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Ethanol expansion tied directly to oil, corn prices

Agriculture.com Staff 09/08/2006 @ 3:59pm

Seventy-dollar-per-barrel crude oil and $2.00 corn prices make ethanol popular, and the industry's boom is a testament to the growth opportunity these figures provide.

But, with $30-per-barrel oil and $5.00 corn, the nation's chief agricultural economist said this week the ethanol industry's skyward climb could grind to a halt.

Today, ethanol production is a booming business, with as many as more than 110 production facilities operational or under construction nationwide, according to Keith Collins, U.S. Department of Agriculture chief economist. With specific economic shifts, this could change.

Collins testified this week before the U.S. Senate Committee on Environment and Public Works about the ethanol industry's future.

"Ethanol production capacity could increase to 8.5 billion gallons by 2008-2009 and more than 10 billion gallons by 2010 if many of the planned plants are built," Collins said Wednesday on Capitol Hill. "Some suggest ethanol production could be well above 10 billion gallons. Is such a production capacity likely?"

Collins outlined the two primary drivers for change in the ethanol market: gasoline prices and corn prices. "A combination of declining gasoline prices, sharply rising corn prices or a decline in the price premium ethanol has had relative to gasoline could curtail the expansion in ethanol production," he said.

World oil prices, on the rise since 1999, have contributed to ethanol's growth, Collins said, and the Energy Information Administration (EIA) estimates the price of crude oil to hover around $70 per barrel through 2007.

If this projection comes to fruition, ethanol demand and prices will remain strong through the end of next year. On the other hand, in the event of a sharp oil price decline, ethanol production expansion will slow because of the resulting demand slide.

"If the world price of crude oil remains higher than $50 (in 2005 dollars) per barrel in the future, as projected by EIA, and corn prices do not rise considerably, then ethanol would be used as a gasoline extender," Collins said. "Below about $30 per barrel for crude oil, there would be no incentive to produce corn ethanol beyond the RFS, because ethanol would be unprofitable to produce and market as a fuel extender."

Collins said a dry-mill ethanol plant can cover operating costs, as of today, with a corn price up to $5.00 per bushel with ethanol prices around $2.25 per gallon at the plant.

Still, Collins reiterated that even with some market fluctuations toward the price points that could rob ethanol of its cost-effectiveness, the EIA projection for energy costs will remain bullish for ethanol industry expansion, at least in the near future.

"Ethanol growth is manageable in the near future. Markets will work over the longer term, but the allocation function of market prices can mean substantial costs for some sectors, so the evolution of ethanol bears close monitoring," he said.

Seventy-dollar-per-barrel crude oil and $2.00 corn prices make ethanol popular, and the industry's boom is a testament to the growth opportunity these figures provide.

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