Minneapolis Star Tribune, MN
05-19-07
Will ethanol's flame last?
Iowa State researchers say that owners of new ethanol plants will see returns
evaporate by next year as ethanol prices drop.
By Mike Meyers, Star Tribune
The building boom in ethanol plants will go bust by the end of this year, scuttled
by increased supplies of the fuel, falling prices and reduced return on investment,
according to researchers at Iowa State University.
If they're right -- and some who follow the industry and invest in it believe their
forecast is off the mark -- ethanol may not bring the same level of profits that
plant investors have enjoyed in recent years.
"We think the expected returns to an ethanol plant are zero or negative in 2008,"
said Bruce Babcock, economist and director of the Center for Agricultural
and Rural Development at Iowa State, in Ames.
At last count, five new ethanol plants were under construction in Minnesota, and
78 nationwide. Minnesota is home to 16 of the ethanol plants already operating.
Meanwhile, corn-based ethanol output has been growing fast. Minnesota plants
this year are projected to produce 620 million gallons of ethanol -- or about 10
percent of the 6 billion gallons nationwide.
"As we move beyond six, seven, eight billion gallons, we think the price will
drop," Babcock said. "As the prices drop, the margins drop. We think that will turn
off investment."
Babcock and his colleagues forecast that ethanol production will reach 11 billion
gallons next year and peak at 14 billion by 2010. They foresee almost no growth
in production in the six years thereafter.
Minnesota ethanol production this year is expected to double the output of five
years ago. Next year, with five more plants under construction, Minnesota will hit
a new benchmark -- 1 billion gallons.
Plentiful profits - for now
The U.S. ethanol industry, with the help of billions of dollars in government
subsidies, has brought a cascade of riches for investors. Some of the 16 ethanol
plants in Minnesota paid for themselves in less than two years. Little wonder that
five more are under construction.
But even with a 51-cent-a-gallon federal subsidy, Babcock said, profits will be
hard to come by in the years ahead -- especially for newcomers that have yet to
pay off the cost of building an ethanol production plant.
Some producers acknowledge as much.
Other states may follow Minnesota in requiring that gasoline contain a 10 percent
blend of ethanol. But ethanol producers will be making more than enough fuel to
meet that demand, said Gerald Tumbleson, a Sherburne farmer, ethanol plant
investor and chairman of the National Corn Growers Association.
"As far as the ethanol market, we'll hit a blend wall," he said. "We could hit that in
a year."
'Not a static marketplace'
Corn growers groups, despite resistance from automakers, have been lobbying
Congress and state legislatures to require even higher proportions of ethanol
blended into gasoline. Automakers contend that higher mixtures of ethanol can
reduce vehicle performance or damage engines, a claim corn growers are
countering with their own research.
Whatever the outcome of that debate, Babcock said the demand for ethanol is
not likely to rise substantially soon, despite the fact that millions of E85 vehicles
are on the road. "Most of them are located where there's no ethanol," he said.
E85-rated engines can burn regular gasoline or gas containing a mixture of as
much as 85 percent ethanol.
The leader of the Renewable Fuel Association, however, believes the Iowa State
researchers are overstating the case for an ethanol glut in the years ahead.
"Looking at a static marketplace, Professor Babcock might be right. But this is not
a static marketplace," said Bob Dinneen, president and chief executive of the
Washington-based trade group.
As many as 4.5 million new E85 vehicles are being sold every year, and half the
nation's cars and trucks will be rated to use E85 by 2020, Dinneen said. The
growing number of E85 vehicles will spur demand for service stations to sell the
fuel, he said.
"Consumers are looking for options and flexibility," Dinneen said. "They're looking
to be empowered, to be able to power their vehicles with something other than
petroleum."
Ethanol demand may be particularly strong in the Twin Cities area.
Holiday service stations have seen a sharp increase in the demand for E85 fuels,
said Ed Hoffman, vice president of petroleum marketing at Bloomington-based
Holiday Companies. Thirty-six of the 107 Twin Cities Holiday stores now sell
E85. Same-store sales of E85 are up 50 percent in the past year. The company
added five stations in the past year and expects to add five more in the year
ahead, he said.
Mike Meyers • 612-673-1746 • meyers@startribune.com