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Corn prices threaten ethanol

Analysts doubt costs will fall anytime soon; Brazil may export sugar-based fuel to U.S.

By Anthony Jaffee | Thursday, July 17, 2008

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Spiraling corn prices have squeezed profits and stressed the U.S. ethanol industry in recent months - a phenomenon that threatens to destroy hope that American farmers could help end the country's dependence on oil imported from hostile nations.

In June, VeraSun Energy, one of the country's largest ethanol producers, recently delayed opening three new ethanol plants because of "volatility in the market," and a Citigroup analyst predicted last month that nearly three-quarters of U.S. ethanol plants could face a possible shutdown in coming months as profit turns negative.

"One of the main reasons for high ethanol prices is that the cost of the feed stock has been soaring," said Jerry Taylor, senior policy analyst at the D.C.-based Cato Institute. "When corn prices go up, its going to make it more expensive for an ethanol processor to make ethanol from corn."

Corn prices this week fell below $7 a bushel for the first time in a month after peaking above $7.80 on July 2.

As recently as March, President Bush reiterated his support for ethanol as a means to reduce reliance on foreign energy supplies.

"If you're dependent on oil from overseas, you have a national security issue," Mr. Bush said at the International Renewable Energy Conference in Sao Paulo, Brazil. "The vast majority of ethanol is coming from corn, and that's good. That's good if you're a corn grower. And it's good if you're worried about national security. I'd rather have our corn farmers growing energy than relying upon some nation overseas that may not like us."

The government spends roughly $7 billion in ethanol subsidies annually. Yet as food prices skyrocket, the prospect of corn ethanol becoming a significant alternative to foreign oil is diminishing.

Analysts say the price of corn is unlikely to fall any time soon. A Chicago Board of Trade report released in May said that despite increased planting tight supply is likely to continue into next year.

Alex Moglia, president of Chicago-based Moglia Advisors, which helps biofuel companies restructuresaid 12 biodiesel and ethanol plants have declared bankruptcy in recent months and that the problems facing the ethanol industry are more profound and long-term than just corn and fuel costs.

Difficulty finding financing, high costs of building new plants and general problems with the business model are taking there toll on the U.S. ethanol industry, he said.