- The Washington Times - Thursday, July 17, 2008

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.

“I think the ethanol industry as a whole will have to re-examine its entire financial model and determine how it can make money,” he said. “Many of these [ethanol] plants never met the objectives that they were designed and built to achieve.”

Many experts say corn has limited potential for securing America’s energy independence in the first place. They say energy independence rests more on experimental cellulose-based ethanol made from switch grass, wood or other nonedible parts of plants.

“We’re already seeing problems with corn prices and so forth at these levels, and its only going to get tougher from here,” Mr. Taylor said. “It’s hard to imagine any huge breakthroughs with corn yields or the ethanol production process because this is not something that was created yesterday.”

Available land for growing more corn in the United States is limited, and while yield increases from existing farms are expected, corn has the potential to supply only a fraction of U.S. energy needs.

“Ultimately corn ethanol can produce up to about 10 percent of the gasoline transportation fuel markets, with [future] yield and efficiency increases,” said Roger Conway, director of the Office of Energy Policy New Uses with the Department of Agriculture. “But to go beyond that we will probably need cellulose-based ethanol.”

The U.S. government supports several cellulose-ethanol pilot programs, but the technology is still developmental and not ready for commercial production.

Analysts say it is impossible to know when the technology will become viable enough to be profitable.

“It’s very hard to predict when the big breakthroughs will occur,” said Ben Lieberman, senior policy analyst at the D.C.-based Heritage Foundation. “What the government will learn is it can’t just wave a magic wand and mandate it to happen. I think that is the lesson we are going to learn with cellulose ethanol.”

As corn and ethanol prices skyrocketed, cheaper sugar-based ethanol from Brazil has become competitive in the U.S. market, despite a 54-cent-a-gallon import tariff.

“After the price of ethanol gets over about $2.50 per gallon, it still pays for Brazil to export ethanol to the United States,” said Joel Velasco, chief U.S. representative of the Brazilian Sugarcane Industry Association.

“With prices in the U.S. approaching $3 per gallon, despite the fact that we have to pay about 50 to 60 cents of tariff coming in, it is still worthwhile to export.”

Current prices for ethanol in the United States average roughly $3 per gallon. Mr. Velasco said that if prices remain high, Brazil will boost its production with the expectation of exporting to the United States.

“Presumably, if ethanol prices stay high, then obviously we will ramp up our production in Brazil,” he said.

Both the Brazilian and U.S. ethanol industries are heavily subsidized by their governments, but ethanol can be made cheaper in Brazil mainly because the sugar cane used to make ethanol in Brazil yields more energy than corn.

Corn ethanol generates around 1.6 times the amount of energy used to produce it, while ethanol made from sugar cane yields more than eight times the energy used for production.

“The basic fact is that it is easier to make ethanol out of sugar than out of corn and the Brazilian ethanol industry has that advantage,” Mr. Lieberman said. “However, there are a lot of advantages that Brazil has that I’m glad we don’t have, like sugar cane field workers who make pennies per day - and that reduces costs.”

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