World Grain - April 2009 - 47

BIOFUELS QUARTERLY

Ethanol's
outlook
sound in long term
T

he corn-based ethanol industry is
currently in the throes of a painful transition. Some of the largest
and most sophisticated operators were
caught on the wrong side of ill-conceived risk management strategies in a
highly volatile environment.
While the industry will not soon return to the heydays of 2005, the economics are fundamentally attractive despite the current spate of bankruptcies.
CORN IS KING
Over the past three years, it has become clear that the single most important determinant of ethanol industry
fortunes is the corn (maize) supply.
Through the third quarter of 2006, there
was surplus corn. Consequently, corn
was cheap, and everyone from feed
mills to exporters to the ethanol industry could get all they wanted. But from
late 2006 to late 2007, the corn market
absorbed the surplus. By the third quarter of 2007, the corn market was clearly
exhibiting deficit characteristics.
It is crucial to note that while the
price of corn went from $2.49 per
bushel in June 2006 to $7.13 per bushel
June 2008, demand for food, feed and
exports did not budge. Over the past
six months, demand for feed and export
has dropped significantly, but this is a
48

by Hunt Stookey

Analyst expects industry to see dramatic
turnaround by 2011
response to the overall economic slowdown rather than to corn prices.
With a limited supply of corn available relative to demand, something had
to give, and that something was ethanol
production. Beginning in the third quarter of 2007, the ethanol fleet, which had
previously been running above nameplate capacity, began to cut production,
and fleet-wide utilization has decreased

in every quarter since (see figure 1,
below). Economists call this "demand
rationing," which means simply that demand has to be cut to balance the available corn supply.
THE NEW ECONOMICS OF ETHANOL
When the corn market transitioned
from surplus to deficit, the economics
of ethanol production was stood on its

Fig. 1: Nameplate capacity and production of the U.S. ethanol fleet
(quarterly annualized run rate - million gallons)

14,000
Idle

12,000

Operating
10,000

Production

8,000
6,000
4,000
2,000
0

Q3/06

Q4/06

Q1/07

Q2/07

Q3/07

Q4/07

Q1/08

Q2/08

Q3/08

Q4/08

Note: Quarterly capacity based on straight line average; capacity includes idled plants 790 MGY at 12/31/2008.
Source: EIA; Soyatech Biofuels Monitor; HighQuest Partners Analysis.

April 2009 / World Grain / www.World-Grain.com



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World Grain - April 2009

Table of Contents for the Digital Edition of World Grain - April 2009

Contents
World Grain - April 2009 - 1
World Grain - April 2009 - 2
World Grain - April 2009 - 3
World Grain - April 2009 - Contents
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