A study from the University of Nebraska brings a foul prediction for the ethanol industry in Iowa — the nation’s top ethanol producer. The findings indicate the ethanol boom will level off and eventually fail without more help from Congress. David Peters, an agricultural economist at the University of Nebraska-Lincoln, says the current ethanol successes won’t last, unless the federal government steps up the amount of renewable fuels refiners are required to blend into the nation’s fuel supply.
Peters says: "There’s overcapacity in the market and so as a natural corrective, prices are going to fall and some ethanol plants won’t be able to make it. There’ll be consolidation. They’ll probably have to pare back production to sort of balance out where the prices are."
An ethanol plant went on-line last week in the southwest Iowa town of Shenandoah. That’s 29 ethanol plants running in Iowa now, with another 18 being expanded or under construction statewide. Peters says his study offers what he calls a wake-up call for ethanol producers, corn growers and anyone else involved in the process.
Peters says, "What the purpose of the study was trying to get people to be more grounded in not to be basing perceptions or decisions on the ethanol industry over the last few years, which was sort of an aberration, but to take a longer term approach that the industry’s going to mature and profit margins aren’t going to be as high as they were in ’06 and ’07."
Peters says without a federally-mandated increase in ethanol consumption, small ethanol plants could stop being profitable by 2011 and will start operating in the red in 2013. He says large plants could see profits cut in half within the next four years before losing millions in seven or eight years.
Peters says: "There’s going to be an overcapacity in the industry. It’s producing much more ethanol than there is demand and that’s going to drive prices down while keeping corn prices relatively high." Peters says a variety of factors came together a couple of years ago — including federal policies, cheap corn and high oil prices — to create the ethanol boom. But he says those dynamics are already shifting to make ethanol less profitable.
Iowa ethanol industry leaders dispute many elements in the study. Monte Shaw, executive director of the Iowa Renewable Fuels Association, says for starters, there is not over-production of ethanol. Shaw says: "For the first six months of this year, all the data we have, each month the U.S. ethanol production has fallen short of U.S. ethanol use by the petroleum industry. So we actually are not in a situation where we’re producing more today than there is demand for it."
Shaw says the gloom-and-doom predictions portrayed in the media, like these in the Nebraska study, usually aren’t based in fact. He says: "Someone’s gone out and done a Google search on every conceivable person who’s ever talked about thinking about building an ethanol plant and they assume they’re all going to come on line over the next couple of years. Yeah, you have corn prices going up, you have too much ethanol on the marketplace, but what we’ve really seen is — the ethanol industry is expanding steadily but pretty reasonably."
While Iowa has 18 ethanol plants under construction or expansion right now, Shaw says the industry is not expanding too quickly nationwide or in Iowa. He says: "We’ve only had two new plants begin construction this year. That’s the smallest number for any year since 2000. The marketplace is looking at what’s going on out there and it generally gets it right."
In 2005, Congress passed a renewable fuels standard of seven-point-five-billion-gallons a year. That standard is expected to be met next year, four years earlier than required. Peters says the standard would need to at least –double– to make the ethanol industry profitable in the long-term. Peters says he would advise communities against investing public funds in ethanol plant construction.