The recent announcement that Pacific Ethanol is suspending production at three of its four facilities in the West exemplifies the troubles facing an industry whose fortunes and future seemed bright only a year ago.
It also serves as a cautionary tale for farmers who make cropping decisions based on the demands and promise of a highly volatile emerging industry.
Pacific Ethanol has suspended production at plants in Burley, Idaho, and Stockton and Madera, Calif. Combined, the plants were capable of producing 160 million gallons of ethanol a year, all made from corn shipped in from the Midwest. The final product was blended with gasoline to reduce crude oil imports.
Like other producers, Pacific found itself caught between the falling price of gasoline and rising corn prices. Its fortunes further decreased as demand fell for distillers grain, the livestock feed that is the byproduct of the distilling process. The industry's problems have been compounded as the demand for blended gasoline has declined as the economy has sputtered.
The Sandia National Laboratories and General Motors released a study earlier this year that said ethanol needs to be priced at least $2.25 a gallon to be economical. In recent weeks it's been closer to $1.75 a gallon.
According to David Peters, an assistant professor in Iowa State University's College of Agriculture and Life Sciences who has studied profitability in the industry, most recently constructed ethanol plants are carrying a great deal of capital debt, debt they didn't have time to retire when ethanol hit its high mark last year. Given the current price of ethanol and corn, Peters said those plants strapped with debt are losing as much as 23 cents for each gallon they produce.
As a result, many ethanol producers are doing whatever they can to cut their losses, either by cutting production or trying to renegotiate contracts they made with corn growers last summer when commodity prices were at all-time highs. Some have filed for bankruptcy protection.
There is an ongoing attempt from within the industry to increase demand by getting the federal government to increase the amount of ethanol that can be blended into regular gasoline. Currently, fuel for standard vehicles can contain no more than 10 percent ethanol. The industry would like that cap extended to 15 percent.
The current market has made it a little more difficult for corn growers in the Midwest making their decisions about this year's crop.
None of this means much to farmers in the West, who grow little corn for use as feedstock in ethanol plants. They're looking down the road at the second generation of ethanol plants.
Turning corn into alcohol isn't that hard. The same technique that entrepreneurs in the Appalachians have used for centuries to make moonshine translates well into the industrial production of ethanol.
Far more difficult is the production of cellulosic ethanol, which is produced from the structural matter that comprises the bulk of the mass of plant matter. Researchers say that once this technique can be perfected on an industrial scale, ethanol's potential will really take off.
In theory, cellulosic ethanol can be made out of just about any plant material, but there are several non-food crops being tested as potential feedstock. Crops like switchgrass could give growers in the West the opportunity to jump on the ethanol bandwagon.
We think biofuels offer a lot of opportunities to growers here. But they should understand that all great opportunities, particularly those provided by markets that lack a proven track record, come with equally great potential risks.
All cropping decisions should be made with great care.
© 2009 by Capital Press Agriculture Weekly
