Finally - Ethanol's Long Boom Stalls -Fuel-Additive Plants Close as Gasoline Demand Falls, Federal Mandates Are Met - The ethanol industry's once powerful political support has weakened amid high corn prices and efforts to cut federal spending and regulation.
From The Wall Street Journal:
WALHALLA, N.D.—For years, the biggest employer in this city of 1,000 people near the Canadian border was the ethanol plant on County Road 9, which pumped out the corn-based fuel additive to satisfy demand driven by federal mandates requiring its use in gasoline.
In April, plant owner Archer Daniels Midland Co. ADM -0.50%closed it, citing lackluster returns. The plant's 61 employees lost their jobs, and Walhalla lost its biggest source of tax revenue.
"Jobs like that are hard to come by," said Chris Jackson, Walhalla's 32-year-old mayor and proprietor of its main watering hole, Jackson's Bar. Business has suffered at the bar and the city's two motels and gas stations because truck traffic to the plant has ended. The mayor says that some residents who worked at the plant are planning to leave.
A local animal-feed company is considering buying the plant, but mainly to get access to a byproduct of ethanol manufacturing that is used to feed cattle.
America's ethanol boom is stalling, and the effects are starting to spread across a Farm Belt that had grown accustomed to soaring growth. Annual U.S. production of ethanol more than tripled from 2005 to 2011, driving up crop prices and pumping money into rural communities from Nebraska to North Dakota.
Now, ethanol demand is topping out. The amount used in gasoline is near federal mandates, and gasoline consumption is declining. After 15 straight years of growth, ethanol production this year will fall slightly and will be roughly flat next year, according to the U.S. Energy Information Administration's May forecast. Updated output numbers will be released Tuesday.
The ethanol industry expanded based partly on expectations that gas consumption would keep rising, and that ethanol's share of that would continue to grow. Instead, gas demand this year is projected to be 6.7% below its peak in 2007, and efforts to expand ethanol's share face challenges. U.S. plants now face excess capacity, producing less than 14 billion gallons of ethanol a year, compared to capacity of 14.7 billion gallons, according to the Renewable Fuels Association, an ethanol trade association.
"A lot of people are rethinking their assumptions on the ethanol industry and the potential size," said Jason Henderson, an economist at the Federal Reserve Bank of Kansas City.
Meantime, the broader farm sector remains a relative bright spot in the U.S. economy. Prices of some key commodities have fallen from historic highs reached in recent years, but land prices have continued to rise and unemployment in big agricultural states is generally below the national average.
The ethanol slowdown has been jarring, especially on the edges of the corn belt. About two dozen workers at an ethanol plant in Sutherland, Neb., were furloughed after the plant was idled in February.
Residents who invested in an ethanol plant in Levelland, Texas, have seen their holdings wiped out: The plant, which filed for bankruptcy protection last year, sold for $9.2 million in May, a fraction of the cost to build it four years ago. "It is a big chunk of the community's change that is gone," said Richard Levy, a lawyer representing the plant's ownership in the bankruptcy case.
ICM Inc., a Colwich, Kan., engineering firm that helped design and build about 100 corn-to-ethanol plants in the U.S., has cut its payroll to 325 workers from 750 workers in 2008, said Chief Executive Dave Vander Griend. Most of its business now is in South America and Europe.
The slump is weighing on prices American farmers get for corn, which rose to record highs in recent years based partly on ethanol demand. The ethanol industry now consumes about 40% of corn produced in the U.S., up from around 14% in 2005. The Agriculture Department projects corn prices for this year will decline at least 20% to an average of $4.20 to $5 a bushel, partly because of flat demand from ethanol producers.
The ethanol boom started in the latter half of the past decade. It was fueled by a need to replace the gasoline additive methyl tertiary-butyl ether—which was used to reduce air pollution but was found to contaminate ground water—and by a federal mandate requiring a growing volume of ethanol be blended into gasoline.
Annual production surged to 13.95 billion gallons last year from 3.8 billion gallons in 2005, according to the energy information agency. The Renewable Fuels Association says the ethanol industry directly employs more than 90,000 people.
Ethanol producers went through a rough patch around 2008, when surging corn prices and plunging prices for gasoline and ethanol squeezed profits. Some plants closed and factory construction slowed. But production kept growing.
