Ethanol Industry's Expansion Plans Face Profit Squeeze

The plans of the ethanol industry to double production over the coming years are running into a profit squeeze. According to an article in the Minneapolis Star Tribune, posted on StarTribune.com, the industry is running into problems with the cost of their raw product, corn. The increased popularity of ethanol has caused the price of corn to increase with a resulting shrinkage in profit margins. The industry's plans for expansion will only create a larger demand for corn, even though farmers are rushing to put more fields into the production of the grain.

The Star Tribune notes that the cost of corn is not the only problem faced by the industry. Ethanol, unlike crude oil, cannot be transported through pipelines, but must be carried by trucks or rail cars. That adds to the cost of the product. Furthermore, ethanol is produced in the Midwest, but is primarily in demand on the coasts of the nation. According to the Star Tribune, the cost problems have led to a decline in the value of the shares of ethanol companies

Despite the financial issues, the Star Tribune reports that companies such as U.S. BioEnergy Corporation of Inver Grove Heights, MN, and ADM Incorporated of Illinois, are part of a group of ethanol producers who plan to double production to 14 billion gallons. That would amount to approximately 10% of the motor fuel used annually in the United States.

An analyst with the Bank of America, Eric Brown, is quoted in the article as saying, "We expect the relentless supply of new ethanol production capacity will lead to a 70 percent decline in [profit] margins by 2009." Since 2005, corn prices have just about doubled, adding to an overall increase in the cost of food products, many of which depend on corn at some point in the production process.

One answer to the cost issue is the possibility of using not just the corn to produce fuel, but also using crop waste. Jack Uldrich, a technology consultant with the NanoVeritas Group of Minneapolis, adds, accruing to Star Tribune, "I suspect that there is still a little money to be made from ethanol, but companies can't just ramp up their production capacity and expect to earn outsized profits," he said. "The successful ones will need to continue to find innovative ways to improve efficiencies, reduce energy expenditures, hedge against corn prices, and cut transportation costs. If I were looking at an investment in this space, I would be concentrating on how the various ethanol companies are addressing these issues and positioning themselves to keep their heads above water in anticipation of the industry's expanded production."

The industry's money problems come at a time when some experts are questioning ethanol's mileage as well as the possible damage to engines using the corn-based fuel.

Source:

Star Tribune, Ethanol industry faces shrinking margins, www.startribune.com/1069/story/1262774.html