Thursday, June 14, 2012

The ethanol slowdown has begun; corn prices expected to decline at least 20 percent

After a visit to Walhalla, N.D., where Archer Daniels Midland Co. had just closed an ethanol producing plant that was the town's largest employer, Mark Peters writes in The Wall Street Journal that America's ethanol boom is stalling. Further, Peters reports that "the effects are starting to spread across a Farm Belt that had grown accustomed to soaring growth." Annual U.S. production of ethanol more than tripled from 2005 to 2011, driving up crop prices and pumping money into rural communities from Nebraska to North Dakota. Now, the demand for the corn-based fuel additive appears to have topped out. The amount used in gasoline is near federal mandates, and gasoline consumption is declining. According to the U.S. Energy Information Administration's May forecast, after 15 straight years of growth, ethanol production this year will fall slightly and will be roughly flat next year. (Most of the story is behind a paywall.)

"The ethanol industry expanded based partly on expectations that gas consumption would keep rising, and that ethanol's share of that would continue to grow," Peters writes. "Instead, gas demand this year is projected to be 6.7 percent below its peak in 2007, and efforts to expand ethanol's share face challenges." U.S. plants now face excess capacity, producing less than 14 billion gallons of ethanol a year, with capacity of 14.7 billion gallons, according to the Renewable Fuels Association, an ethanol trade association.

What does this mean for farmers? Writes Peters: "The slump is weighing on prices American farmers get for corn, which rose to record highs in recent years based partly on ethanol demand. The ethanol industry now consumes about 40 percent of corn produced in the U.S., up from around 14 percent in 2005. The Agriculture Department projects corn prices for this year will decline at least 20 percent to an average of $4.20 to $5 a bushel, partly because of flat demand from ethanol producers."

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