October 29, 2007

 

Ethanol bubble deflating; many plants on-hold

 

 

In what seemed to be new goldmine in the past two years, the rush of building of corn-based ethanol is now cooling off.

 

Corn-based ethanol became something of a rage in 2005 and 2006, as rising oil prices and fears of tightening supplies and national security boosted Americans' interest in alternative fuels.

 

Plans to build ethanol plants were announced across the Corn Belt. In the Owensboro region, construction on an ethanol plant was announced in nearby Spencer County, Indiana.

 

Today, however, many of those planned plants are still on the drawing board.

 

According to Matt Roberts, an agricultural economist with Ohio State University, said ethanol's big issue is its expansion driven by the profits.

 

In 2005, ethanol producers were receiving a 50 percent return on their investments, the prime reason why people are in haste of building their plants in haste.

 

But the price of ethanol has fallen dramatically -- from a high of US$2.40 a gallon to US$1.70 last week. Meanwhile, the spike in interest in ethanol caused corn prices to rise dramatically. Since corn is the only cost-effective way currently available to produce ethanol, people in ethanol production found themselves competing for corn and paying a high price.

 

Chad Lee, an extension grain crop specialist with the University of Kentucky said higher commodity prices of corn has tightened the margins of profit.

 

Roberts said no one expected the fundamental change as corn prices went up from US$2 to US$2.50.

 

Also, some experts contend the ethanol boom came too early: Although ethanol producers began ramping up production, the transportation didn't exist in many areas to take ethanol from the production plant to the refinery where the product is blended to make fuel.

 

Meanwhile, the blenders that exist "simply do not have the storage and blending capacity" to handle the amount of ethanol currently being produced, Roberts said.

 

The decline in ethanol prices -- along with the increases in corn and transportation and processing difficulties -- has dampened the enthusiasm of many potential ethanol entrepreneurs.

 

According to Lee, companies that weren't efficient or didn't have good business models are not doing well and it is understandable.

 

The decrease in the number of planned ethanol plants will benefit the ethanol industry overall, Roberts said. For example, fewer expected plants will decrease the expected demand for corn, which will allow prices to decline somewhat.

 

There are a lot of plants that have been completely shelved, Roberts said.

 

Over time, more rail transport will become available to move ethanol to blending facilities, and the blenders will be able to increase their storage and processing capacity.

 

It is possible to make ethanol out of products other than corn. Switchgrass, for example, can be converted to cellulose for ethanol, but the process is cost prohibitive at present. Roberts said while research is continuing on cellulosic sources of ethanol, it is unclear when the process will be economical enough to enter into widespread production. He added that while there's a lot of work being done on making the process more efficient, there are a lot of logistical challenges that are have to be faced.