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Ethanol boom stalling?

Updated: 06/12/2012 @ 9:18am

For years, the biggest employer in this city of 1,000 people near the Canadian border was the ethanol plant on County Road 9, which pumped out the corn-based fuel additive to satisfy demand driven by federal mandates requiring its use in gasoline.

In April, plant owner Archer Daniels Midland Co. closed it, citing lackluster returns. The plant's 61 employees lost their jobs, and Walhalla lost its biggest source of tax revenue.

"Jobs like that are hard to come by," said Chris Jackson, Walhalla's 32-year-old mayor and proprietor of its main watering hole, Jackson's Bar. Business has suffered at the bar and the city's two motels and gas stations because truck traffic to the plant has ended. The mayor says some residents who worked at the plant are planning to leave.

America's ethanol boom is stalling, and the effects are starting to spread across a Farm Belt that had grown accustomed to soaring growth. Annual U.S. production of ethanol more than tripled from 2005 to 2011, driving up crop prices and pumping money into rural communities from Nebraska to North Dakota.

(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)

Now, ethanol demand is topping out. The amount used in gasoline is near federal mandates, and gasoline consumption is declining. After 15 straight years of growth, ethanol production this year will fall slightly and will be roughly flat next year, according to the U.S. Energy Information Administration's May forecast. Updated output numbers will be released Tuesday.

The ethanol industry expanded based partly on expectations that gas consumption would keep rising, and that ethanol's share of that would continue to grow. Instead, gas demand this year is projected to be 6.7% below its peak in 2007, and efforts to expand ethanol's share face challenges. U.S. plants now face excess capacity, producing less than 14 billion gallons of ethanol a year, compared to capacity of 14.7 billion gallons, according to the Renewable Fuels Association, an ethanol trade association.

"A lot of people are rethinking their assumptions on the ethanol industry and the potential size," said Jason Henderson, an economist at the Federal Reserve Bank of Kansas City.

Ethanol makers are pushing regulatory changes to increase ethanol's share of the U.S. gasoline supply, and are also looking to exports, which surged last year to a record 1.2 billion gallons. Still, domestically, "you won't see the massive supply growth you've seen," said Todd Becker, chief executive of Green Plains Renewable Energy Inc., one of the largest U.S. ethanol producers.

The slowdown has been jarring, especially on the edges of the corn belt. About two dozen workers at an ethanol plant in Sutherland, Neb., were furloughed after the plant was idled in February.

Residents who invested in an ethanol plant in Levelland, Texas, have seen their holdings wiped out: The plant, which filed for bankruptcy protection last year, sold for $9.2 million in May, a fraction of the cost to build it four years ago. "It is a big chunk of the community's change that is gone," said Richard Levy, a lawyer representing the plant's ownership in the bankruptcy case.

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