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Wednesday, Jan. 30, 2008 10:02 pm

The thrill is gone

The fever to build ethanol refineries has passed. Blame good ol’ supply and demand.

Greg Sherwood grew 400 acres of corn last year in anticipation of higher corn prices, banking on continuation of the ethanol boom
Photo by Robert Cohen/MCT
Untitled Document 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.
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