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Corn prices cutting into ethanol profits

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Stacy Vogel
July 13, 2008

For months, the country has debated how much ethanol production has to do with the skyrocketing price of corn.


Now, the question can be turned upside-down: How much is the spike in corn prices affecting ethanol plants?


According to the Chicago Board of Trade, the price of ethanol has risen 49 percent over the past year. The price of the corn used to create ethanol, however, has shot up 123 percent, pushed by the weak dollar, recent flooding and the increase in ethanol production, among other things.


That leaves ethanol plants in a pickle, said Randy Fortenbery, UW-Madison professor of agribusiness. The price of ethanol depends more on demand and the price of gas than it does on the price of corn, meaning ethanol plants can’t necessarily pass increased costs on to the consumer, he said.


“Ethanol plants really can’t dictate what price they sell for any more than a gasoline station can dictate what it sells for,” Fortenbery said.


Some plants have managed to avoid the squeeze by buying corn at a guaranteed price when the price was lower. But plants that are buying corn day-to-day could be losing 25 to 50 cents per gallon, Fortenbery said.


“I don’t think we’re going to see all the plants go out of business, but we might see some fail as we go through the adjustment,” he said.


But it’s not as simple as comparing the increase in corn to the increase in ethanol, said Russ Kashian, associate professor of economics at UW-Whitewater.


Ethanol plants have other costs such as labor and energy, he said. They also have other sources of income, such as the distilled grain left over from the ethanol process. Plants sell the grain to local farmers as livestock feed.


Kashian agreed the rising price of corn is hurting ethanol plants’ profits, but he doesn’t believe the profits are vanishing all together, he said.


Indeed, an official at United Cooperative, the parent company of the United Ethanol plant in Milton, said the company is concerned about rising corn prices but hasn’t been hurt yet.


The company needs the price of a gallon of ethanol to rise 10 cents for every 25-cent increase in a bushel of corn to maintain its profit margins, Jan Moyer, United Cooperative commodity merchandiser, said in a statement. So far, that’s happened.


“Actually, the cost of natural gas is putting more of a squeeze on ethanol plants right now than corn,” Moyer said.


Whether or not existing ethanol plants are losing money, Fortenbery and Kashian agreed the rising price of corn will impact plants in the planning stages.


“We’ve seen a lot of prospective plants and plants that were looking at expanded production backing away from their plans,” Fortenbery said.


For example, Tennessee-based Heartland Ethanol announced last month it was abandoning plans to build seven ethanol plants across Illinois.


Jeff Knight, director of Whitewater-based Global Renewable, told The Janesville Gazette this week “there’s a better than 50-50 chance” the company will follow through with plans to build an ethanol plant in Sharon.


But Fortenbery doesn’t predict much growth in the ethanol industry in the next year or two, he said.


“As I look forward a year, I just see a lot of uncertainty,” he said.


The government is unlikely to increase ethanol tax credits or subsidies to boost ethanol production because the rising cost of food has made people question the use of food for fuel, Fortenbery said.


“If you look over the last couple months, the political pressure has gone sort of the other way,” he said.


Corn-based ethanol will decrease in importance in the renewable fuels movement as other biofuels, such as cellulosic ethanol and biodiesel, become more viable, Fortenbery and Kashian said.


But that doesn’t mean ethanol is going away, they said.


“Ethanol has its place at the table,” Kashian said. “Is it the solution? No, it’s not the solution.”



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