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By Seth Slabaugh
of TheStarPress.com
The proposed construction of nine ethanol plants
in East Central Indiana is happening at a time when
the rapidly growing ethanol industry might be headed
into a bust period, some experts suggest.
"I'm not against ethanol by any means, but it
can't continue to grow like this," says Christopher
Hurt, an agricultural economist at Purdue
University. "It's going to hit constraints, one of
which is the availability of corn."
Of the 18 ethanol bio-refineries either under
construction or announced in Indiana, half are in
East Central Indiana communities: Alexandria,
Bluffton (two projects), Hartford City, Marion,
Montpelier, Muncie, Portland and Winchester.
Hurt predicts that only seven to nine ethanol
plants will be built state-wide during the next
several years, not 18.
"The current expansion rate of the ethanol
industry is about 70 percent," he said in an
interview. "It's doubling every one year and five
months. That is a rate that certainly cannot be
sustained for another year."
Today, there are 107 ethanol bio-refineries in
the United States with the capacity to produce more
than 5 billion gallons of ethanol annually,
according to the Renewable Fuels Association.
Another 56 ethanol plants are under construction and
will add another 3.8 billion gallons a year of
production capacity within 18 months.
Gov. Mitch Daniels and Lt. Gov. Becky Skillman
have attended ground-breaking ceremonies recently
for ethanol plants in East Central Indiana, pointing
out that when Daniels took office in January of 2005
Indiana had only one ethanol plant.
If all 18 of Indiana's announced plants are
built, they would have the capacity to produce more
than 800 million gallons of ethanol a year and to
consume more than 600 million bushels of corn a
year, according to a state department of agriculture
fact sheet.
Indiana produced a record 929 million bushels of
corn in 2004 and is expected to produce 856 million
bushels this year.
Seventeen to 19 percent of Indiana's corn crop is
fed to the Hoosier livestock industry. That
percentage will increase if Indiana achieves the
governor's goal of doubling pork production. About
30 percent of Indiana's corn crop is processed in
the state for industrial and human products,
including corn starch and high fructose corn syrup
for the soft drink industry. The remaining 50
percent or so of Indiana's corn crop is shipped to
Southeastern states to feed poultry, swine and other
livestock, and to Japan, Mexico and other countries.
The weakest link
"This ethanol expansion is going to bid up the
price of corn to a level where it is simply not
profitable to use corn as the raw material for
ethanol, and there is no other raw material they can
use of that magnitude," Hurt said. "For ethanol to
get that corn, it has to outbid somebody else who is
already using it. Who's the weakest link?"
Will it be livestock producers? Hurt asked.
Japan? Mexico? Ethanol producers?
While high corn prices will be good for Indiana
corn growers, they'll be bad for livestock
producers, for whom feed is their most expensive
input.
"For our hog producers, our estimates there are
anything higher than $3.50 per bushel and it's just
red days at the bank, sorry, in terms of losses,"
Hurt said. "We're virtually at those levels now on
corn."
Cash corn prices in Indiana today are in the
range of $3.50 per bushel, the highest in years, due
in part to strong demand for corn from ethanol
producers.
"The corn growers will say, 'Give us a chance to
increase supply,' and they will have that
opportunity, but it's a huge challenge," Hurt said.
"We can grow the total supply of corn -- by adding
more acreage and kicking yields up -- but we can't
grow it at the rate of 70 percent."
Hurt has asked ethanol plant producers in East
Central Indiana, the East Coast, the West Coast and
Canada where they will get their corn.
"And of course, they all say Iowa," Hurt said.
"But it's not going to happen. Iowa is not going to
be a surplus corn state of any magnitude."
Boom, then bust
Hurt wouldn't be surprised to see an ethanol
industry bust.
"Good old capitalism being what it is, does
expansion always just stop at the exact moment when
you are going to have enough ethanol plants that are
in balance with the amount of corn we have?" Hurt
asked. "And the answer to that is no. We usually
boom it and then bust it. So we probably will
overbuild for what we can really handle, and it
won't be obvious until some of these plants are
halfway constructed. Most investors will finish up
and see how it goes. Then you run with excess
capacity and poor margins and bankers say it stinks,
don't talk to me about ethanol."
