Edmonton Journal, Canada
06-08-07
Ethanol growth at limit, say industry researchers
McClatchy Tribune
MINNEAPOLIS - 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, 78 new ethanol plants were under construction nationwide.
Meanwhile, corn-based ethanol output has been growing fast; this year, U.S.
plants will yield about six billion gallons.
"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.
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, for example, paid for themselves in less than two years.
Little wonder that five more are under construction in that state.
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, Minn., 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."
Automakers contend that higher mixtures of ethanol can reduce vehicle
performance or damage engines, a claim that corn growers, who want to
increase sales, dispute.
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
(cars that can run on a mixture of 85 per cent ethanol and 15 per cent gasoline)
are on the road.
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.