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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Ethanol producers reach a crossroads


A truck is loaded with corn  in Curran, Ill. Corn topped $6 a bushel in the past year, but ethanol failed to match that increase. Associated Press
 (File Associated Press / The Spokesman-Review)
Joshua Boak Chicago Tribune

HENNEPIN, Ill. – When Mark Marquis started building his $180 million ethanol plant along the Illinois River, turning corn into fuel seemed like a license to print money. Ethanol enjoyed the unflinching support of the federal government, making it the preferred alternative to foreign oil.

But as Marquis Energy recently loaded its first batch of fuel onto a barge, ethanol refiners found themselves facing a backlash.

Corn passed $6 a bushel in the past year, threatening to expose plants to losses as ethanol failed to match that increase. Rising food prices led Congress to consider halting its aggressive promotion of ethanol. And Wall Street is punishing the few publicly traded players, as investments in new refineries begin to slow.

“We have a modest margin at this point, enough to stay in business,” Marquis said. “But there’s not enough margin to encourage the construction of any new ethanol plants. The investors want a significant margin, not a modest one.”

Ethanol has arrived at a crossroads, one that will decide which fuels keep the American economy running. Unless ethanol startups generate significant returns, the industry could struggle to continue developing a network of refineries and filling stations to effectively challenge a century-old petroleum culture. If there is one common element required for ethanol, hydrogen or electricity to replace oil, it is profitability.

The 150-foot-high concrete silos like those belonging to Marquis Energy could either deliver wealth to a remote Midwestern outpost or haunt a rolling landscape no differently than shuttered factories do along the Great Lakes. While refiners expressed confidence about the future of their business, noting that non-food sources such as switch grass and wheat stover will eventually supply ethanol, they must also overcome tremendous financial and political pressures.

The share prices of Aventine Renewable Energy Inc., VeraSun Energy Corp. and Pacific Ethanol Inc. each shed more than two-thirds of their market value this year. Congress launched hearings about whether corn-based ethanol is a catalyst for food inflation, and likely Republican presidential nominee Sen. John McCain joined other senators in requesting that federal ethanol mandates be relaxed. The United Nations on Thursday asked countries to suspend their biofuel programs.

“The industry has lost favor with the Street because of food versus fuel,” said Ron Miller, chief executive of Pekin, Ill.-based Aventine. “We’ve been unfairly characterized as the problem, with food riots in the Far East.”

Ethanol has a reputation for surviving on government largesse, but futures markets such as the Chicago Board of Trade have sustained refiners this year. Refiners unable to hedge in the markets would currently lose 4 cents for each gallon of ethanol they produce, according to the North Dakota-based information service DTN.

Ethanol gets the blame for high corn prices, yet its refiners suffer from those prices just as meat and pork producers that rely on corn for feed do. At the start of 2007, a gallon of ethanol was $2.26. With corn selling for $3.68 a bushel, a refiner could earn 74 cents a gallon. But ethanol prices have failed to climb along the same curve as corn, narrowing profit margins. The same gallon of ethanol now fetches about $2.50, though corn has surged by more than 60 percent in price.

One reason for this phenomenon is that corn now serves as an energy source, which connects it to record oil prices caused by heavy international demand and a weak dollar. But unlike oil and corn, ethanol is largely a domestic market that is less sensitive to these global factors.

There are 151 ethanol refineries across the U.S., according to the Renewable Fuels Association. Their operators include farmer collectives, private startups and household names such as Archer Daniels Midland, the agricultural giant based in Decatur, Ill.

Other major companies such as automaker General Motors and chemical producer DuPont have invested in companies attempting to make cellulosic ethanol from sources other than corn.

The 151 refineries produce a total of 8.69 billion gallons of ethanol a year. That figure will reach 36 billion gallons by 2022, according to the mandates in the energy bill signed into law in December.

The refineries under construction will add a capacity of 4.91 billion gallons.

Even with their troubled circumstances, ethanol producers say the clouds surrounding industry have a silver lining for the country, because consumers’ money is better spent on corn than oil from the Middle East.

“The big benefit, even though corn is more expensive, is that the money is going to people in the United States, rather than people overseas who wish to ultimately see our demise,” said Keith Gibson, general manager of Iroquois Bio-Energy in Indiana.

Refiners such as Marquis refuse to see the industry as all “gloom and doom,” but he said the sudden reversal by many federal officials could scare others from making similar investments in future ethanol projects.

“How many people are going to invest in cellulosic ethanol if the government changes its mind every six months about what it wants to do?” he asked.