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Ethanol production will have to increase to meet government mandates

Ethanol plant construction has come to a halt, but the mandates by government are not declining, which could mean prices could jump again. Producers should prepare for round two, a Texas AgriLife Extension Service specialist said.

"Expanded ethanol production is probably a given; however, the pace is expected to slow due to capacity limits and policy," said Dr. Steve Amosson, AgriLife Extension economist.

The president-elect and U.S. Secretary of Agriculture are both big supporters of renewable fuels, Amosson said. President-elect Barack Obama has stated, "I have established a goal to have 60 billion gallons of our fuel come from sustainable, affordable biofuels in 2022."

The reality right now is that nationwide 213 ethanol plants were in production or under construction in September 2007, with many more on the drawing table, he said.

Nine months later, some of the plants that were under construction have come into operation, but no new plants have started construction.

Bill Tierney, former Kansas State University grain marketing economist and former head of the U.S. Department of Agriculture wheat and feedgrains forecasting division in Washington, D.C., said the global "credit crisis" came at just the right time to stop the U.S. ethanol industry from seriously overbuilding capacity relative to the market share.

"In early August 2007, the industry was well on its way to overbuilding, much as the U.S. biodiesel industry already has," Tierney said.

The credit crisis and declining ethanol margins dried up financing for 11 billion gallons of "probable" projects, he said.

"Ethanol production is and will continue to suffer from growing pains," Amosson said.

Recent analysis shows that ethanol plants are losing money given the current prices of ethanol and distillers grains by-products, after taking into consideration the cost of the primary inputs natural gas and corn, Amosson said. However, he said, considering oil prices are expected to start going back up and "we may be falling below producing enough ethanol to meet the amount necessary to meet the renewable fuel standards, ethanol prices should rise."

The energy bill signed into law in December 2007 requires 36 billion gallons of ethanol to be available for use by 2022, Amosson said. Twenty-one billion gallons is supposed to come from feedstocks other than corn.

The problem, he said, is that cellulosic ethanol production is not even expected to get off the ground until 2015 or after, and then it takes time to ramp up the industry.

"The renewable fuel standards will not hold up--it can't," Amosson said.

The renewable fuels standard mandate enacted under the Clear Air Act applies to blenders but has never been enforced, he said. The Environmental Protection Agency is the enforcement arm.

According to the standards, 11.1 billion gallons of ethanol nationwide, or 10.21 percent of the national energy supply, must come from renewable fuel this year, Amosson said. The amount gradually steps up from there.

Penalties for blenders not meeting the mandates include having to return any profit from non-renewable fuels and a fine of $25,000 per day, he said, so that may be enough incentive to keep them moving in that direction.

One bushel of corn will produce 2.8 gallons of ethanol and 17 pounds of dried distillers grains, Amosson said.

"I thought distillers grain prices would go down, but last year Europe had a disaster in their wheat," he said. "While they wouldn't import any of our GMO (genetically modified) corn, they still used our distillers grains for feed and that is why we didn't see the decrease."

Amosson said distillers grain prices could be expected to start falling, making them more attractive for livestock rations and that should increase their usage.

At the same time, the limit on corn-based ethanol and the growth in yields will eventually cap corn prices, he said.



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