NEVADA, Iowa, Sept. 24 — The ethanol boom of recent years — which spurred a frenzy of distillery construction, record corn prices, rising food prices and hopes of a new future for rural America — may be fading.
Only last year, farmers here spoke of a biofuel gold rush, and they rejoiced as prices for ethanol and the corn used to produce it set records.
But companies and farm cooperatives have built so many distilleries so quickly that the ethanol market is suddenly plagued by a glut, in part because the means to distribute it have not kept pace. The average national ethanol price on the spot market has plunged 30 percent since May, with the decline escalating sharply in the last few weeks.
“The end of the ethanol boom is possibly in sight and may already be here,” said Neil E. Harl, an economics professor emeritus at Iowa State University who lectures on ethanol and is a consultant for producers. “This is a dangerous time for people who are making investments.”
While generous government support is expected to keep the output of ethanol fuel growing, the poorly planned overexpansion of the industry raises questions about its ability to fulfill the hopes of President Bush and other policy makers to serve as a serious antidote to the nation’s heavy reliance on foreign oil.
And if the bust becomes worse, candidates for president could be put on the spot to pledge even more federal support for the industry, particularly here in Iowa, whose caucus in January is the first contest in the presidential nominating process.
Many industry experts say the worst problems are temporary and have been intensified by transportation bottlenecks in getting ethanol from the heartland to the coasts, where it is needed most. And even if some farmers who invested in the plants lose money, most of them are reaping a separate bounty from higher prices for corn and other commodities, which are expected to remain elevated for some time.
Even so, companies are already shelving plans for expansion and canceling new plant construction. If prices fall more, as many analysts predict, there is likely to be a sweeping consolidation of the industry, and some smaller companies could go out of business.
The falling price of ethanol comes in sharp contrast to the rise in crude oil prices. Lower ethanol prices help reduce gasoline prices at the pump, where ethanol is available, but because it constitutes 10 percent or less in most blends, the impact for the consumer is marginal.
Congress essentially legislated the industry’s expansion by requiring steadily higher quantities of ethanol as a gasoline blend, a kick-start that was further spurred by the proliferation of bans on a competing fuel additive used to help curb air pollution.
But the ethanol industry, which is also heavily subsidized by federal tax incentives, got far ahead of the requirements of the law, rapidly building scores of plants and snapping up a rising share of the corn harvest. Many of those plants have gone into operation in recent months, and many more are scheduled for completion by the end of next year.
The resulting ethanol oversupply is buffeting the market. Here in northern Iowa, deep in the corn belt, newly cautious farmers and ethanol executives are figuring out how to cut costs and weighing their options should the situation get worse.
“We don’t know what, ultimately, the marketplace will price ethanol at,” said Rick Brehm, president and chief executive of Lincolnway Energy, a midsize distillery here. “It could go lower.”
Since construction crews broke ground on the Lincolnway plant in 2005, the price of ethanol on the local market has fallen to $1.55 a gallon from about $2, Mr. Brehm said. Over the same period, the price of corn, representing 70 percent of production costs, has risen to $3.27 a bushel from $1.60. “We’re trapped between two commodities,” he said.
Lincolnway was once virtually alone in the region, but now a handful of new competing distilleries are operating and pouring even more ethanol onto the market, offering blenders more options to negotiate lower prices and driving up demand for corn.
“Obviously, I’m concerned about where we’re going,” said Bill Couser, chairman of Lincolnway Energy, though he added that his company is still making money and he is optimistic about the future.
The ethanol boom was set off when Congress enacted an energy law in 2005 that included a national mandate for the use of renewable fuel in gasoline, obliging the market to consume 7.5 billion gallons a year by 2012, compared with 3.5 billion gallons in 2004.
Already, ethanol producers are poised to outpace that mandate, with capacity expected to reach 7.8 billion gallons by the end of 2007 and 11.5 billion gallons by 2009, although some in the industry are now predicting that the expansion could slow.
The number of ethanol plants in the country has increased to 129 today from 81 in January 2005, according to the Renewable Fuels Association, while plants under construction or expanding have mushroomed to about 80 from 16 during the same period.
