Uncertain future looms for corn-based ethanol

These are precarious times for the corn-based ethanol industry.

Catastrophic flooding across the Midwest this spring inundated millions of acres of already-planted corn and land slated for planting. With corn prices already above $7 a bushel – more than triple what they were only three years ago – a significantly reduced corn crop will send them even higher.

How much higher is anybody’s guess as the summer growing season moves into July.

Mark Sponsler, director of Greeley-based Colorado Corn, said he’s not sure the Midwestern corn crop is as damaged as many media reports would indicate. But he does acknowledge there will be less corn grown this year and smaller yields in many fields.

That will undoubtedly push up prices, and while that’s good for Colorado corn growers and others not impacted by the floods it means troubling times for the fledgling corn-based ethanol industry.

“It will drive (corn prices) up, and that makes it a very uncomfortable time for ethanol plants that need to get a decade or so of profitability so that base of infrastructure can become healthy,” he said. “I don’t think any of their business models contemplated $7 to $8 corn.”

The “arrival” of the corn-based ethanol market and industry around 2005 was a boon for corn growers, who had struggled for years to get $2 or slightly more per bushel for their crop at harvest. Finally, the stars began to align with a growing public demand for homegrown fuels, rising interest in alternative-fuel vehicles and the creation of an incipient ethanol-producing industry and delivery system.

Production costs rise

But steadily rising costs of production – now estimated at about $5 per bushel for corn farmers according to Sponsler – have eaten into profits and only a continuing strong demand for ethanol production keeps them in the black.

At the same time, corn-based ethanol, under constant attack by the oil and grocery industries and sometimes meat producers, is facing an uncertain future.

Shifting more acres to corn from other food crops, along with making it more expensive to feed cattle and hogs, is raising the price of food, some claim. And E85 ethanol – the blend of fuel that’s 85 percent ethanol and 15 percent gasoline – has not proven to be a viable alternative to gas when ethanol’s lower energy content is factored in, others say, even when paired against $4 gasoline.

Sponsler disputes all of these criticisms. Concerning the claim that ethanol contributes to higher food prices, he points out that the rising cost of oil has “three times the impact” of the higher cost of corn after factoring in the skyrocketing costs of transportation, packaging and marketing of processed food.

“There’s a marketing disconnect between what it costs a producer to produce a crop and what he gets for the commodity,´ said Sponsler, noting that the cost of producing that crop has recently doubled and even tripled. “He has to take whatever the price is available when he decides to take it to market.”

Regarding E85’s lower energy content and lower miles-per-gallon, Sponsler said most agree that it’s no more than 15 percent to 20 percent less than gasoline and that as long as the cost of E85 remains about 20 percent lower than gas, it’s financially a wash.

Reducing dependence

E85 users also get the additional satisfaction that the fuel is helping reduce the nation’s dependence on foreign oil in places like Iraq and Saudi Arabia and resulting in a cleaner environment because of its lower carbon emissions.

“In 2006, ethanol was taking the equivalent of 1.2 million cars off the road by reducing those emissions,” Sponsler said. “Was taking 1.2 million cars off the road a worthwhile thing? If so, it would indicate we’re making some very large improvements in the environment.”

So does the already-almost-unbearable price of gasoline have to keep going up to make E85 more attractive and stimulate car makers to shift more production toward E85-using vehicles?

Sponsler admits that a continuing spike in gas prices will likely have that effect, but adds that the best answer is for the price of everything to come back down to Earth.

“I think what needs to come down first is the cost of production to levels that aren’t so challenging,” he said.

The price of corn also probably needs to come down, Sponsler notes. “I’m stunned that (corn) futures are trading at $8 a bushel and I can’t help but wonder if it’s not the result of major trader speculation,” he said. “Since 2007, there’s been heavy investment by fund managers and folks are starting to use them as a speculative tool and caused excessive interest in commodities markets that have no intention of taking delivery.”

Sponsler said the current situation is creating some hard-to-answer questions for the future of E85. “It’s a puzzle,” he said. “I think we know what the overall picture on the box should look like, with greater energy independence through homegrown renewables, lower production costs and strong markets for everyone.

“But right now we’re all struggling with how to make it work.”

Steve Porter covers agribusiness for the Business Report. He can be reached at 970-221-5400, ext. 225, or at sporter@ncbr.com.

on Facebook on LinkedIn