A rush to cash in on ethanol has slowed as soaring corn prices squeeze profit margins for producers of the alternative fuel. At a recent high of $7 per bushel, the corn used to make ethanol has tripled in price since many plants were built two years ago, and some facilities have been shut down or put on hold.
Ethanol took off in 2006, in response to two federal policies.
One policy was longstanding: Most gasoline had to include an additive that would oxygenate it, make it burn cleaner and reduce air pollution. The other policy was new: The government decided not to shield the oil companies against lawsuits over the additive that they had been using — methyl tertiary-butyl ether, or MTBE, which was found to contaminate groundwater.
So there had to be a different additive. Ethanol, a type of alcohol that is distilled from corn, fit the bill. And the oil companies could get a 51-cent-per-gallon tax credit for using ethanol.
The rush was on, and producers moved quickly to get ethanol plants online.
But recent ethanol news from the Corn Belt has been a lot less upbeat, as many ethanol-plant projects have stalled.
Changing Economics
"The ethanol industry is going through some ... adjustments or, we might say, growing pains," says Chris Hurt, a professor of agricultural economics in the heart of the Corn Belt at Indiana's Purdue University.
"Obviously, we've seen a massive boom in ethanol," he says. "We've seen a lot of capacity put in place. We've had some infrastructure problems in terms of moving all of that ethanol. And we've seen some very rapid changes in prices."
Corn is now more expensive than it was when many of the ethanol plants were built, Hurt says. Two years ago, when many of the plants were being built, corn was $2 per bushel, making ethanol production so profitable, that in some cases a plant could be paid off in just 6 months, he says.
"We were in largely a surplus corn production situation. Today, we've seen corn go to $6, and then, with the flooding most recently through the Midwest, above $7 a bushel," Hurt says.
Mark Stowers of Poet Ethanol Products, one of the biggest ethanol companies, says the economic picture has changed.
"That may have been the case in 2006, but typically that would not be the forecasted return" this year, he says. Stowers says that while the gold rush may be finished, Poet is not.
"There's already evidence that some people have closed plants, and some people have not started up plants. I don't see that impacting Poet," he says.
Stowers says the company expects to open three plants later this year. But Poet did have to cancel plans for a plant in Minnesota this year for lack of an air quality permit.
That's one of 18 problem plants listed on a "Biofuels Deathwatch" map at Earth2Tech.com. The plants are either late to open, soon to close, or already out of business.
A Plant 'On The Edge'
Some plants are just barely making it.
"We're on the edge right now," says Ken DeCubellis, the CEO of AltraBiofuels. In April, his California-based ethanol company opened a $170 million plant in Cloverdale, Ind. "We are one bad day of ethanol pricing from having to decide to shut the plant down," DeCubellis says.
At AltraBiofuels' Indiana plant, trucks drive in and dump their loads of corn to be distilled into alcohol and then shipped off to be blended into auto fuel.
The plant is powered by natural gas and employs 47 people. Two giant storage tanks hold as much as half a million bushels each of dried corn, ready to be processed. A few years ago, filling them both with corn that cost $2 a bushel would have been easy.
But today, DeCubellis says AltraBiofuels has to watch its costs very carefully.
"We run lean and mean," he says. "With corn at $7 a bushel, you don't have the working capital to fill these things up"
DeCubellis is an engineer/MBA who used to work for Exxon Mobil. Having made the switch to biofuels, he is a gung-ho proponent of ethanol. But he's also realistic about the business and the impact of rising prices for his inputs.
"If we aren't able to cover our variable costs" — for corn, natural gas and other raw materials — "we will not run the plant," he says.
Not Enough Corn
Hurt, the Purdue economist, says two big changes explain what's happened to the ethanol producers.
Once the federal requirement for a clean additive has been met, ethanol is only worth as much as the energy it packs, plus the tax break it conveys. And in fact, ethanol packs less energy than gasoline.
So ethanol can't sell for as much as gasoline, but it has to sell for more than corn. Hurt has plotted corn prices and ethanol prices for the past year. His studies show that profit margins have mostly been slim and sometimes negative.
The second big change, he says, has to do with what used to be seen as the perennial problem facing the Corn Belt: the threat of producing too much corn.
"That concept that corn was unlimited" is no longer valid, Hurt says. "Corn is not unlimited. If we used every bushel of corn that we produce this year, we could only substitute for about 14 to 15 percent of the gasoline."
According to the most recent figures, more than 30 percent of this year's U.S. corn crop is going to ethanol, and it accounts for about 8 percent of all the blended gasoline sold at the pump.
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