As Production Rises, Prices Fall, Profits Stagnate
Minneapolis, Minnesota, June 12, 2007 – 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, in Ames.
If they’re right – and some who follow the industry and invest in it believe their forecast is off the mark – ethanol might not bring the same level of profits that plant investors have enjoyed in recent years.
“We think expected returns to an ethanol plant will be zero or negative in 2008,” said Bruce Babcock, economist and director of the Center for Agricultural and Rural Development at Iowa State.
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 6 billion gallons.
“As we move beyond 6, 7, 8 billion gallons, we think the price will drop,” Babcock said. “As prices drop, margins drop. We think that will turn off investment.”
Babcock and his colleagues forecast that ethanol production will peak at 14 billion gallons by 2010. They foresee almost no growth in production in the six years thereafter.
However, 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 who have yet to pay off the cost of building a production plant.
Several states are considering requiring gasoline to contain a 10 percent blend of ethanol, but producers will be making more than enough fuel to meet that demand, said Gerald Tumbleson, a Sherborne, Minnesota 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.”
Corn growers’ groups, despite resistance from automakers, have been lobbying Congress and state legislatures to require even higher proportions of ethanol blended into gasoline.
Whatever the outcome, Babcock said demand for ethanol is not likely to rise substantially soon, despite the fact that millions of E85 vehicles 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 CEO of the Washington-based trade group.
SOURCE: McClatchy Newspapers; Associated Press
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