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Ethanol: bumpy times ahead
Ethanol could face a bumpy time next year in the US, as a plethora of new plants come on stream, the oil price falls and the price of grain remain the same, according to Tom Webb in the St Paul Pioneer Press. Webb says
Ethanol prices are down 50 percent from their June peak, and so are stock prices at many ethanol companies, despite a bump from Tuesday's election results. While the corn-based fuel remains profitable, analysts see a big squeeze coming, which could singe those who viewed ethanol as a can't-miss investment — or the salvation of the rural Corn Belt.
US farmers look like they'll be in for a bumper year at the expense of the bioethanol industry in 2007, Webb quotes Wells Fargo economist Michael Swanson notes today's ethanol profits are already below historical averages and are projected to keep dropping for the next year, until ethanol is barely profitable at all. The reasons: higher corn prices, lower oil prices and a flood of new ethanol plants starting up.
Wells continues Some 55 ethanol plants are under construction nationwide, the industry says. When they're all operating, in about a year, U.S. ethanol production will soar 70 percent, with much more to come.
This is like the US auto industry with more capacity than demand and the world chemical industry which regularly overbuilds capacity, destroys capital and has a long expensive (and for some companies fatal) wait for markets to match capacity. "I don't think the industry can sustain that type of growth, so probably, over the next year or two years … some of these plants will falter," said Darin Newsom, a senior analyst for DTN. "It's just too many, too fast."
So ethanol growth in the US a bubble and partly a result of a failure of policy at the highest levels in the US. I am non-partisan in US politics and would make the same point if a Democrat president had set the ethanol and biodiesel balls rolling last year in the same way that Bush did. Am I being too short term? How much of this is a failure of policy at national, state and local levels? Please tell me what you think. Picture from www.goldminingclaims.netMore...