In addition to the federal subsidies for ethanol, the state of Iowa also provides incentives, such as tax credits to businesses that sell the fuel. The credits help reduce the price of ethanol to consumers.
Iowa pump prices are some of the lowest in the nation. Using ethanol blends means the oil-deficient state captures ten percent of every fuel dollar, if not more, as higher ethanol content blends are utilized.
The industry is in transition, shaken by a series of economic tremors. But, last week’s election may have stabilized the politics of ethanol.
With the election of Illinois Senator Barack Obama, a measure of relief washed over the Corn Belt, even in Republican quarters.
Illinois is the second-leading corn producer in the country and has long enjoyed a robust bio-fuels industry. Unlike his opponent, Obama endorsed the government’s subsidies of ethanol. His victory signals continued support for it, but even with the subsidies the industry is enduring a difficult period. This past year, the industry has been whipsawed by myriad economic forces.
While high oil prices have generally encouraged the use of ethanol, last year’s spike in oil prices also raised the cost of transporting ethanol, and sent prices of corn soaring, due to higher global demand. Rising ethanol production also dramatically tightened ethanol profit margins.
The industry had quickly ramped up production to the point of exceeding the government’s 7.5 billion gallon mandate. The pace of output was far greater than ability of refiners to absorb it. The ethanol makers were essentially drowning in their own product that was costing them more to produce.
Last year a study by economist David Peters warned the plants were on the cusp of financial collapse if the government didn’t expand the so-called renewable fuels standard.
Dr. David Peters, University of Nebraska: “Essentially what the study was showing, that without a doubt a doubling of the renewable fuels standard with corn-based ethanol a lot of the smaller plants would really struggle to survive. So that policy change is essential to keeping the industry going and in keeping a lot of the plants operating.”
Oil and corn prices have returned to a balance closer to normal. But, ethanol continues to be difficult to transport and the infrastructure has not been fully developed to move it to refiners. Most ethanol plants are in corn country, near corn. Oil refineries are typically either closer to sources of oil or to large gasoline-hungry markets. Still another challenge has emerged -- the liquidity crisis.
During the Iowa caucus campaign, Obama spoke at the groundbreaking of a VeraSun bio-fuel plant in Charles City. This week finds VeraSun seeking to reorganize under bankruptcy statutes.
Ethanol plants, large and small, are reported to be running near if not in the red. Even large players like ADM have reported a downturn in ethanol operating profits. A number of ethanol producers have called off expansion projects and some have curtailed operations.
The financial liquidity crisis is making it difficult for many operators to secure lines of credit. The uncertainty raises the prospect that the industry, composed of a few large players and many smaller operators, will consolidate. That could change the renewable fuels sector of the agri-economy, especially Iowa’s.