Two key federal rules govern ethanol's use. One, created in 2007, requires total ethanol production of 15 billion gallons a year by 2015. That is only about 9% above current levels.
But that target, based on projections that fuel consumption would keep growing, now conflicts with an older rule that, until recently, capped ethanol's share of gasoline at 10%. That cap, in place for more than 30 years, determined how gasoline stations and most cars were built, and it has effectively been reached: Ethanol is expected to constitute 9.7% of the nation's gasoline supply this year, up from less than 5% in 2007.
In several steps in the past year and a half, the Environmental Protection Agency has effectively increased the cap to allow gasoline that is 15% ethanol, known as E15. The ethanol industry is pinning its hopes on rapid adoption of E15. "We are putting a lot of faith in E15," said Walter Wendland, CEO of two ethanol plants in northern Iowa. "We have a market problem out there for our production."
But large-scale adoption of E15 faces sizable challenges. Not a single fuel station sells it today. Gasoline stations need to spend money changing pumps and alerting customers. The auto and oil industries have voiced strong concerns about E15, saying the fuel could damage cars and leave customers with expensive repairs.
Meanwhile, the ethanol industry's once powerful political support has weakened amid high corn prices and efforts to cut federal spending and regulation. Congress last year eliminated about $6 billion in annual subsidies, and critics are pushing for cuts in the 15 billion-gallon-a-year mandate.
The change was evident in Iowa, where support for ethanol has usually been an important part of campaigning ahead of the state's caucuses. In this year's Republican race, the issue barely registered, said Tim Hagle, a political science professor at the University of Iowa. "It is taking a back seat to other issues," he said.
Changes in politics or other factors could brighten ethanol's outlook. For example, falling corn prices could improve the profitability for ethanol makers, who have struggled to balance strong corn prices with weak ethanol prices.
In Walhalla, there is still hope workers could return to the plant, but not because of optimism about ethanol. SweetPro Feeds is talking to ADM and state officials about buying the plant, said Bob Thornberg, SweetPro's president. ADM declined to comment.
If the deal goes through, the plant would start making ethanol again, but mainly because SweetPro sees value in an ethanol byproduct. Ethanol "has hit a limit right now," Mr. Thornberg said.
WALHALLA, N.D.—For years, the biggest employer in this city of 1,000 people near the Canadian border was the ethanol plant on County Road 9, which pumped out the corn-based fuel additive to satisfy demand driven by federal mandates requiring its use in gasoline.
In April, plant owner Archer Daniels Midland Co. ADM -0.50%closed it, citing lackluster returns. The plant's 61 employees lost their jobs, and Walhalla lost its biggest source of tax revenue.
"Jobs like that are hard to come by," said Chris Jackson, Walhalla's 32-year-old mayor and proprietor of its main watering hole, Jackson's Bar. Business has suffered at the bar and the city's two motels and gas stations because truck traffic to the plant has ended. The mayor says that some residents who worked at the plant are planning to leave.
A local animal-feed company is considering buying the plant, but mainly to get access to a byproduct of ethanol manufacturing that is used to feed cattle.
America's ethanol boom is stalling, and the effects are starting to spread across a Farm Belt that had grown accustomed to soaring growth. Annual U.S. production of ethanol more than tripled from 2005 to 2011, driving up crop prices and pumping money into rural communities from Nebraska to North Dakota.
Now, ethanol demand is topping out. The amount used in gasoline is near federal mandates, and gasoline consumption is declining. After 15 straight years of growth, ethanol production this year will fall slightly and will be roughly flat next year, according to the U.S. Energy Information Administration's May forecast. Updated output numbers will be released Tuesday.
The ethanol industry expanded based partly on expectations that gas consumption would keep rising, and that ethanol's share of that would continue to grow. Instead, gas demand this year is projected to be 6.7% below its peak in 2007, and efforts to expand ethanol's share face challenges. U.S. plants now face excess capacity, producing less than 14 billion gallons of ethanol a year, compared to capacity of 14.7 billion gallons, according to the Renewable Fuels Association, an ethanol trade association.
"A lot of people are rethinking their assumptions on the ethanol industry and the potential size," said Jason Henderson, an economist at the Federal Reserve Bank of Kansas City.
