that it joined the National Corn Growers Association and
the American Farm Bureau Federation in successfully opposing efforts in May to
remove the import tariff on ethanol. Much attention was given to that idea as a
way to boost ethanol supplies and lower gas prices, according to the association.
Pace of building questionable
In a report prepared last month for the International Institute for Sustainable
Development, energy analyst Doug Koplow of Cambridge, Mass., questioned
"the vast array of public support at all levels of government being showered on"
the ethanol industry.
"Aside from growing public costs, there remains a concern that productive
capacity -- driven by the subsidies -- will grow at an unsustainable rate," Koplow
reported. "Such growth would result in a number of potentially damaging
outcomes. First, too much industry capacity could lead to shakeouts and
bankruptcies."
In an interview, Koplow said it was a question of price.
If gasoline prices fall or the cost of ethanol production rises (for example, if corn
prices spike), ethanol becomes less competitive and the industry will look for
ways to avoid using ethanol, Koplow said.
"If too much of this goes on, the plants would lose money or eventually go out of
business," he said. "There could also be other forms of over-shooting, like if Iowa
begins trying to import corn feedstocks for all of its new plants, yet the states it
had assumed would have surplus corn are using them for their own ethanol
production."
The pace of construction of ethanol bio-refineries should be questioned,
according to Koplow.
"Robert Wisner of Iowa State University has raised concerns that Iowa will
need to become a net corn importer to feed its plants," Koplow said. "Might a
similar situation arise in Indiana? Is the state overseeing construction, or is it
occurring based on uncoordinated local decisions and subsidies? Does the
Indiana build-out take proper consideration of the rate of construction from
surrounding states, which also need corn feedstocks?"
These and many other questions are worth asking before all the plants are on the
ground, he said.
Part of our landscape
"While the market will determine which ethanol plants are built in Indiana,
biofuels production is now a part of our state's landscape and will be for some
time to come," responded Deb Abbott, spokeswoman for the Indiana Department
of Agriculture (ISDA). "Biofuels are environmentally friendly, reduce our
dependence on foreign sources of energy and support farmers and rural
economies in Indiana."
In May, ISDA released a study that looked at the compatibility of the
department's bioenergy and livestock strategies, Abbott said.
"The study concluded there is enough corn to support both initiatives," she said.
"During the past six years, Indiana has exported on average more than 50
percent of the corn we produce. That corn could stay in our state and support
ethanol production. Secondly, yields continue to increase each year, adding to
corn supply without adding acreage. USDA (U.S. Department of Agriculture) also
has concluded that adequate corn is available to supply both the ethanol and
livestock industries."
Lenders will help prevent Indiana from over-building, says corn grower Troy
Prescott, president of the proposed Cardinal Ethanol bio-refinery near
Winchester. Officials from First National Bank Omaha, Cardinal Ethanol's senior
lender, flew in for Cardinal Ethanol's ground-breaking ceremony last month.
"With 106 ethanol plants right now, there will be some shakeouts, yes," Prescott
said. "If you look at the list of 106, a lot are 10- and 15-million-gallon plants. The
original ones are not nearly as efficient as the large facilities like ours. The
smaller ones would go bankrupt, not us."
Cardinal Ethanol, designed to produce 100 million gallons of ethanol a year, will
have unit-train loading capability. A unit train is one made up completely of one
commodity, such as coal, corn, or distillers grain (a byproduct of ethanol
production used in animal feed), shipped from one place of origin to the same
destination.
"We built our plant to be as efficient as possible," Prescott said.
Corn grower Joe Russell, who has attracted a proposed ethanol bio-refinery to
his Ag Biovision Park north of Muncie, says farmers are excited about the
challenge of keeping up with demand.
"It would be like telling the auto industry, 'We could use three million more cars;
do you think you can produce it?' Yes, we can. There is enthusiasm in the farm
fields of America to feed the world, help fuel our nation and create jobs."
Contact news reporter Seth Slabaugh at 213-5834.