“As ethanol supply increases over the next 12 months, the challenge will be to find a home for it,” said Mark Flannery, head of energy equity research at Credit Suisse. “The ethanol surplus is here already.”
Because ethanol is corrosive and soaks up water and impurities, it cannot be shipped through the country’s fuel pipeline network. So it must be transported by train, truck and barge, a more expensive transportation network that is suddenly finding it hard to keep up with the surge in ethanol production.
There is a long backlog in orders for specialized ethanol rail cars to ship the surplus production. Many rail terminals at the ethanol plants do not have spurs large enough to accommodate the long trains that ethanol promoters like to call “virtual pipelines.” And pumps from the storage tanks to the rail cars at the terminals often do not have sufficient capacity to load trains quickly and efficiently.
Phillip C. Baumel, economics professor emeritus at Iowa State University, said that in many cases ethanol producers ramped up their production so rapidly that they gave “inadequate attention to meeting transportation and distribution needs.”
Gasoline wholesale marketers have been slow to gear up ethanol blending terminals, in part because they had to invest simultaneously in equipment to manage low sulfur diesel and tougher product specifications.
Prices of ethanol range widely around the country, even differing from one county to the next in the same state on a daily basis. [The average rack, or wholesale, price reported by the DTN Ethanol Center on Tuesday was $2.42 a gallon in New York and $1.77 in Iowa.] Generally, prices are highest in states farthest away from the Midwest farm belt and in ones that have federal or state clean-air requirements that encourage the use of ethanol.
In a new study, the Agriculture Department warned of “several supply chain issues that could inhibit growth in the ethanol industry,” including a backlog in rail tank car orders that grew to 36,166 rail cars by the end of the first quarter in 2007 from about 10,000 in the third quarter of 2005.
“You just can’t scale it up overnight,” said Chuck Baker, vice president and executive director of the National Railroad Construction and Maintenance Association.
Stiff blending regulations in some southern states like Florida have also been an impediment to ethanol. And so far, only about 1,000 of the 179,000 pumps at gasoline stations around the country offer E-85, a fuel that is 85 percent ethanol and 15 percent gasoline, intended for the five million flex-fuel vehicles on the road that can run on high ethanol blends.
Major ethanol producers and lobbyists describe the developing gulf between production output and transport capacity as a temporary growing pain that will be alleviated over time.
“We have an industry that has doubled in size in just the past couple of years,” said Bob Dinneen, president of the Renewable Fuels Association. “It is going to take a little time for the infrastructure to catch up.”
Some analysts outside the industry think the current market upheaval may be more than simply a hiccup.
Aaron Brady, a director at the consulting firm Cambridge Energy Research Associates, said the current market problems could worsen if combined with other “unintended consequences that may be lurking” from increased ethanol production. He said pressure on corn and other food prices, water shortages, soil and fertilizer runoff could hurt political support for the industry.
“If Congress doesn’t substantially raise the renewable fuel standard,” Mr. Brady said, “then this is not just a short term problem but a long term issue, and there will be more of a shakeout in the industry.”
The Senate has approved a bill that would require gasoline producers to blend 36 billion gallons of ethanol into gasoline by 2022, an increase from the current standard of 7.5 billion gallons by 2012. The House did not include such a provision in the version it passed, and it is uncertain whether any final legislation will emerge this year and what it will say about ethanol if it does.
Ethanol proponents say a new energy law is virtually inevitable at some point, and that even if it does not pass this year, lower ethanol prices will provide an incentive for refiners to blend more ethanol into expensive gasoline. A higher renewable fuels standard would force refiners and blenders to work faster to process increased amounts.
A strong energy law would also increase investment and research into ethanol production from nonfood sources, like switch grass, and persuade auto companies to make more cars that run on blends well beyond the standard low percentage ethanol mixture, ethanol proponents argue.
“This is an industry that is going to continue to grow,” said Bruce Rastetter, chief executive of Hawkeye Renewables, a private company based in nearby Ames that has two distilleries and two more under construction. “Once you see an energy bill, I think you will see the industry respond again.”
Still, he has dropped plans to build a fifth plant and take Hawkeye public.