Other potential limits to ethanol expansion
include the rising cost of building ethanol
bio-refineries and the possibility of losing
government support, Hurt said. The ethanol industry
is heavily subsidized, from corn crops to flex-fuel
vehicles to per-gallon tax credits. The American
ethanol industry is also protected by tariffs on
imported ethanol.
But there could be attempts to remove subsidies
and import tariffs.
For example, the Renewable Fuels Association (the
trade association for the ethanol industry) says
that it joined the National Corn Growers Association
and the American Farm Bureau Federation in
successfully opposing efforts in May to remove the
import tariff on ethanol. Much attention was given
to that idea as a way to boost ethanol supplies and
lower gas prices, according to the association.
Pace of building questionable
In a report prepared last month for the
International Institute for Sustainable Development,
energy analyst Doug Koplow of Cambridge, Mass.,
questioned "the vast array of public support at all
levels of government being showered on" the ethanol
industry.
"Aside from growing public costs, there remains a
concern that productive capacity -- driven by the
subsidies -- will grow at an unsustainable rate,"
Koplow reported. "Such growth would result in a
number of potentially damaging outcomes. First, too
much industry capacity could lead to shakeouts and
bankruptcies."
In an interview, Koplow said it was a question of
price.
If gasoline prices fall or the cost of ethanol
production rises (for example, if corn prices
spike), ethanol becomes less competitive and the
industry will look for ways to avoid using ethanol,
Koplow said.
"If too much of this goes on, the plants would
lose money or eventually go out of business," he
said. "There could also be other forms of
over-shooting, like if Iowa begins trying to import
corn feedstocks for all of its new plants, yet the
states it had assumed would have surplus corn are
using them for their own ethanol production."
The pace of construction of ethanol
bio-refineries should be questioned, according to
Koplow.
"Robert Wisner of Iowa State University has
raised concerns that Iowa will need to become a net
corn importer to feed its plants," Koplow said.
"Might a similar situation arise in Indiana? Is the
state overseeing construction, or is it occurring
based on uncoordinated local decisions and
subsidies? Does the Indiana build-out take proper
consideration of the rate of construction from
surrounding states, which also need corn feedstocks?"
These and many other questions are worth asking
before all the plants are on the ground, he said.
Part of our landscape
"While the market will determine which ethanol
plants are built in Indiana, biofuels production is
now a part of our state's landscape and will be for
some time to come," responded Deb Abbott,
spokeswoman for the Indiana Department of
Agriculture (ISDA). "Biofuels are environmentally
friendly, reduce our dependence on foreign sources
of energy and support farmers and rural economies in
Indiana."
In May, ISDA released a study that looked at the
compatibility of the department's bioenergy and
livestock strategies, Abbott said.
"The study concluded there is enough corn to
support both initiatives," she said. "During the
past six years, Indiana has exported on average more
than 50 percent of the corn we produce. That corn
could stay in our state and support ethanol
production. Secondly, yields continue to increase
each year, adding to corn supply without adding
acreage. USDA (U.S. Department of Agriculture) also
has concluded that adequate corn is available to
supply both the ethanol and livestock industries."
Lenders will help prevent Indiana from
over-building, says corn grower Troy Prescott,
president of the proposed Cardinal Ethanol
bio-refinery near Winchester. Officials from First
National Bank Omaha, Cardinal Ethanol's senior
lender, flew in for Cardinal Ethanol's
ground-breaking ceremony last month.
"With 106 ethanol plants right now, there will be
some shakeouts, yes," Prescott said. "If you look at
the list of 106, a lot are 10- and 15-million-gallon
plants. The original ones are not nearly as
efficient as the large facilities like ours. The
smaller ones would go bankrupt, not us."
Cardinal Ethanol, designed to produce 100 million
gallons of ethanol a year, will have unit-train
loading capability. A unit train is one made up
completely of one commodity, such as coal, corn, or
distillers grain (a byproduct of ethanol production
used in animal feed), shipped from one place of
origin to the same destination.
"We built our plant to be as efficient as
possible," Prescott said.
Corn grower Joe Russell, who has attracted a
proposed ethanol bio-refinery to his Ag Biovision
Park north of Muncie, says farmers are excited about
the challenge of keeping up with demand.
"It would be like telling the auto industry, 'We
could use three million more cars; do you think you
can produce it?' Yes, we can. There is enthusiasm in
the farm fields of America to feed the world, help
fuel our nation and create jobs." |
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