Ripple Effect

August 1, 2008 10:03 AM

The direct effects of this year's historic Midwest floods on the ethanol industry were relatively minor. During the height of the deluge, an estimated 300 million gallons of Iowa's 2.2-billion- gallon ethanol capacity were knocked offline, according to the Iowa Renewable Fuels Association.

In Cedar Rapids, two producers were affected: Penford Products shut down its new 45-million-gallon-per-year plant when the government mandated evacuation of the area. Archer Daniels Midland temporarily shut down its plant because of local water use constraints.

Yet, overall, the Iowa ethanol industry was able to minimize losses, says Monte Shaw, director of the Iowa Renewable Fuels Association. "One of the untold stories of this flood is how well our ethanol distribution system held up," he says. "There were transportation problems because of down rail bridges and roads under water, but the logistical people were able to work together and get around them. To my knowledge, not a single customer lost a drop of delivery."

Ripples. However, some now fear the flood and its effect on corn production could create prolonged ripple effects in the biofuels industry.

"Everybody is trying to evaluate how many bushels of corn we have lost because of weather," notes Chris Hurt, Purdue University Extension agricultural economist. "The fact is, hardly anyone who uses corn can pay these kinds of prices and still have positive margins."

The U.S. ethanol industry alone needs 4 billion bushels of corn this year—about 1 billion bushels more than in 2007, Hurt says. Last year, livestock producers used 6.15 billion bushels and foreign buyers needed 2.45 billion bushels of U.S. corn. That spells potential demand in the 12.6-billion range.

Yet we'll harvest fewer acres of corn this year, and national yields could drop some due to wet fields and delayed planting. Using the 1993 Midwest flood as a model, Hurt estimates corn production could drop below 11 billion bushels this year. That's not nearly enough to go around, he says.

Backing off. Ethanol giant VeraSun was just finishing construction of its two newest 100-million-gallon plants in Iowa and Minnesota when the rains began. In the midst of Midwest flooding, the ethanol processor announced it would delay startup.

VeraSun is not alone. Over the past year, the industry has experienced other construction slowdowns, driven by the high cost of corn and building materials. Industry newcomer Heartland Ethanol LLC nixed plans to build seven plants in Illinois and is dissolving the company. Even the world's largest ethanol producer, POET, has delayed projects.

Iowa's Monte Shaw notes that although it is true some plants are having trouble, "many plants have locked in ethanol sales and every bushel of corn for the rest of the year, often at significant discounts to the current spot market."

In addition, he says, "During the heyday of the ethanol industry in 2005 and 2006, lots of ethanol plants got delayed and no one noticed," he says. "Today it's big news because of market speculation."

Bob Dinneen, president of the Renewable Fuels Association, also says end users will make it through: "Last year's record corn crop and this year's anticipated increases in worldwide grain production should help all corn buyers withstand these unprecedented conditions."

However, Shaw adds that if some sanity doesn't return to the corn market in six to 12 months, a number of ethanol plants will be making tough decisions. "You cannot starve a plant or continue to operate under these corn market conditions in the long term," he says.

To contact Jeanne Bernick, e-mail

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