Des Moines Register
10-14-07
Elbert: Iowa's ethanol: Future of peril, or prosperity?
An economist says falling prices mark a 'dangerous time,' but industry insiders blame growing pains for volatility.
DOWN TO BUSINESS
By DAVID ELBERT
REGISTER BUSINESS EDITOR
Neil Harl has started letting air out of Iowa's ethanol balloon, which has sent corn and farmland prices soaring.
"The end of the ethanol boom is possibly in sight and may already be here," Iowa
State University's emeritus professor of economics told the New York Times recently.
"This is a dangerous time for people who are making investments" in ethanol,
Harl added, citing a drop of more than 30 percent in spot market prices since
May.
Industry insiders say the volatility is the result of growing pains.
The huge decline in ethanol prices is more of a "return to reality" than a market collapse, said Monte Shaw, executive director of the Iowa Renewable Fuels
Association.
There was "some irrational exuberance" built into the high prices early this year,
Shaw said. "That doesn't mean we aren't positioned for some very solid growth over a long period of time."
Harl's concerns go beyond the spot market.
The prices of grain and farmland during the past year remind Harl of the early years of the 1970s that produced the farm crisis a decade later.
"Aberrational conditions create the seeds for later problems," Harl said last week.
In the 1970s, he said, unrealistic expectations about overseas grain sales produced speculation that caused the price of Iowa farmland to climb too much, too fast.

Something similar may be happening as demand for more ethanol puts pressure on corn prices, he said.
Earlier this year, the price of corn doubled from less than $2 a bushel to nearly
$4. It has since come back down to just under $3. But the higher prices have helped fuel a 20 percent increase in the value of farmland this year, according to a farm real estate survey covering the 12 months ending Sept. 1.
That's the largest one-year increase ever.
"I'm urging investors and farmers: Don't count on this lasting forever," Harl said.
He offered similar advice 30 years ago, but few listened.
The price of farmland more than doubled between 1975 and 1981. Then, it came crashing down, driving a lot of farmers and 37 Iowa banks out of business. Many small towns never did recover.
Harl is no Chicken Little. He isn't saying there's another farm crisis in the offing.
In fact, he said, any collapse in farmland values is years away, if ever.
But he is concerned about the degree to which Iowa farmers are increasingly counting on ethanol.
"Three things will spell out the future of ethanol," Harl said.
First is whether U.S. leaders follow through on pledges to end dependence on foreign oil.
"We have a history of some fairly sharp shifts in energy policy," he said.
Given that history, he asked: "What will U.S. energy policy be a year from today, if peace breaks out in the Middle East and oil is flowing freely again?"
The answer, a panel of banking, energy and agricultural experts told Harl at a recent meeting, is that we'd do the same thing we did in the early 1980s.
"We'd go back to imported energy because it is cheaper" than finding alternative sources for power, like wind, solar and biofuels, Harl said.
Ethanol advocate Shaw disagreed. Even if oil were to begin flowing freely again from the Middle East, Shaw said, demand from the rest of the world, including
China, would keep the price high.

Harl said his second key factor for determining the future of ethanol is "the economics of conversion."
"Success in ethanol is its own undoing," he said.
A version of it happened earlier this year, he said.
Increased demand for ethanol raised the price of its main input, corn. The higher price of corn, in turn, raises the cost of the finished product, making it less desirable to consumers.
"There is a self-corrective loop there that I don't think people have really appreciated," and from which ethanol cannot escape, Harl said.
"The third factor," he said, "is the big one, technology."
"Ethanol may have a three-, five-, seven-year run, but I don't believe it is going to be the low-cost energy source down the road," Harl said.
"There are lots of possibilities that are already on the radar screen, and there has never been this much incentive for development of technology," he said.
The goal is low-cost, reliable energy.
"Whoever can do that will be in the driver's seat," he said.
Ford, General Motors and Toyota expect to have vehicles on the market next year that run on hydrogen. "Not hydrogen fuel cells, but hydrogen," Harl said.
Hydrogen, nuclear power, solar, wind and coal gasification are all in the running as future alternative energy sources, he said.
"There is a lot of innovative thinking going on, and it will be a stern test: Who can produce the quantity at the lowest cost?"
Right now, it would appear that the odds are stacked against ethanol, Harl said.
Again, Shaw disagreed. The director of the Iowa Renewable Fuels Association said today's problems are simply the result of too much growth, too quickly, starting in 2006.
"We've got pretty good underpinning for growth," Shaw said. "That doesn't mean we aren't going to have growing pains."
In any event, Harl is right to advise caution now, rather than wait too long and let the balloon of rural prosperity burst, as it did in the 1980s.

Business Editor David Elbert can be reached at (515) 284-8533 or delbert@dmreg.com