Fort Dodge Messenger, IA
10-13-07
Is the ethanol boom running out of gas?
Too much supply plagues ethanol industry
By DARCY DOUGHERTY MAULSBY, Messenger correspondent
Oversupply is putting the brakes on ethanol’s fast-lane growth, at least for now.
Experts say the adjustment will be fairly severe, unless something happens to
increase demand for ethanol substantially.
“The pain will be felt mainly by investors,”î said Neil Harl, a Charles F. Curtiss
Distinguished Professor in Agriculture and emeritus professor of
economics at Iowa State University. “While transportation problems play into
the travail, it’s basically a problem of too much supply.”î
Ethanol that was selling for close to $2.50 per gallon a couple of years ago
dropped to the $1.50-per-gallon range recently. A triple whammy of rising corn
prices, higher construction costs for new plants and the plummeting price for
ethanol in the markets have hit home, impacting both planned ethanol projects
and those in production. While hints of trouble in the industry had been rumbling
for months, a New York Times article on Sept. 30, followed an Oct. 1 piece by
the Wall Street Journal, focused public attention on the issue.
“I anticipate that the plants in operation will continue to function so long as they
can cover their variable costs,”î Harl noted. “The adjustment process now faced
by the ethanol industry will have some impact on corn demand,” he added.
“There is sufficient momentum, enough plants in operation and enough under
construction to assure that the demand for corn for ethanol will not disappear,
however. There is likely to be some consolidation in the industry, but in all
likelihood the demand for corn will remain strong.Ӕ
Investors keep an eye on the bottom line
Some industry observers say the downturn exposes the ethanol industry’s
reliance on political support in Washington. Fueled by government mandates and
calls from President Bush that bio-based fuels could help wean Americans off
foreign sources of energy, ethanol hit all-time highs in the past year. U.S. ethanol
production rose to 4.8 billion gallons last year, up from 1.6 billion gallons in 2000,
according to the Renewable Fuels Association. The number of ethanol plants
across the country increased to 119, up from 54 in 2000, and there are 86 more
plants under construction.
In Iowa alone, ethanol production soared to 1.5 billion gallons in 2006, up from
440 million gallons in 2000. The state currently boasts 28 ethanol refineries in
production, which offer 1.9 billion gallons of annual production capacity and
equate to 690 million bushels of corn demand. In addition, 20 ethanol refineries
are under construction or expansion, which will create 1.5 billion gallons of new
annual production capacity, according to the Iowa Renewable Fuels Association,
which adds that there are more than a dozen new projects under development in
the state.
The government’s policy process essentially insulated ethanol production from
the full range of market forces so that supply lost touch with demand, Harl noted.
’’There was a belief in some quarters that the potential demand was so huge that
overproduction was unlikely.î
Harl said it’s not surprising that financing for new ethanol plants is drying up in
many areas, and plans to build are being delayed or canceled across the
Midwest, as more investors decide that only the most-efficient ethanol plants are
worth their money.
VeraSun Energy, one of the nation’s largest ethanol producers, recently
announced it will suspend construction of its 110 million-gallon-per-year ethanol
biorefinery in Reynolds, Ind., due to current market conditions. The company
expects to resume construction in 2008, depending upon the return of more
favorable market conditions.
“Given the abrupt change in market conditions that have seen ethanol prices
drop nearly 50 cents per gallon in the last 60 days, it’s prudent for us to adjust
our current pace of expansion,”î said Danny Herron, VeraSun’s chief financial
officer and senior vice president. “Due to Reynold’s early stage of development,
we believe it is wise to suspend investment until the market provides an
acceptable return.î”
Sen. Charles Grassley, R-Iowa, isn’t surprised that the ethanol boom has hit a
snag. “Only in the last five to six years has ethanol really caught on, and you’ll
always have some problems and conflict with any infant industry. I’m very
confident in the future, however, because we’ll be promoting the production of
more ethanol, including cellulosic ethanol, in the next Farm Bill.Ӕ
Cautious optimism emerges
Despite the challenges, some companies continue to expand their business.
VeraSun, for example, has four facilities under construction in Hartley, Welcome,
Minn., Albion, Neb. and Bloomingburg, Ohio.
“We remain confident in the outlook for our industry and believe that with ethanol
currently priced at a dollar less than gasoline, it provides a great value as a high-
octane, clean-burning renewable fuel that will drive additional blending
throughout the nation,Ӕ said Don Endres, VeraSun chairman and CEO.
A new breed of cautious optimism has emerged in the wake of the biofuels gold
rush. Some industry experts believe the worst problems are temporary and have
been intensified by transportation bottlenecks in getting ethanol from the Midwest
to the coasts, where it is needed most. Regardless of how the adjustment is
approached, it will take considerable time before the supply-demand balance is
rectified, either by the market or by government policy, Harl said.
“None of this necessarily spells doom for the ethanol industry. The long-term
future of ethanol depends on the future of U.S. energy policy and the energy
policies of other countries, the economics of conversion of corn and other
materials into ethanol, and the future of energy production technologies.î
“The key question is which technology will produce the quantity of energy
needed, on a reliable basis, at the lowest cost to the user,” Harl concluded. “It’s
certain that the alternatives will all be subjected to a least-cost test — and
ethanol will be no exception.”