Ethanol concerns from the American corn heartland

While ethanol production is expected to remain profitable in the short term, a team of six economics experts at Iowa State University (ISU) have raised concerns about the industry's medium-term future.

The rising demand for corn for ethanol production and subsequent rise in corn prices, along with a variety of infrastructure concerns, are problems, they said in a presentation yesterday in Ames, Iowa.

It's a second warning in a week about the sustainability of today's ethanol industry (see Ethanol shakeout coming?)

"We've been relied upon around the world for our corn exports. What happens when we start using all our corn?" asked area farm management economic field specialist Kelvin Leibold. "Last year, Iowa produced about 2.1 billion bushels of corn. If all the ethanol plants that are being talked about come online, Iowa would need to be producing 2.6 billion bushels in three years just to satisfy that demand. We'd need to more than double our production in the next three years. How are we going to do that?"

Questions were raised about the amount of power required to distill ethanol. Speakers showed a 100M gallon plant uses enough energy to power 30,000 homes.

Transportation of the raw feedstock and finished product were also identified. It was unclear, speakers said, whether it was most economical to build ethanol plants close to corn supply, or closer to where the finished product would be required and where the wet distiller's grain ethanol byproduct could be repurposed as cattle feed.

And that's assuming that transportation was even available. "Infrastructure is not yet set up for high volume. You can't get steel overnight, let alone build railcars overnight," warned Leibold.

Paul Gallagher, associate professor of economics, said higher corn prices, increases in processing costs and higher costs for equipment will slow the rate of expansion in the industry. Higher corn prices this year and next will increase the cost of producing ethanol by 30 cents a gallon, he said.

"We're going to see lower profit margins in the industry in the near future. In long run, there'll be consolidation in the industry," suggested Leibold.

"Any industry that over-expands has to contract and then consolidate. The hog industry in Iowa went through a similar cycle."

Further, the pricing of ethanol on the public markets was also cause for concern. Economists pointed to the Chicago Board of Trade, where in contrast to the tens of thousands of corn trades a day there were about 5 trades a day in ethanol. Pricing of ethanol was characterized as arbitrary, pegged to a gasoline derivative, raising the question of what the fuel is really worth.

Anxious bankers and entrepreneurs stayed after the event, and asked questions for an hour, trying to understand the implications of the data. Many people seemed surprised by what they heard, said organizers.

For an archive of the webcast and presentations from the event, visit:

http://www.extension.iastate.edu/ag/ethanol.html