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    Falling ethanol prices cutting plant profits Nov 15, 2007 10:02 AM, By Elton Robinson Farm Press Editorial Staff Recent declines in ethanol prices have sharply
    Message 1 of 1 , Dec 6, 2007
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      Falling ethanol prices cutting plant profits
      Nov 15, 2007 10:02 AM, By Elton Robinson
      Farm Press Editorial Staff



      Recent declines in ethanol prices have sharply reduced profitability
      for ethanol producers, USDA's chief economist Keith Collins told the
      House Agriculture Committee last month.

      Speaking at a hearing on disaster conditions across the nation on
      Oct. 18, Collins noted that ethanol prices have weakened since mid-
      summer as additional plants have come on line, adding to ethanol
      supplies and contributing to some infrastructure bottlenecks.

      For example, prices at ethanol plants in Iowa and Nebraska have
      fallen nearly 50 cents per gallon since late July 2007. During the
      same period, futures prices on the nearby contract have lost about 40
      cents per gallon.

      Until recently, ethanol premiums have averaged 50 cents per gallon
      compared with unleaded gasoline. The situation has suddenly reversed,
      with wholesale ethanol prices as much as 39 cents per gallon below
      the wholesale price for gasoline during September.

      The outlook for ethanol prices appears even less favorable in the
      futures market, with the nearby Chicago Board of Trade contract for
      ethanol trading 50 cents per gallon below the nearby New York
      Mercantile Exchange contract for reformulated gasoline blendstock.

      This shift in the ethanol-gasoline price relationship has sharply
      reduced returns for ethanol producers, according to Collins. "With
      current retail gasoline prices at $2.80 per gallon, wholesale prices
      without federal and state excise taxes would be about $2.20 per
      gallon. Nearby futures for ethanol are trading at $1.57 per gallon,
      71 percent of the $2.20-per-gallon estimated wholesale gasoline price
      and about equal to ethanol's energy value relative to gasoline."

      U.S. ethanol production capacity for today is estimated at 6.9
      billion gallons, up 2 billion gallons from a year ago. Production
      capacity is expected to increase sharply over the coming 18 to 24
      months, if the 76 plants currently under construction are completed.

      The new construction would add 6.7 billion gallons of ethanol
      production capacity, bringing total capacity to 13.6 billion gallons
      potentially as early as late 2009.

      This year's record U.S. corn production is bringing some relief to
      declining ethanol producer margins, according to Collins. "However,
      despite the expected record corn harvest, corn prices remain strong
      supported by strong demand, record-high wheat prices, and strong
      soybean prices."

      USDA estimates that a 40 million-gallon Midwest ethanol plant,
      receiving the late September price of $1.52 per gallon for ethanol
      and paying $3 per bushel of corn, was earning 17 cents per gallon
      above variable costs of production and 3 cents below total variable
      plus capital costs of production.

      "In the current price environment, the 51 cents-per-gallon ethanol
      tax credit is important in sustaining ethanol demand and prices at
      levels that are forestalling some plant shut-downs."

      The news is not so good for soydiesel production either, noted
      Collins, even though U.S. biodiesel production continues to rise,
      setting new production records each month.

      According to Collins, 20 percent of 2007-08 soybean oil production is
      expected to be used to produce about 580 million gallons of
      biodiesel. This compares with only 8 percent of soybean oil
      production used to produce about 200 million gallons in 2005-06.

      But as with ethanol, biodiesel profit margins are eroding due to
      sharply rising soybean oil prices. The price of soybean oil, which is
      the feedstock for 85 to 90 percent of domestically produced
      biodiesel, has increased over 40 percent over the past year, causing
      biodiesel returns to decline from around 80 cents per gallon to near
      zero.

      Prices for vegetable oil, another feedstock for biodiesel, are
      expected to remain strong due to strong demand, particularly for
      biodiesel in the EU, according to Collins.

      "Due to the $1 per gallon tax credit for blending, U.S. produced
      biodiesel is competitive in the EU biodiesel market. Since March
      2007, net exports of biodiesel have accounted for more than 25
      percent of U.S. biodiesel production. As long as U.S. biodiesel
      remains competitive in world markets, U.S. production is likely to
      grow despite weak margins."

      USDA is also projecting smaller U.S. corn acres and higher U.S.
      soybean acres for 2008-09. Corn planted area for 2008 is expected to
      fall as prices and returns for competing crops, such as wheat and
      soybeans, have improved relative to corn in recent months, Collins
      said.

      "December 2008 futures prices for corn are currently more than 30
      cents per bushel below the peak of December 2007 futures last
      February. Current cash prices are more than $1 per bushel below their
      levels in late February.

      "Although world demand remains strong for feed grains, record U.S.
      corn supplies are expected to put downward pressure on corn prices
      over the coming months. Given the current outlook for the 2008 crop,
      corn planted area next spring could decline 6 to 8 percent from 2007
      to around 87 million acres.

      "Even with the potential for a 6 to 8 percent reduction in planted
      area next spring, 2008 corn area would still be 8 to 12 percent above
      the 1997-2006 average. Lower production combined with continued
      growth in the corn-based ethanol industry could reduce carryover
      stocks adding support to prices in 2008-09.

      "U.S. soybean area forecast to rebound to 70 million acres in 2008,
      regaining more than half of the 11 million acres lost primarily to
      corn in 2007. The soybean to corn price ratio, which declined to
      below 2 in the spring of 2007, strongly favored corn planting.
      Current March 2008 futures imply a soybean to corn price ratio of
      2.7, favoring soybeans over corn. Rotation practices also favor a
      switch back to soybeans."
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