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Alternative Energy: Ethanol

posted on October 30, 2007 at 11:53 AM

If you were to talk with small-town implement dealers or bankers or nearly anyone on main street Iowa, you’d generally find some pretty happy folks. Much of that joy is attributable to ethanol.  Ethanol has been a boon to Iowa. Ten percent of every fuel dollar stays in the state, benefiting the Iowa economy. Demand for the substance has pushed corn prices higher, also benefiting the state’s economy.

The farmer-visionaries, who for so long preached in the wilderness and stubbornly invested their own money to build the processing plants, were just beginning to see their ideas bear fruit. But in recent months, just as the disciples of ethanol thought they were about to cross into the economic Promised Land, the ethanol economy began to stumble.

Still, they insist the fundamentals for prosperity remain in place. From their view, if the state is to be anything other than a provider of raw commodities, it would seem ethanol must succeed.

Miller: The allure of ethanol has been strong in Iowa for some time. Farmers have long seen it as the means of adding value to their crops and realizing the higher prices that have gone to neighboring states that enjoy closer proximity to processors and river terminals.

The combination of a national desire to reduce dependence on foreign oil and cut greenhouse emissions has more recently pushed fuels blended with ethanol to the forefront of U.S. energy policy.

Buttressed by federal and state tax incentives and a government mandate to produce 7.5 billion gallons a year, corn-rich Iowa has hit the mother load. Demand for the grain has exploded, adding value to the corn in the field. Moreover the process yields not only ethanol but distillers grains that are ideal for livestock feed.

The demand fed a boom in construction of plants in Iowa as the state expanded its production capacity. When new construction is completed, Iowa will have a total capacity of more than 3 billion gallons a year, about half the nation’s total output.

Ethanol demand has contributed in great part to the record corn prices that farmers are enjoying even as harvest is underway on a record crop. As much as 25 percent of the bounty is destined for ethanol production.

But record production of ethanol has outstripped demand from bio-refiners or, perhaps more accurately, the market no longer has the ability to absorb all the ethanol that is produced.  Just as most of the nation’s refineries are situated near where the oil is, ethanol is located near where the corn is.

It’s a glut caused by logistics. Because of its corrosive attributes, ethanol is not easy to transport. No matter government mandates or incentives, the industry is experiencing a logistical bottleneck and its effect is causing some pain.

A few companies have stopped construction on new plants, and last week an ambitious venture to unify farmer-owned plants was put on hold. The plan, led by Iowa venture capitalist John Pappajohn, would have bought controlling interest in the plants. Ultimately shares of the company formed through the consolidation would have been sold to the public, allowing farmers the means to realize a return from their investments. Also it would have provided a mechanism to finance future expansions.

The ethanol over-supply is being labeled a temporary problem that could be fixed by tapping markets in the Southeastern United States. This will likely require an investment in infrastructure in states like Georgia and Florida where little, if any, of the fuel is sold. And a study by Dr. David Peters at the University of Nebraska suggests ethanol plants will cease to be profitable in the not so distant future if the market doesn't change.

Peters: Essentially what the study was showing, that without 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 keeping a lot of the plants operating.

Miller: The future of the industry may come from developments in the lab. Other feed stocks like switch grass and new processes to use more of the plant hold promise. These developments might help counter the argument that using the entire corn crop for fuel wouldn't cover a quarter of the nation's 140 billion gallon fuel needs.

Until these processes are fully developed it remains to be seen how long it will take to get them into widespread production. For “The Iowa Journal,” I'm David Miller.

Tags: biofuels corn ethanol Iowa renewable fuels