NEC: Urbanchuck optimistic about ethanol's future

By Susanne Retka Schill | February 04, 2009
Web exclusive posted March 2, 2009, at 10:52 a.m. CST

John Urbanchuck, an economic analyst with LEGC LLC, struck a note of optimism on Feb. 25, the last day of the National Ethanol Conference in San Antonio. Urbanchuck called the current economic situation for the ethanol industry a shakeout - but reminded conference attendees that the industry has seen it happen before, and survived. For example, he said short corn crops in the mid 1990s shot up corn prices, causing ethanol production to drop 28 percent. Today's tight margins are hurting the industry, he admitted, "but because of the renewable fuels standard we're not seeing the same decline in ethanol production."

The conditions for recovery now are similar to what the industry experienced in 1995 and 1997. The post drought recovery came from lower corn prices and increased demand from reformulated gas. This recovery will involve lower corn prices than 2008, along with strong demand from the RFS and higher oil prices improving blending economics.

Urbanchuck called present crude prices at under $40 a barrel unsustainable and predicted crude would slowly rise until stabilizing at around $75 a barrel. Current corn prices of $3.50 may not change much. "I look for corn stocks to slowly build," he said, "and prices to stabilize at $3.50 to $4." That would compare to the typical pre-2008 range of $2 to $2.50.

Urbanchuck also projected that the current recession will last about 18 months, ending in late 2009, with a 2.5 percent decline in Gross Domestic Production. That would actually be only a couple of months longer than the 1973 recession, he said, which also involved a major jump in petroleum prices and saw a 3.1 percent decline in GDP. However, many of the players in the current ethanol industry weren't in existence then, he pointed out. "The ethanol industry doesn't have experience in managing through a recessionary period."