LINCOLN, Neb.—Ethanol producers have friendly government policies to thank for the current boom in the corn-based alternative fuel and will need more help from Washington to keep from going belly up in a few years, says a new study.
Without a federally mandated increase in ethanol consumption, small plants could stop being profitable by 2011 and be operating in the red in 2013, according to the study by David Peters, an agricultural economist at the University of Nebraska-Lincoln.
Large plants, meanwhile, could see profits cut in half in four years before losing millions of dollars in seven or eight years and being forced to rely on reserves to cover losses.
The study comes as Congress tries to craft an energy bill that addresses alternative fuels.
A Senate-approved bill calls for doubling annual consumption of ethanol to 15 billion gallons by 2015. The current requirement is 7.5 billion gallons by 2012, though actual consumption could meet that mark next year.
The study looked at economic prospects for two sizes of plants: those that produce 40 million gallons per year and those producing 100 million gallons annually. The plants’ prospects were considered for two scenarios, under the government’s current consumption requirement and the proposed, 15 billion gallon requirement.
While it used financial circumstances in Nebraska, general projections are applicable to other states, Peters said.
More government-driven demand could be particularly important for Corn Belt states such as Nebraska and Iowa where plants have sprouted quickly and are seen by politicians and others as a way of revitalizing struggling rural areas.
But Peters said financial projections for a fuel whose demand “is entirely government driven” show that plants shouldn’t be counted on as a reliable tool for rural resurgence.
“Don’t base decisions in your community on the aberration of 2005 and 2006,” when there were record-high profits at ethanol plants, Peters said he tells small-town leaders. “I think that’s what the mind-set is, but there’s a new reality coming around and people haven’t gotten their heads around it.”
He said he expects prices to drop to historically normal levels.
“It’s not going to be this revolutionary development for rural communities,” Peters said.
In Nebraska, which is poised to become the second-largest producer of ethanol behind Iowa this year, 17 plants are running, 10 are under construction and 30 more are planned.
A spokesman for the main trade group for the ethanol industry said people should expect a burgeoning industry to rely on the government, but should not expect the explosive growth of the ethanol industry over the last two years to continue.
But ethanol production is a viable economic pursuit with a promising future as the country seeks to lessen reliance on fossil fuels, said Renewable Fuels Association spokesman Matt Hartwig.
“We’re not holding ethanol up to be the panacea for anything—our energy security, revitalizing rural America or the environment,” said Hartwig, who declined to comment on figures in the study. “But it’s a good place to start. It’s provided in many small communities across the country economic opportunity they may not have seen in a generation.”
The study found that a combination of high corn prices, rising energy costs, lower demand for ethanol in coming years and expiring government tax credits in 2011 could cause a 40 million-gallon plant to lose $1.4 million in 2011 if the current requirement for ethanol consumption isn’t increased. And the slide could begin soon: In 2009, net profits for such a plant could slip from a high of $45 million last year to about $3.6 million, with most of that coming from government tax breaks.
Revenues at larger plants, meanwhile, “will experience a slow decline over the coming decade as the 7.5 billion-gallon fuel standard is met,” the study says. The study says that By 2013, 100 million-gallon plants might only break even.
While meeting the 7.5 billion-gallon mark early could lessen demand soon, Peters says another factor is cooling the market: Once-strong demand for ethanol as fuel additive is now being met. The 2005 energy bill encouraged refiners to stop using MTBE, a commonly used fuel additive found to contaminate drinking water.
That spurred a rush for ethanol to replace MTBE as an additive.
While the higher, 15 billion-gallon standard would drive more sales of the alternative fuel, helping small plants, it could serve to only lessen, and not prevent, economic pain caused by high corn, energy and water prices.
The study projects losses for such plants in 2012 even with the higher consumption requirement—the losses would just be less than under the current standard. And the plants could see small net profits in 2015 instead of multimillion dollar losses. The study found that higher production costs could lessen benefits from a higher, 15 billion-gallon standard.
Big, 100 million-gallon plants, meanwhile, would benefit more from raising the consumption bar to 15 billion gallons, “greatly enhancing” their profitability.
New technology in the large plants that tends to increase efficiency, combined with lower average costs of larger companies, are main reasons big plants might benefit more from a doubling of the consumption standard, Peters said.
By 2012, a large plant could expect net profits of about $6 million—compared with about $2.2 million under the current consumption standard.
Only about a quarter of Nebraska’s operating ethanol plants have the ability to produce about 100 million gallons a year, but 23 of the 30 plants under consideration would have that capacity, according to the Nebraska Ethanol Board. Four of the 10 plants under construction will be able to produce at or near 100 million gallons annually.
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