Industry watchers fear ethanol oversupply

Last year the United States produced nearly 5 billion gallons of ethanol and will reach around 7 billion this year, according to the Renewable Fuels Association, the ethanol industry’s main trade group.

The federal renewable fuels standard sets a goal for Americans to burn 4.7 billion gallons of renewable fuels such as ethanol this year, rising to 7.5 billion gallons by 2012. Some states also offer various tax incentives to encourage ethanol use. Some states also have mandates. Minnesota, for example, requires that all gasoline sold in the state be 10 percent ethanol.

Babcock said once production reaches the 9 billion to 10 billion gallon range, the price will have to come down to induce blenders to use more of it than the rules now require, he said.

Ethanol now makes up about 4.5 percent of the nation’s gasoline mix, depending on location. Once that rises to 10 percent — the percentage all cars now sold in the U.S. can use without modifications — Babcock questions where any additional demand would come from. Given that ethanol has about two-thirds the energy content of gasoline, he said, ethanol would have to be priced at two-thirds the price of gasoline to induce a major turn toward E85, an 85 percent ethanol blend that can power flex-fuel vehicles.

“Otherwise no one will fill up with E85,” he said.

The chairman of the National Corn Growers Association, Gerald Tumbleson, shares that concern.

“We call it a ’blend wall,”’ said Tumbleson, who farms near Sherburn in southern Minnesota. “If you hit that blend wall, what’s the value of our product? That’s what makes us nervous.”

Tumbleson said corn growers are hoping to get laws changed to require even greater use of ethanol, such as a 20 percent mandate. He said America’s energy independence is at stake.

The Renewable Fuels Association is downplaying fears of a glut. Matthew Hartwig, a spokesman for the group, said there’s a lot of room for growth before ethanol makes up 10 percent of the market, which would be around 14 billion gallons a year.

“Certainly the market for E85 will continue to grow as Detroit builds more of their new vehicles as E85 vehicles,” and as gas stations install more E85 pumps, he said. Most stations that offer E85 are in the Midwest, though availability is expanding.

Hartwig discounted fears of distribution bottlenecks, expressing optimism that the railroads can handle the volume. The industry increasingly has been using long “unit trains” carrying nothing but ethanol from where it’s made to where it’s needed. Pipelines may finally make economic sense down the road when the industry produces larger volumes of both grain and cellulosic ethanol made from other plant material, he said.

A glut could set the stage for industry consolidation, said Pavel Molchanov, an analyst with Raymond James & Associates. But industry observers said consolidation is not a burning issue right now.

If a shakeout does happen, US BioEnergy may be in acquisition mode, Ommen said. The company picked up five of its operating or planned plants through acquisitions. Most recently, it announced May 31 that it’s acquiring Millenium Ethanol LLC, which is building a plant near Marion, S.D., with a capacity of 100 million gallons per year that’s expected to begin production in the first quarter of 2008.

“There’s going to be bumps in the road,” Ommen said. “Those bumps could produce opportunities for well-positioned companies.”

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