GTL Charts

--------------------------------------------------------------------------------
Ethanol makes advances
Investors still cautious about industry’s growth

By Dirk Lammers
Associated Press
Posted Thursday, December 28, 2006

SIOUX FALLS, S.D. — The ethanol industry appears poised for another big year in 2007, as companies scramble to take advantage of continuing government subsidies and a growing political desire to reduce the country’s dependence on foreign oil.

But Wall Street investors who went pedal-to-the-metal during ethanol’s midyear IPO frenzy seem to be easing off the accelerator upon warnings of volatile commodity prices and a potential oversupply down the road.

VeraSun Energy Corp. and Aventine Renewable Energy Holdings Inc., the country’s second- and fourth-largest ethanol producers, respectively, went public in June amid perfect market conditions. Corn was cheap, gas cost a bundle and refiners were clamoring for more ethanol to use as a cleaner-burning alternative to the additive MTBE.

But autumn brought falling gas prices, and ethanol companies saw their stock prices drop by more than 40 percent.

The deteriorating market conditions also prompted the country’s third largest ethanol producer, Iowa-based Hawkeye Holdings Inc., to postpone its planned IPO.

“The biggest factor right now is the increased price of corn,” said Spencer Kelly, an ethanol analyst for the Oil Price Information Service in Rockville, Md. “It doesn’t look to be coming down anytime soon right now, and it’s been strong even though the crop has been pretty good.”

High corn prices squeeze producers’ profit margins a bit, Kelly said, but the industry still would be profitable unless it faced a massive drop in fuel prices.

“Looking down the road, a lot has to do with where you think gasoline will be,” he said.

Brian Jennings, executive vice president of the American Coalition for Ethanol, called 2006 a “watershed year” for the industry.

Production reached a record 427.8 million gallons in August, according to the Renewable Fuels Association, and more capacity is set to come online. The nation’s 108 ethanol plants can produce nearly 5.2 billion gallons of the corn-based fuel per year, and another 55 plants under construction and seven under expansion are getting ready to boost annual capacity to 9.5 billion gallons.

There’s some concern among analysts about whether there are enough energy-conscious drivers and ethanol-ready gas stations to use up all those gallons, Kelly said.

“We have had situations in the past where extra ethanol came online before the markets were there and ethanol prices actually dipped below gasoline,” Kelly said.

Congress has ensured a good chunk of those markets. The renewable fuels standard, passed as part of the 2005 energy bill, stipulates that 4.7 billion gallons of renewable fuels such as ethanol be used nationwide in 2007, increasing incrementally to 7.5 billion gallons by 2012.

The federal government also refunds 51 cents per gallon of ethanol to the companies that blend it with regular gas, and many states offer their own subsidies.

Jennings said the industry is constantly exploring ways to create new markets for ethanol, and he doesn’t expect the ongoing construction boom to lead to an oversupply.

The Sioux Falls-based trade group, which lobbies Congress for federal ethanol mandates and encourages states to offer excise tax exemptions, wants to make E-10 — a blend of 90 percent gasoline and 10 percent ethanol — the norm at the pumps across the country.

Nationwide use of E-10 would ensure a market for 14 billion gallons of ethanol each year. Jennings said that’s a reasonable goal considering every car can handle the alternative fuel without any modifications and gas stations wouldn’t have to make changes to store and handle it.

E-85 — an 85-percent ethanol, 15-percent gasoline mixture that runs in flexible fuel vehicles — has traditionally been more of a corn belt fad. Few cars on the market currently can use it, and only about a 1,000 out of the country’s 168,000 gas stations carry it.

But that soon could change, as U.S. automakers are working with retailers in several non-Midwest states to open up new E-85 ethanol fueling sites. The Big Three have also promised to double their production of flexible fuel vehicles by 2010.

The ethanol industry’s rapid growth has led to a growing debate over whether the use of corn as a fuel source is putting a strain on food markets.

Lester Brown, founder of the Earth Policy Institute, a Washington-based think tank, said the escalating demand for ethanol is driving up corn prices, and that will have wide-reaching effects.

When ranchers have to pay more to feed their livestock, consumers pay more for milk, meat, eggs and cheese. And that will leave some of the world’s poorest countries competing against energy companies for their food supply, said Brown, a vocal opponent of ethanol.

“If we start cutting our exports substantially, it’s going to affect countries all over the world,” he said.

Jennings called the food-versus-fuel debate “a fabricated concern.”

Very little of the field corn raised in the U.S., about 7 or 8 percent, goes directly from the field into human food supply, Jennings said. More than half goes to livestock feed, about 20 percent goes to ethanol plants and the rest goes to exports and other uses, he said.

The ethanol industry recognizes there are limits on how much corn can be produced for ethanol, Jennings said, which is why it’s researching ways to produce ethanol out of plant waste such as switchgrass, wheat straw and cornstalks.

“That will change the game for the ethanol industry, where we don’t simply become a blend component of gasoline but we become more of a real alternative and replacement to gasoline, and that’s what we’re all trying to accomplish,” Jennings said.

Brown said he expects switchgrass to eventually become the centerpiece of the ethanol industry, as it offers a better alternative to current corn-based alternative fuels.

“When it’s a perennial crop, once you’ve planted it you can harvest it for 20 years,” he said. “You don’t have to keep plowing and planting again each year as you do with most of the grains.”

But switchgrass’ common commercial use could be five to 10 years away, and he’d like the country to move toward an even different alternative — gas-electric hybrids plugged into grids powered by domestic wind farms. That, Brown said, offers the best path toward energy independence.




--------------------------------------------------------------------------------

dailyherald.com