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Will the biofuels boom last?

By Staff | Dec 1, 2008

AMES – New industries used to emerge over decades or generations. All that changed first with the computer revolution, then with the Internet revolution, each transforming our planet within a few years. So the breakneck speed of today’s biofuels revolution is no surprise. But new uncertainty about what happens next for ethanol and other alternative fuels is a concern. Iowa State University agricultural economist Don Hofstrand and his colleagues at ISU’s Agricultural Marketing Resource Center are trying to understand ethanol and the future of the biofuels industry.Hofstrand said his research is attempting to answer such questions as should investors and government invest in biofuels? Is it a safe investment? Are there better alternative fuels? Is Brazil’s successful ethanol program the best model for other countries? How is the current financial crisis impacting biofuels? Will climate change and expected carbon cap-and-trade legislation catapult biofuels to new heights?“All ethanol plants are different of course,” Hofstrand said, “with different break-evens, but we’ve built an ethanol model on our AgMRC site, a hypothetical ethanol plant in Northern Iowa and we track its profitability month by month. At the present time, it’s right about at the break-even level.” Hofstrand says it was predictable that the surge in ethanol profits in 2005-2006 led to a surge in building new ethanol plants.As expected, this was followed by a narrowing of ethanol profit margins which has precipitated a decline in new ethanol plant construction. With Wall Street still waiting for Washington’s $700 billion rescue package to take effect and with crude oil prices at half their July 2008 peak, Hofstrand expects less ethanol plant investment until markets stabilize.He said that “attracting capital to build more ethanol facilities, especially with the margins we have now, is going to be much more difficult than it was a year or two ago.” However, a wild card for the renewable fuels industry, he said, is climate change. Barack Obama promised to tackle climate change. If the new Obama administration “puts a price on carbon” with cap-and-trade legislation or a carbon tax, he said, “it will change the calculus of economics for the whole energy industry.”It should give an immediate boost to renewable alternatives like wind, solar and geothermal. But there is uncertainty about how it would impact ethanol because of the controversy over the greenhouse gas emissions caused by the corn ethanol industry.Hofstrand, and co-author Gene Takle, have laid out the issues associated with agriculture and climate change in a series of articles in the AgMRC Renewable Energy Newsletter.Hofstrand has built an economic model that looks at “Who profits from the corn ethanol boom?” Hofstrand concludes that the ethanol boom has rewarded different segments of the industry at different times.Initially the rewards went to the ethanol producers.However, the producers expanded capacity, bid up the price of corn, and transferred the rewards to the corn producer. Higher production input prices and land rental rates are eating into corn producers’ rewards.If the boom continues, the “eventual beneficiary” will be landowners because “Cropland is the eventual limiting resource in the supply chain.” However, the current drop in ethanol price has tightened the margins for the entire industry. So it will be interesting to see how the economics for each industry segment will evolve over time. To read Hofstrand’s profitability analysis go to: www.agmrc.org/renewable_energy.

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