Reap What You Sow

It seems that there is going to be an over supply issue with ethanol later this year. I am shocked, SHOCKED! After all, market forces are supposed to . . . oh, wait, never mind.

But, that's not all - it gets better:

"'We expect the relentless supply of new ethanol production capacity will lead to a 70 percent decline in margins by 2009,' wrote Bank of America analyst Eric K. Brown in a report late last month. The report, 'The Ethanol Floodgates Have Opened,' downgraded ratings on several ethanol-related stocks.

"Researchers at Iowa State University also raised concerns about profit margins being battered by corn prices that, driven by ethanol, have risen from under $3 per bushel last summer to close to $4 per bushel lately. They say that will make it difficult for ethanol plants to make money. And as the ethanol supply grows, they predict, ethanol prices will drop relative to gasoline unless there’s a change in government policy to encourage more demand for it."

What a fantastic idea! Let's have a government policy change to bail out an industry that faces potential problems precisely because of government intervention.

"Ethanol now makes up about 4.5 percent of the nation’s gasoline mix, depending on location. Once that rises to 10 percent — the percentage all cars now sold in the U.S. can use without modifications — [Bruce Babcock, director of the Center for Agriculture and Rural Development at Iowa State] questions where any additional demand would come from. Given that ethanol has about two-thirds the energy content of gasoline, he said, ethanol would have to be priced at two-thirds the price of gasoline to induce a major turn toward E85, an 85 percent ethanol blend that can power flex-fuel vehicles.

"'Otherwise no one will fill up with E85,' he said.

"The chairman of the National Corn Growers Association, Gerald Tumbleson, shares that concern.

"'We call it a ’blend wall,’ said Tumbleson, who farms near Sherburn in southern Minnesota. 'If you hit that blend wall, what’s the value of our product? That’s what makes us nervous.'

"Tumbleson said corn growers are hoping to get laws changed to require even greater use of ethanol, such as a 20 percent mandate. He said America’s energy independence is at stake."