Minus the tax subsidy, the price of ethanol is $2.04 a gallon, which is 70 cents more than the $1.34 wholesale price of gasoline.
Jonathan Fahey - Forbes - Jan. 23, 2007
At $4.18 per Bushel (July delivery), Corn to Ethanol begins to make much less sense.
This is what moonshine does to people. Ethanol was making investors giddy last year when oil prices were high, corn prices were low and ethanol producers like Archer Daniels Midland and small farmer cooperatives were reaping huge profits distilling corn mash into fuel.
It created a corn rush. Money from Wall Street to Australia started pouring into ethanol distillery construction all over the U.S. heartland. Seventy-five distilleries are under construction, on top of the 111 now operating. "Everybody thought they could become the new Saudi oil barons of Champaign, Illinois," says Daniel Basse, president of AgResource, a Chicago agricultural research and forecasting outfit.
Amid the frenzy, corn prices spiked, ethanol prices collapsed and yet more ethanol supply is coming online. Basse predicts the ethanol makers that were coining money last year are on track to start losing money by the end of this year.
Unless, of course, the industry gets yet another boost from the federal government, after President Bush's State of the Union address, a distinct possibility. The President said he wants 35 billion gallons of renewable and alternative fuels by 2017, displacing 15% of projected annual gasoline use by that target date. Ethanol has achieved hallowed status in the battle to reduce the U.S.' dependence on imported oil (not to mention the battle for votes in Iowa). The federal government already supports ethanol with a tax subsidy equivalent to 51 cents per gallon of ethanol. That comes to $3 billion a year. Also helping the business are environmental mandates (depending on where it is sold, some gasoline must contain up to 10% ethanol as an antismog measure) and energy independence mandates (national use of ethanol must meet certain minimums by various deadlines).
"All the buzz in Washington surrounding ethanol indicates that it's going to survive," says David Lehman, managing director of the Chicago Board of Trade's commodities group.
Ethanol makers need the help. Corn prices, 75% of the cost of ethanol production, have doubled in the past six months, to more than $4 a bushel. At the same time, the price of ethanol has followed the price of gasoline downward.
Absent a rescue from Capitol Hill, the glut is going to get worse. AgResource's Basse estimates the blending demand for ethanol at 10 billion gallons, 7% of the 150 billion gallons of blended fuel burned each year. Current nationwide ethanol capacity is 5.4 billion gallons. But 6.1 billion gallons' worth of capacity is now under construction, according to the Renewable Fuels Association. That would push supply right past demand and destroy ethanol prices. Unless mandates are tightened. At the moment the motor fuel industry is meeting environmental minimums and exceeding the energy independence ones.
Under present law the independence minimum comes to 4.7 billion gallons of ethanol this year and 7.5 billion in 2012. But now the Bush Administration is considering boosting this mandate to 60 billion gallons by 2030. That target is also mentioned in a pair of Senate bills penned by presidential hopefuls Joseph Biden (D--Del.) and Barack Obama (D--Ill.). They would as well provide tax credits for high-ethanol fuel pumps, refineries and other biofuels production.
There are lots of ifs here, but investors in ethanol producers were heartened at first. Shares of companies like VeraSun Energy, Pacific Ethanol and ADM, which had been beaten down by as much as 60%, quickly began recovering when news of the higher mandates broke. You might even see the revival of public offerings for Hawkeye Renewables of Iowa Falls and Global Ethanol of Brisbane, Australia, both of which were shelved late last year.
Other potential winners include agricultural equipment makers like John Deere, which would help farmers plant a lot more corn; Monsanto, which is developing corn that can flourish in dry climates like western Colorado; and railroads such as Burlington Northern Santa Fe, which haul ethanol from the Midwest to the coasts.
Losers: companies that raise livestock that eat corn, people who buy meat, taxpayers and drivers. Net of the tax subsidy, the price of ethanol is $2.04 a gallon, which is 70 cents more than the $1.34 wholesale price of gasoline. And the energy content of ethanol is only two-thirds that of gasoline.
Environmentalists are queasy about ethanol. Made from corn, it takes so much water, energy and land to produce that its environmental benefits are dubious. Corn ethanol also has no chance of curing the nation's addiction to foreign oil. (Ethanol from cellulose would be more of a winner, but the technology does not yet exist.) Neither of these inconvenient truths will necessarily prevent the politicians from bailing out the distillers.