Fears rise about an ethanol bust

A growing number of analysts agree with Lehman Brothers' conclusions. "We remain cautious on the ethanol stocks over a 12-month period," wrote Bank of America analyst Eric Brown in an Apr. 24 research note. "Looking ahead we continue to believe that an oversupply of ethanol in the second half of 2007 will depress ethanol's premium to gasoline."

A glut of ethanol stuck in the Corn Belt would be unwelcome news for corn growers and the agricultural entrepreneurs who had set their hopes on a bright future for what has since become a controversial fuel. Farmers are beginning to voice their concern.

"We've got an enormous amount of product coming online in a short period of time," says Geoff Cooper, director of ethanol programs for the National Corn Growers Assn. "The market is surprised by all this volume and can't absorb it now."

Evolving infrastructure
He says the problem of transporting ethanol to parts of the country like the Southeast remains a problem, as does a shortage of storage capacity in these areas. Yet Cooper calls those obstacles "bad news but not disastrous" for corn growers, as a more effective ethanol infrastructure will evolve in the next several years. "The oversupply now is more a bump in the road than a catastrophe," he says.

Plus, not everyone agrees with the emerging consensus among analysts. The Renewable Fuels Assn., an industry trade group for ethanol producers, maintains that the problem is a lack of capacity rather than an excess of it. Using Energy Dept. figures, the RFA calculates that demand now stands at 416,000 barrels a day but production is only 386,000 barrels a day. Even the 80 new ethanol plants expected to be operating by 2009 won't be able to meet the growing demand, according to the association.

"Right now we have ethanol making up 4% of transportation fuels, but we can get to 10% with no changes to cars' engines or retail pumps," says Matthew Hartwig, an RFA spokesman. He acknowledges that transportation is an issue but says rail cars are able to transport the product now, and there are studies under way about a national pipeline.

Short-term pain, long-term gain?
In any case, Hartwig says, any oversupply domestically could be exported to other counties, as demand for fuel is growing in all parts of the world, and gasoline prices are increasing.

Waldron of Lehman Brothers sees another outcome to a glut. An ethanol oversupply would make ethanol blends cheaper for consumers, potentially eliminating the need for the 51¢-per-gallon subsidy blenders get from the government. In other words, too much ethanol means cheaper ethanol, which could ultimately extend its longevity in the marketplace.

"Too much supply could hurt ethanol producers' margins, but in the end it may be a good thing for prices to come down," Waldron says. "A short-term problem for the industry could be healthier for it in the long run."

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