Cash corn between $4-$5/bushel may slow ethanol expansion
US - A delicate balancing act has developed between the price of corn and the construction of ethanol plants.
6 February 2007
5 minute read
“A lot of questions these days revolve around what's going to happen to the price of ethanol, and how much can these plants afford to bid for the price of corn,” said Vernon Eidman, University of Minnesota economist with the Department of Applied Economics.
Eidman figured that at $4.14-$4.20/bushel, ethanol plants would make a normal rate of return on equity capital - not an excessive return. As long as ethanol production is profitable, more ethanol plants will be built.
“At $4.14-$4.20/bushel, we're probably not going to draw in that additional money to build an ethanol plant that we've seen in recent months,” he said. “Somewhere around that $4/bushel is what I expect will shut down this enthusiasm for building.”
For plants that are built, the price of corn would likely have to go over $5/bushel before they would consider shutting down, he said.
Renewable Fuels Association's (RFA) Dec. 29, 2006 data indicates that the U.S. has 110 ethanol plants on line producing 5.4 billion gallons annually. Another 73 are under construction and there are eight expansions planned that could bring ethanol production up to 11.4 billion gallons.
It takes about 16 months to build an ethanol plant - or longer if there is financing to obtain or permitting work to complete.
“When they say they are under construction, that means they have an agreement with a builder - it doesn't mean there's anybody actually out there building,” said Eidman. “Some of these plants will not be started until 2008, maybe 2009, so they are not all going to build as quickly as some people are indicating.”
According to the RFA, approximately 4.8 billion gallons of ethanol was produced in 2006, using about 1.65 billion bushels of corn. Plant capacity is expected to reach 6 billion gallons in 2007 - using about 2.14 billion bushels of corn and 7 billion gallons in 2008 - using about 2.5 billion bushels of corn.
Current estimates put ethanol production at over 11 billion gallons in 2010 or 2011, Eidman said. Eleven billion gallons would use a little less than 4 billion bushels of corn.
Geoff Cooper, National Corn Growers Association director of ethanol and business development, agrees that additional ethanol plant construction is not as likely to occur when corn is over $4/bushel.
“The return on investment and just the prospects for profitability are much different for an ethanol project at $4 than they are at $2/bushel corn,” said Cooper. “I think that $4 is a threshold that is really going to rein back some of the projects that are in the consideration stage - where they haven't quite pulled the trigger yet, and they are waiting to see how things shake out.”
National Corn Growers Association numbers suggest that if corn goes above $4 - approximately 1 billion gallons of the plant capacity now listed as under construction by the RFA may not take place as quickly.
Producing 10 billion gallons of ethanol would use about 3.57 billion bushels of corn.
“RFA numbers may be a little higher than reality proves out,” said Cooper. “Some of the projects may be on the list, but they haven't actually poured concrete or put steel in the ground. Things may change, and they may end up not even building.”
Cooper also agrees that over $5/bushel corn will result in some idling of plants.
“When you get to $4 corn, just the return on investment and the prospects for profitability are much different for an ethanol project than at $2 corn,” he said. “I think when you look at a breakeven point for current ethanol plants, the plant begins to lose money when corn is upwards of $5/bushel.”
Alternatives to corn
Much work is going on to develop cellulosic ethanol plants, Eidman said. He listed the following examples of commercial cellulosic plants projects:- Iogen plant plans to produce ethanol from 400,000 tons of barley straw. Construction is slated to begin in the summer of 2007 in southeast Idaho.
- Colusa Biomass will convert rice straw to ethanol in Sacramento Valley, Calif. Production will begin in 2007.
- Broin Companies intend to expand an ethanol plant at Emmetsburg, Iowa to include production of ethanol from corn stover. Construction is expected to begin in 2007, with production in 2009.
“I think it's realistic to say we're going to have ethanol from cellulose, but I think that's something that will really come into its own about 2015 at best,” said Eidman. “We'll build and change things, and then we'll build another round (of cellulose ethanol plants) that likely works. Then we really start building around 2014. That's about the best we can hope for. In the meantime, I think most of the ethanol being produced will come from corn.”
One of the biggest challenges with ethanol production from cellulose is the amount of water it takes for the process. The answer, Eidman said, could be to gasify or combust cellulose.
Major efforts to substitute biomass for natural gas in ethanol plants are also underway, but development problems remain.
“It appears periods of favorable profits are ahead for grain ethanol production, but not at the levels of the past two and a half years. Future profits are highly dependent on future energy prices and corn prices,” said Eidman. “Cellulosic conversion becomes more competitive with higher priced corn.”
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