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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 51¢-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."

Caldwell points out that in some regions of the country refiners will have to change the type of gasoline that they blend with ethanol before higher amounts of ethanol can be used. In high smog areas, gasoline with a lower sulfur content must be used before blending with ethanol, he says. Right now, ethanol content in California gasoline is less than 6% of gasoline.

"In other words, don't expect California to go to 10% ethanol next year," Caldwell says.

California Governor Arnold Schwarzenegger's goal is to have the state using 10% ethanol blends by 2010. Caldwell says that the permitting process and construction could delay changes at California refineries by about three years.

Fred Bosselman, Jr., whose family owns a gasoline wholesale and retail business in Nebraska, Kansas and Iowa, is a strong supporter of ethanol.

"We've been pro-ethanol since the late seventies and we're going to continue to be, because it's a renewable fuel and it's produced right here," Bosselman told Agriculture Online. In his own gas stations and truck stops, Bosselman is doing all he can to sell more E-85, which is currently priced at $1.99 a gallon. He buys ethanol directly from producing plants to blend with gasoline.

He knows of major oil companies that have already increased ethanol use. But he, too, sees a remaining blend wall.

"What's happened is the infrastructure for E-10 blending is not prepared in the right areas," he said. "Take Oklahoma, you can't get E-10 there."

"I think we're going to have a year or two with oversupply and low prices," he said.

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.

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