Economist: What if ethanol expansion levels off?

By Ryan C. Christiansen | November 03, 2008
Web exclusive posted Nov. 6, 2008 at 11:59 a.m. CST

If the U.S. corn-based ethanol industry doesn't expand in capacity beyond the plants that are currently producing or under construction, tightness in corn supplies will gradually ease as average corn yields continue to rise, according to Robert Wisner, a biofuels economist for the Agricultural Marketing Resource Center at Iowa State University in Ames, Iowa. That scenario would result in increased use of corn for feed, exports and carryover stocks, but a decrease in the price of corn and possibly soybeans, if more corn acres are shifted back into soybean production. The new market conditions would become noticeable in 2011-2012, he said.

The current economic environment, with declining ethanol prices and rising construction costs, strongly discourages additional investment in new plants, Wisner said. If the corn ethanol industry expansion levels off, U.S. production will fall 15 percent short of the current legislated mandate for using 15 billion gallons of ethanol per year by 2015.

If U.S. ethanol supplies do fall below the mandated level, Wisner said the price of ethanol might go up and consumers might pay more for ethanol-blended gasoline at the pump. Because fuel blenders are obligated to meet the renewable fuels standard volume requirements and must acquire sufficient renewable identification numbers (RINs) to demonstrate compliance with their volume obligation, fuel blenders might bid up the price of ethanol in order to obtain RINs, which in turn would increase demand and profitability for new corn ethanol plants and would in turn increase demand for corn. This scenario might be avoided if the United States were to import more ethanol from Brazil.

Increased consolidation in the ethanol industry is very likely, but "the question is how quickly and how much," Wisner said. "We will see a gradual maturing of the ethanol industry and consolidation into fewer and larger ethanol companies."