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It wasn’t so long ago that ethanol was riding
an amber wave of success. Just three years ago, Congress passed and President
George W. Bush signed the Renewable Fuels Standard, which pumped another
7.5 million gallons of the corn-based biofuel into the nation’s fuel
supply. Thanks to the legislation, demand for ethanol soared.
Politicians, led mostly by lawmakers from the Midwest, gushed over the
environment-healing, terrorist-defeating magical powers contained within
cornhusks.
New biorefineries to turn grain into fuel sprouted
like weeds across the Midwest, and dozens more were proposed. Banks handed
out loans to ethanol prospectors like candy corn on Halloween, and the
Chicago Board of Trade added ethanol to its list of contracts of
commodities-futures trading.
Farmers were swept up in the frenzy, planting corn
wherever they could and even investing in refinery projects. Detroit
automakers got into the act, expanding their lines of flexible-fuel
vehicles powered by gasoline or the ethanol-petroleum blend known as E85. “There was a gold-rush mentality,” says
Walker Filbert, president of Heartland Ethanol LLC. His firm plans to build
at least three ethanol facilities in Illinois. But every gold rush comes to an end. Speculators soon
realized that corn wasn’t magic beans — there was too much ethanol and there were too few
people to buy it. The hefty profit margins enjoyed by ethanol
manufacturers began to shrivel. New ethanol ventures in Illinois and around
the country are on hold, and some plans have been scrapped. Filbert says that ethanol’s troubles are
largely the result of poor planning by would-be producers early on: “A lot people who didn’t understand the
agriculture industry and the commodity markets came in and had some real
unrealistic ideas.”
D ebate had long raged over the science and politics
of ethanol production, but after Hurricane Katrina put the Gulf Coast
underwater — destroying refineries, disrupting transportation, and
sending the price of gas past the $3-per-gallon mark — a second look
at ethanol and other long-ignored biofuels seemed like a good idea to
everyone. In 2005 the U.S. was home to 81 ethanol plants,
according to ethanol trade group the Renewable Fuels Association. Once the energy bill was enacted, construction took
off. By January 2006 the number of ethanol-production facilities had grown
to 95. By the start of 2007, 110 refineries were online, with another 73
under construction, and today there are 139 in the U.S. and at least 60
under construction. As the nation’s No. 2 corn producer, Illinois
has gotten in on the action.
Early in 2006 the Illinois Environmental Protection
Agency published a how-to manual titled Building
an Ethanol Plant in Illinois and held
workshops on the subject around the state. Six such plants now operate in
the state, and another 57 are in various stages of the IEPA approval
process. So far the state has also doled out more than $25
million in assistance to several private entities for ethanol-focused
endeavors. Since the ethanol boom began, farmers have been
planting more and more corn — and they’re getting rich doing
it. In 2005, Illinois farmers planted corn on 11.3 million acres, producing
a yield of 1.7 billion bushels. In 2006, after the federal legislation was
enacted, Illinois farmers planted corn on 13.2 million acres and harvested
2.2 billion bushels — a 30 percent increase. But demand for corn
pushed prices higher, so the value of the crop climbed by 71 percent, from
$3.5 billion to $6 billion, from 2005 to 2006.
Output at ethanol plants also flew sky-high. Annual
capacity of U.S. ethanol factories hit 4.4 billion gallons in February
2006, according to data from the U.S. Department of Agriculture, which also
predicted that production could exceed 7 billion by 2010.
But making a product is one thing; selling it is
another. Plants churned out ethanol faster than they could
unload it on the marketplace, and soon they were stuck with excess barrels
of the stuff. The price of ethanol hit rock bottom. Ethanol prices peaked at almost $5 per gallon during
the summer of 2006, then slid to $1.86 at one point before rebounding to
the current national average of $2.35 per gallon.
Meanwhile, the price of grain on the Chicago Board of
Trade has increased from $2.50 per bushel
at the height of the ethanol
craze, in September 2006, to around $3.80 now.
In short, the ethanol bubble has burst.
Recent earnings reports from publicly traded ethanol
producers show the scope of the problem: • VeraSun Energy Corp., headquartered in
Brookings, S.D., has applied for environmental permits to construct a
biorefinery in Litchfield and recently acquired land in Vermilion County.
Its 2007 third-quarter results were dismal: net income of $7.8 million on
revenues of $221.9 million, compared with a net income of $32 million on
revenues of 148.2 million in the third quarter of 2006. • In a conference call with investors, Ron
Miller, president and chief executive officer of Pekin-based Aventine
Renewable Energy Inc. told shareholders that falling ethanol prices, coupled with the
soaring price of corn, resulted in “a difficult operating
environment” for his firm. Aventine reported net sales of $360
million for the third quarter of 2007, compared with $407 million during
the same period in 2006; net income for 2007 dropped to $3 million from
$5.2 million in 2006. • Although the world’s biggest largest
producer of ethanol — Decatur-based Archer Daniels Midland Co.
— reported income of $12.8 billion in the first quarter of 2008 (the
three months ending Sept. 30, 2007), compared with $9.4 billion the
previous year, operating profits from the company’s corn-processing
business slipped from $289 million to $253 million in the same period. Corn processing was the only ADM segment to report a
decrease in operating profit, and the company blamed the decline on lower
ethanol sales.
