Is an ethanol shakeout coming? Red ink is flowing
Clouds hang over Corn Belt ethanol plants this fall. Credit for new plants has dried up. New construction has been delayed. Even plants that manage price risk face losses soon.
"We're in good shape for a few more months," says Dave Nelson, an Iowa farmer who is chairman of Global Ethanol and Midwest Grain Processors. "To try to get anything placed for next summer is impossible unless you're willing to accept red ink."
Nelson, who is also on the executive committee of the Renewable Fuels Association, reflects the frustration of many in the ethanol industry when he says, "There's almost a dollar a gallon the oil companies can make on ethanol right now. They aren't using it outside of mandated markets."
Wholesale gasoline has been about $2 a gallon. Ethanol was running about $1.55. And with the 51Â¢-per-gallon tax credit blenders get for using ethanol, the difference comes out to roughly $1.
"Nothing makes sense right now," Nelson adds. "We've got an oversupply of corn -- over a billion-bushel carryover. We've got an undersupply of gasoline and $80-a-barrel oil."
Logan Caldwell, Houston BioFuels Consultants, says the oil industry infrastructure hasn't been able to keep up with the rapid increase in ethanol production. "What's holding this up is that the facilities aren't there," he says.
The U.S. has about 1,000 terminals that serve gas stations. Most don't have rail access to bring ethanol to the terminals efficiently, he says. And most haven't yet installed tanks, pipes, and meters to splash blend ethanol into truckloads of outbound gasoline. Doing all that can take months or years of permitting and engineering. And, outside of the Midwest, state standards for gasoline to be blended with ethanol need to be changed, he adds. This so-called blend wall is creating the ethanol glut and disparity between its price and gasoline, he says. "My hunch is it's going to be 2010 before prices start connecting back to gasoline."
To Nelson, that's an eternity. If Congress doesn't pass an energy bill with a Renewable Fuel Standard to require more ethanol use, "this industry is going to look a lot different next year," he says. "That would be the time the oil industry gets ahold of the alcohol industry."
Caldwell says delays are state and local issues. "The [federal] government can't mandate this away," he says. "These are very prosaic. It's like mandating a cure for cancer."
Nelson is skeptical. "The energy bill would mean less market share for oil companies, and they're fighting back," he says.
Nelson has also heard reports of terminals that have the equipment needed to blend ethanol but still aren't using it.
Matt Hartwig, spokesman for the Renewable Fuels Association in Washington, DC, says that when the petroleum industry replaced the octane booster MTBE, the industry made the switch to ethanol in a few months.
"You do have to ask the question why the refiners aren't blending more," Hartwig says. "The economics today suggest that refiners would b tripping all over themselves to blend ethanol."