Ethanol Producers Face Price Pressures, Fundamental Questions

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 |  Includes: ADM, ANDE, BFRE, GPRE, PEIX, USBE, VSUNQ
by: SA Editors

The profitability of ethanol producers has been hit by rising commodity prices and a sharp reduction in the price of ethanol. The price of corn has risen to about $3.80 a bushel on the Chicago Board of Trade from less than $2.50 in September 2006, whereas the price of ethanol has fallen to about $1.86 a gallon versus $4.33 in June 2006. Ethanol production in August, at 10.3 million barrels, was 32% higher than a year earlier. But restrictions by Georgia and Florida on use of ethanol during the summer, when the fuel easily evaporates, cut demand by about 3 billion gallons -- or 45% of current national demand -- according to Friedman, Billings, Ramsey. Despite ethanol plant closures, new mills are expected to come on line next year, raising output to 11.3 billion gallons by year-end. Without a relaxation in fuel regulations by Georgia and Florida, demand is likely to grow slower than supply. David Pimentel, a professor of ecology and agriculture at Cornell, claims that manufacturing ethanol from corn requires 29% more energy than ethanol itself produces. Michael Wang, an environmental engineer at the Argonne National Laboratory outside Chicago, disputes the inclusion of energy spent on making fertilizers and pesticides in the calculation, and therefore estimates that ethanol production results in a 33% gain in combustible energy. According to Ron Oster, a principal at Broadpoint Capital, "Ethanol companies are near breakeven at best; that's not a good recipe when you have $100 oil."

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