• Production of ethanol grew from 1.6 billion gallons in 2001 to 4.9 billion in 2006 and could reach 6.5 billion this year. “Why should anyone pay more when there is more and more supply coming on line?” said economist Douglas Tiffany at the University of Minnesota.
• “At this price, it’s pretty attractive for them [refiners] to blend ethanol. And it’s hard to believe at this price, except for the transportation difficulties, that they wouldn’t want to blend it, because they’re profit maximizers,” Perdue University economist Wallace Tyner said.

Sharp price drop puts brakes on ethanol boom
Experts can’t agree on what’s causing decline or where market is headed

By Ben Shouse AP, Argus Leader, October 7, 2007

A 40 percent drop in the price of ethanol this year is reining in the galloping growth of the industry and adding a twist to the debate over the future of biofuels.

The wholesale price of ethanol is about $1.50, down from about $2.50 late last year. Along with high corn prices, that is pinching the profits of ethanol companies and pushing them to scale back their expansion plans.

Brookings-based VeraSun announced last week it would suspend construction at a plant in Reynolds, Ind. - one of the five it is building - because of poor market conditions.

Some in the industry say the declining price is part of a normal swing, accentuated by the undue influence of oil companies. But transportation issues and an increasingly complex marketplace also factor in, leaving plenty of room to keep arguing the politics of ethanol.

Observers widely agree that basic supply and demand is driving the price decline. Production of ethanol grew from 1.6 billion gallons in 2001 to 4.9 billion in 2006 and could reach 6.5 billion this year.

“Why should anyone pay more when there is more and more supply coming on line?” said economist Douglas Tiffany at the University of Minnesota.

The price of ethanol now should depend on its value as a replacement for gasoline, Tiffany and other economists say. Ethanol also has value because it reduces certain air emissions and increases octane value, but those markets are fully satisfied, he said.

That would put the expected wholesale price at about $1.80 per gallon. Yet something is forcing it even lower, to $1.50 a gallon.

“The price of ethanol relative to unleaded gasoline seems to be extreme. We thought that ethanol, if you had adequate supply, should be priced at its fuel value,” said economist Darrel Good at the University of Illinois.

That is adding a new dimension to the debate over ethanol’s place in the fuel supply.

Economist Wallace Tyner at Purdue University said part of the reason for the excess price drop is a shortage of trucks, rail cars and other infrastructure to ship ethanol outside the Midwest.

But Brian Jennings of the American Coalition for Ethanol in Sioux Falls says there is adequate infrastructure in place.

“The producers do not control how our product gets used. We depend on someone else,” he said. “That someone else happens to be our competition.”

The coalition wrote to congressional leadership last week, arguing that oil companies were not passing the low price of ethanol on to consumers.

“Given the economics, it’s surprising that refiners aren’t blending more ethanol,” said Jeff Broin, chief executive officer of ethanol company Poet.

Tyner is skeptical that the oil industry is to blame.

“At this price, it’s pretty attractive for them to blend ethanol. And it’s hard to believe at this price, except for the transportation difficulties, that they wouldn’t want to blend it, because they’re profit maximizers,” Tyner said.

The debate is important not for assessing blame, but because knowing the reason for the low price could clarify the outlook for ethanol and corn producers.

But the prices of ethanol, corn, crude oil and gasoline are increasingly interrelated. That makes a big difference for corn prices, said economist Alan May at South Dakota State University.

“For years, grain markets were a supply-dominated market, where we produced corn, soybeans and wheat and hoped we’d have enough demand to get rid of it. And now we have very strong demand,” and grain buyers are hoping there will be enough supply, May said.

“The long-term outlook for ethanol, however, still appears to be one of a growth industry, so expecting lower ethanol production over the long term would not be likely,” he said

Oil executives, for their part, do not see an immediate return to explosive growth.

“Ethanol will not take the place of gasoline; it will take some of the growth away from gasoline,” Lynn Westfall, chief economist at Tesoro Corp., told a Citi conference in New York last week. “It is not the death of our business, (and) as I said earlier, we really don’t fear it.”

Jennings, of the ethanol coalition, said that attitude is holding ethanol back, and more congressional action now seems necessary to ensure the industry keeps growing.

The Senate passed a bill in June raising the mandated use of ethanol and other renewable fuels to 36 billion gallons by 2022. This Renewable Fuels Standard - or RFS - now is for 7.5 billion gallons by 2012, which the industry is on pace to reach as soon as 2008.

The House passed an energy bill in August that does not include the increased mandate but would promote pipelines able to carry ethanol. A conference committee now must reconcile the two bills.

The livestock industry will be one important voice` in that process. Meat producers and food companies have opposed the RFS increase, worried that it could raise corn prices and thus their production costs.

The South Dakota Cattlemen’s Association has not taken a position on the issue, said the group’s president, rancher Scott Jones of Midland.

“We’re kind of keeping a low profile, but we do have some concerns with the effects it’s having on livestock producers,” Jones said. “We’re in a new world or a different age as far as livestock feeding and cattle feeding goes, and we’re going to have to make adjustments.”

The Associated Press contributed to this story. Reach Ben Shouse at 331-2318.