The ethanol boom of recent years may be receding sooner-than-expected after companies and farmers have flooded the market with distilleries, and distribution fails to keep pace with production, the New York Times reported Sunday. Spot ethanol prices have fallen 30% since peaking in May, with the drop escalating sharply in recent weeks. "The end of the ethanol boom is possibly in sight and may already be here," said Iowa State economics professor and industry consultant Neil E. Harl. "This is a dangerous time for" investors. The ethanol boom began in 2005 after Congress legislated the use of renewable fuel -- 7.5 billion gallons a year by 2012 -- vs. just 3.5 billion in 2004. But producers are expected to outpace that mandate by the end of this year, reaching 7.8B gallons, and 11.5B by 2009. Ethanol can only be moved by train, truck and barge, and there is a huge backlog in orders for specialized ethanol rail cars. Iowa State University professor Philip Baumel says producers ramped up production rapidly, but failed to pay adequate attention to transportation and distribution needs. Bulls say a new energy law that increases consumption and potentially government subsidies is inevitable, and that lower ethanol prices will lead to refiners blending more ethanol into their gasoline. "This is an industry that is going to continue to grow," said Hawkeye Renewables CEO Bruce Rastetter. "Once you see an energy bill, I think you will see the industry respond." In the meantime, Rastetter shelved his plans to build a fifth distillery and take Hawkeye public.
Sources: New York Times
Commentary: Everything You Wanted To Know About Ethanol Production But Were Afraid to Ask • Ethanol Producers Feel The Impact of Higher Corn Prices
Ethanol producers: ADM, VSE, USBE, AVR, ANDE, PEIX. ETFs: PBW, PUW
Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.