Meantime, the broader farm sector remains a relative bright spot in the U.S. economy. Prices of some key commodities have fallen from historic highs reached in recent years, but land prices have continued to rise and unemployment in big agricultural states is generally below the national average.
The ethanol slowdown has been jarring, especially on the edges of the corn belt. About two dozen workers at an ethanol plant in Sutherland, Neb., were furloughed after the plant was idled in February.
Residents who invested in an ethanol plant in Levelland, Texas, have seen their holdings wiped out: The plant, which filed for bankruptcy protection last year, sold for $9.2 million in May, a fraction of the cost to build it four years ago. "It is a big chunk of the community's change that is gone," said Richard Levy, a lawyer representing the plant's ownership in the bankruptcy case.
ICM Inc., a Colwich, Kan., engineering firm that helped design and build about 100 corn-to-ethanol plants in the U.S., has cut its payroll to 325 workers from 750 workers in 2008, said Chief Executive Dave Vander Griend. Most of its business now is in South America and Europe.
The slump is weighing on prices American farmers get for corn, which rose to record highs in recent years based partly on ethanol demand. The ethanol industry now consumes about 40% of corn produced in the U.S., up from around 14% in 2005. The Agriculture Department projects corn prices for this year will decline at least 20% to an average of $4.20 to $5 a bushel, partly because of flat demand from ethanol producers.
The ethanol boom started in the latter half of the past decade. It was fueled by a need to replace the gasoline additive methyl tertiary-butyl ether—which was used to reduce air pollution but was found to contaminate ground water—and by a federal mandate requiring a growing volume of ethanol be blended into gasoline.
Annual production surged to 13.95 billion gallons last year from 3.8 billion gallons in 2005, according to the energy information agency. The Renewable Fuels Association says the ethanol industry directly employs more than 90,000 people.
Ethanol producers went through a rough patch around 2008, when surging corn prices and plunging prices for gasoline and ethanol squeezed profits. Some plants closed and factory construction slowed. But production kept growing.
Two key federal rules govern ethanol's use. One, created in 2007, requires total ethanol production of 15 billion gallons a year by 2015. That is only about 9% above current levels.
But that target, based on projections that fuel consumption would keep growing, now conflicts with an older rule that, until recently, capped ethanol's share of gasoline at 10%. That cap, in place for more than 30 years, determined how gasoline stations and most cars were built, and it has effectively been reached: Ethanol is expected to constitute 9.7% of the nation's gasoline supply this year, up from less than 5% in 2007.
In several steps in the past year and a half, the Environmental Protection Agency has effectively increased the cap to allow gasoline that is 15% ethanol, known as E15. The ethanol industry is pinning its hopes on rapid adoption of E15. "We are putting a lot of faith in E15," said Walter Wendland, CEO of two ethanol plants in northern Iowa. "We have a market problem out there for our production."
But large-scale adoption of E15 faces sizable challenges. Not a single fuel station sells it today. Gasoline stations need to spend money changing pumps and alerting customers. The auto and oil industries have voiced strong concerns about E15, saying the fuel could damage cars and leave customers with expensive repairs.
Meanwhile, the ethanol industry's once powerful political support has weakened amid high corn prices and efforts to cut federal spending and regulation. Congress last year eliminated about $6 billion in annual subsidies, and critics are pushing for cuts in the 15 billion-gallon-a-year mandate.
The change was evident in Iowa, where support for ethanol has usually been an important part of campaigning ahead of the state's caucuses. In this year's Republican race, the issue barely registered, said Tim Hagle, a political science professor at the University of Iowa. "It is taking a back seat to other issues," he said.
Changes in politics or other factors could brighten ethanol's outlook. For example, falling corn prices could improve the profitability for ethanol makers, who have struggled to balance strong corn prices with weak ethanol prices.
In Walhalla, there is still hope workers could return to the plant, but not because of optimism about ethanol. SweetPro Feeds is talking to ADM and state officials about buying the plant, said Bob Thornberg, SweetPro's president. ADM declined to comment.
If the deal goes through, the plant would start making ethanol again, but mainly because SweetPro sees value in an ethanol byproduct. Ethanol "has hit a limit right now," Mr. Thornberg said.
posted by Sid Cottingham | 5:26 AM
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