October 16, 2007 in Business

Variety of startup woes a drag on biofuels industry

Bert Caldwell The Spokesman-Review
 

Blowback has hit the biofuels industry just as Northwest plants get their canola together. Or corn. Or restaurant grease.

Biofuels have been promoted, from President Bush on down, as one way to reduce dependence on imported oil. But startup pains, not surprising for a new industry, have been a problem.

A combination of low prices for ethanol and high prices for corn is squeezing producers in the Midwest, the ethanol heartland. Since May, the price of a gallon of ethanol has tumbled from $2.50 to $1.50. Distiller competition for corn, the raw material for 85 percent of ethanol production in the United States, has doubled the price to $3.50 per bushel.

Expensive corn, in turn, has affected prices for everything from the syrup that sweetens nondiet soft drinks to meat, much of which comes from corn-fed cattle. Even U.S. food aid does not go as far as it used to. In part because of pricey corn, the $1.2 billion budgeted for relief will feed only two-thirds as many as it did two years ago.

Environmentalists worry about increased water use, and fertilizer runoff.

Feedlot owners and other constituencies are pressing Congress to ease up on the ethanol throttle as members draft a new farm bill. In 2005, lawmakers mandated biofuel consumption of 7.5 billion gallons per year by 2012. But primed with federal tax subsidies as well as state assistance, the industry jacked up production so fast that goal could be reached by the end of this year.

A bill already passed by the Senate would up that target to 36 billion gallons by 2022.

But the nation has no way to efficiently distribute the ethanol produced today. Because the fuel is corrosive, it cannot be shipped by pipeline. Rail cars, the handiest alternative means of transportation, are back-ordered. Storage capacity is inadequate.

Investors who threw money at the industry a year ago are backing off, and analysts expect that smaller producers on shaky ground will be rolled up by giants like Archer Daniels Midland. In the Northwest, investor disinterest may be a problem for Imperium Renewables, owner of biodiesel plants in Seattle and Hoquiam. The Hoquiam plant, which will produce 100 million gallons per year at full capacity, is the largest in the United States.

Imperium filed for a $345 million initial public offering earlier this year. Because of the quiet period that follows such filings, the company cannot comment on its activities.

There are several biofuel plants in the region that have the capacity to produce 1 million gallons per year or more each. The newest, Pacific Ethanol, was dedicated Friday in Boardman, Ore.

Oregon and Washington have similar mandates for the use of biofuels that start kicking in Jan. 1. Starting from 2 percent of fuels sold, requirements increase as production capacity reaches certain levels. Montana also has a capacity mandate .

“The goal is to build a regional industry,” says Robert Grott, director of the Northwest Biofuels Association.

The industry’s future in the region may depend on its farmers. The Northwest plants are importing feedstock from the Midwest and Canada. When transportation availability allows, says Grott, those suppliers will want to export the fuel itself, which will force Oregon and Washington plants to rely on nearby farmers. But farmers will not change crops without the assurance they will have a market. Some will remember a bad experience with a sugar beet plant in Moses Lake that folded in 2002, taking some farmers down with it.

Grott is optimistic. The Boardman plant, for example, can offer a price for corn that not only incorporates its use for ethanol, but also the use of plant byproduct as cattle feed. The plant also has barge access to Portland, which reduces shipping costs.

Meanwhile, more service stations are installing pumps that can handle biodiesel and ethanol blends. And carmakers are promoting vehicles that can burn the fuels. That will be the key.

So far, pressure for biofuels has come from the top down. The industry will not be secure until demand comes from the bottom.

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