Saturday, January 12, 2008

Ethanol Rollercoaster

A couple of posts ago I tried to map out the net profitability of an ethanol plant in the United States. I try not to get bogged down in numbers and details so that people can quickly read and get the most out of what I have to say. I found a very good and succinct picture that I'd like to show that illustrates the point I was making even better.

This graph, from DTN's ethanol page, reflects the tight economics of an ethanol plant. Even though there have been several months particularly this past summer in which net profits have been very good, the situation has taken a turn for the worst. This really isn't a reflection on ethanol, or an inability to compete with $100 a barrel ethanol, rather it is a reflection of the changing economy that is now coupled to the swings of the oil and energy markets. I wanted touch on this idea again because of what happened this past week on the Chicago Board of Trade (CBOT) -- corn prices reached $4.95 per bushel. This is a reflection of investors moving to secure enough acres to satisfy the varying demands of corn, soybeans, and other agricultural products. This is not to blame one single industry for the shortfalls -- even this past year as acreage became tight the United States exported record amounts of corn and soybeans to China, so there is definitely supplies to feed people in the future. The problem isn't necessarily a shortage of any one grain, but at $4.95 per bushel, corn becomes an increasingly expensive feedstock for an ethanol plant trying to get by on tight earnings. This situation might result in a slight pullback or consolidation in the industry to try to absorb these potential loses if the price of corn doesn't recede.

What this information proves is that researchers need to continue to work hard in moving from an ethanol industry dependant on corn, towards one that can use multiple feedstocks based on their costs -- wood chips, switchgrass, and even corn all combined into a single effort to balance our need for fuel and other end products.


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