R od Weinzierl, executive director of the Illinois
Corn Growers Association, concedes that ethanol processing’s pace of
expansion has slowed. Still, he remains optimistic about the
industry’s future — despite the widely held view of analysts
that the ethanol market has tanked. Weinzierl believes that that the industry will
continue to grow, perhaps by 20 percent in next year to 18 months. “The industry is still proceeding at a fairly
rapid pace. I think beyond that the industry is going to continue to grow,
but, depending on economics, that will influence what rate the industry
will continue,” he says. His colleague Mark Lambert, the corn
association’s spokesman, blames Big Oil for the slowdown. Petroleum refiners must mix their product with
ethanol at special blending facilities, which tend to be scarce in certain
parts of the country, creating what Lambert calls a bottleneck in
ethanol’s lines of distribution. “Oil companies dominate and control the
distribution level. The oil industry is keeping ethanol out of the
pipelines,” Lambert says. And making the logjam worse is the scarcity of
pumping stations that sell E85, Lambert says. Underwriters Laboratories, which sets safety
standards for a number of products and whose seal of approval is required
by many municipal governments, yanked its certification of E85 in 2006
pending further study. Once UL releases its findings in the coming months,
the installation of more E85 pumps should happen quickly, Lambert says.
Al Mannato, fuels issues manager for the American
Petroleum Institute, the oil companies’ main Washington, D.C.,
lobbying arm, calls Lambert’s assertions a “gross
mischaracterization.”
“There’s no conspiracy. We don’t
control the cost of his feedstock,” he says. Mannato says that oil companies have actually helped
the ethanol business. Petroleum refiners, he says, are the world’s
top buyers of ethanol.
E thanol’s harshest opponents have long held
that encouraging production was bad public policy from the start.
Environmentalists and some scientists argue that
manufacturing the fuel requires too much fossil fuel and that ethanol may
take as much energy to produce as it yields. Money-in-politics watchdog
groups, which believe that ethanol gives too many federal and state
government subsidies to farmers and large corn-processing firms, have been
equally outspoken. Human-rights activists, who say that earmarking corn
for ethanol production takes food out of the mouths of the world’s
poor and hungry, are also blaming corn farmers and ethanol companies for
driving up the price of beef, milk, and the Frosted Flakes over which the
milk is poured. Livestock farmers, who depend on corn for animal
feed, don’t disagree. “It’s pretty bad right now,” says
Jim Kaitschuk, director of the Illinois Pork Producers Association. Kaitschuk says low pork prices, combined with the
high cost of grain feed, are causing hog farmers to lose between $40 and
$50 per head (some of which they’ve been able to offset by growing
crops — in many cases, corn). Many Illinois hog farms are getting
smaller or, in some instances, being liquidated, he says. Weinzierl, of the Illinois Corn Growers Association,
scoffs at the oft-made suggestion that his members are behind the spike in
food prices. “We’ll be the first to admit that
there’s 2 to 3 cents more corn in cornflakes than there was two years
ago,” he jokes. “In a box of cornflakes the farmer gets about 6
percent. With meat, the farmer gets about 32 cents. Right now pork at a
wholesale level is cheap and pork producers are under a lot of pressure
— but meat at the retail level is not being lowered.”
The same holds true for other meat products, he says.
“As corn prices have gone up, the price of
chicken has gone up — and that’s because the Tysons and the
Pilgrims are saying, ‘Hey, we want to still make money, so
we’ll just raise our prices.’ ”
Transportation costs resulting from higher per-gallon
gasoline and diesel prices are the real culprits in the increase in
per-gallon milk prices, Weinzierl says, adding that if biofuels
weren’t being blended into the fuel supplies of trucks and planes
fuel costs would be much higher.
“If corn is having an effect on food prices,
then how much is it suppressing the cost of gas?” Weinzierl asks.
“My guess is that it’s probably close to
a swap.”
A fter the initial of
flurry of activity, ethanol-industry insiders believe that the business is
finally settling down and shaking out the losers.
“The future for ethanol is good, and we need to
make more of it,” says Filbert of Heartland Ethanol. Heartland, based in Pittsfield, also wholly owns
Waverly Ethanol LLC. In Oct. 2006, Waverly residents sued the company to
block construction of a $300 million ethanol
refinery [see Manjula Batmanathan, “Not in their front yards,”
Oct. 26, 2006]. The lawsuit is now in the discovery phase, he says. Filbert even sees some benefits to the ethanol
market’s current stagnation. For example, costs of ethanol-plant
construction, such stainless steel, are lower now than they were two years
ago. Firms that specialize in building ethanol refineries may soon start
lowering their prices as well. “Congress, in its infinite wisdom, has mandated
more use, which they really didn’t have to do,” he says.
“This is a temporary situation. The crisis will blow over.”
In addition, he says, corn-futures trading on the
Chicago Board of Trade looks promising and technological advances in the
farming industry are increasing corn yields every season. No matter what problems have arisen, Weinzierl is
reluctant to characterize ethanol’s ebb as a bust similar to those of
failures of dot-com businesses in the 1990s and the more recent collapse of
the home-mortgage market. “A year ago there were 50 proposed plants. We
thought that if 10 of them got built that’s a pretty good rate of
expansion. There’s more proposed plants than what could ever
conceivably be built,” Weinzierl says. “[Ethanol] plants are producing a physical
product, and these plants aren’t going to just go away — unless
people think we’re going to find oil someplace in the world where
they like us.
“These plants aren’t making the money
they were two years ago. Most of them are making money, but will there be
some ownership changes? There are in every industry. Will these plants shut
down? Ninety-five percent of them won’t, which is different from the
dot-com business, when plants just went out of business, never to be heard
from again.”
Weinzierl may be correct — thanks again to
ethanol’s friends in Washington. The 2007 energy bill, which Congress
passed in December, mandates the addition of 36 billion gallons of ethanol
to the nation’s fuel supply by 2022.
Contact R.L. Nave at rnave@illinoistimes.com.
This article appears in Jan 24-30, 2008.
