Western Railroad Discussion > RR's and the ethanol boom...

Interesting article....

http://www.dailyreportonline.com/Editorial/News/new_singleEdit.asp?individual_SQL=2%2F1%2F2007%4013469_Public_.htm



AM

Heres another angle from Forbs

Whoops
Jonathan Fahey 02.12.07


U.S. politicians and Wall Street cheered when the ethanol industry went on a building binge. Now the distillers are waking up to the ugly possibility of a gasohol glut.
Ethanol was making investors giddy last year when oil prices were high, corn prices were low and ethanol producers like Archer Daniels Midland and small U.S. farmer cooperatives were reaping huge profits distilling corn mash into fuel.

It created a corn rush. Money from Wall Street to Australia started pouring into ethanol distillery construction all over the U.S. heartland. Seventy-five distilleries are under construction, on top of the 111 now operating. "Everybody thought they could become the new Saudi oil barons of Champaign, Illinois," says Daniel Basse, president of AgResource, a Chicago agricultural research and forecasting outfit.

Instead ethanol makers may be headed for the soup kitchen. Amid the frenzy, corn prices spiked, ethanol prices collapsed and yet more ethanol supply is coming online. Basse predicts the ethanol makers that were coining money last year are on track to start losing money by the end of this year.

Unless, of course, the industry gets yet another boost from the U.S. government. Ethanol has achieved hallowed status in the battle to reduce the U.S.' dependence on imported oil. The U.S. government already supports ethanol with a tax subsidy equivalent to 51 cents per gallon of ethanol. That comes to $3 billion a year. Also helping the business are environmental mandates (depending on where it is sold, some gasoline must contain up to 10% ethanol as an antismog measure) and energy independence mandates.

"All the buzz in Washington surrounding ethanol indicates that it's going to survive," says David Lehman, managing director of the Chicago Board of Trade's commodities group.

Ethanol makers need the help. Corn prices, 75% of the cost of ethanol production, have doubled in the past six months, to more than $4 a bushel. At the same time, the price of ethanol has followed the price of gasoline downward.

Absent a rescue from Capitol Hill, the glut is going to get worse. AgResource's Basse estimates the blending demand for ethanol at 10 billion gallons, 7% of the 150 billion gallons of blended fuel burned each year. Current nationwide ethanol capacity is 5.4 billion gallons. But 6.1 billion gallons' worth of capacity is now under construction, according to the Renewable Fuels Association. That would push supply right past demand and destroy ethanol prices. Unless mandates are tightened. At the moment the motor fuel industry is meeting environmental minimums and exceeding the energy independence ones.

Under present law the independence minimum comes to 4.7 billion gallons of ethanol this year and 7.5 billion in 2012. But now the Bush Administration is considering boosting this mandate to 60 billion gallons by 2030. That target is also mentioned in a pair of Senate bills penned by presidential hopefuls Joseph Biden (Democrat--Delaware) and Barack Obama (Democrat--Illinois). They would as well provide tax credits for high-ethanol fuel pumps, refineries and other biofuels production.

There are lots of ifs here, but investors in ethanol producers were heartened at first. Shares of companies like VeraSun Energy, Pacific Ethanol and ADM, which had been beaten down by as much as 60%, quickly began recovering when news of the higher mandates broke. You might even see the revival of public offerings for Hawkeye Renewables of Iowa Falls and Global Ethanol of Brisbane, Australia, both of which were shelved late last year.

Other potential winners include agricultural equipment makers like John Deere, which would help farmers plant a lot more corn; Monsanto, which is developing corn that can flourish in dry climates like western Colorado; and railroads such as Burlington Northern Santa Fe, which haul ethanol from the U.S. Midwest to the coasts.

Losers: companies that raise livestock that eat corn, people who buy meat, taxpayers and drivers. Net of the tax subsidy, the price of ethanol is $2.04 a gallon, which is 70 cents more than the $1.34 wholesale price of gasoline. And the energy content of ethanol is only two-thirds that of gasoline.

Environmentalists are queasy about ethanol. Made from corn, it takes so much water, energy and land to produce that its environmental benefits are dubious. Corn ethanol also has no chance of curing the nation's addiction to foreign oil. (Ethanol from cellulose would be more of a winner, but the technology does not yet exist.) Neither of these inconvenient truths will necessarily prevent U.S. politicians from bailing out the distillers.

Somebodies math is a bit optimistic, adding ethanol means the total fuel available has increased, not neccessarily the consumption.

How long can the derived ethanol be stored?

And an alternative viewpoint...

Pepperidge



Ethanol won't buoy corn prices forever
Production climb will take prices near average, analysts say

Jeff Caldwell
Agriculture Online News and Features Editor

1/16/2007, 9:32 AM CST

Will the ethanol boom continue to drive up corn prices?

In a white paper released this week by the Ethanol Promotion and Information Council (EPIC), Nathan Danielson of BioCognito and Geoff Cooper of the National Corn Growers Association (NCGA) say corn production levels will continue to climb alongside the growing demand for the ethanol feedstock. As a result, concerns about high corn prices going higher are "unfounded.

"It is unlikely that considerable price increases will be seen in the immediate future given current and expected corn production levels," Danielson and Cooper write in the white paper. "The authors believe that while the market may very well show some transitory increases in price because of increased demand, corn prices will adjust to near the historic average in the long term."

Why? Danielson and Cooper say rising yield potential and the growth and segmentation of both new and old corn markets will, in the end, keep the marketplace on an even keel. When it comes to yields, per-acre production has grown annually at a higher clip in the past decade than in the previous 50 years. This biotechnology-driven increase, from 1.5% per year from 1944 to 1994 to two percent per year since 1996, will likely translate to a 15 billion-bushel corn crop by 2020, the authors say.

Growth is not the only dynamic force pulling on the changing corn market, however. Some traditional corn markets have remained relatively static in recent years, and while ethanol's growth has created a strong demand upswing, markets like livestock feeding have grown slowly, if at all. In this regard, ethanol's presence in the corn marketplace is necessary to stabilize what otherwise might be consistently bearish.

"With the exception of ethanol, markets for corn have not seen significant growth in the past 10 years. Livestock feeding has been growing only marginally, while other markets appear to have stabilized or slightly shrunken," Danielson and Cooper write. "It is likely that without the increasing market for ethanol, corn prices would have decreased and acres would have transitioned into other crops or taken out of crop production entirely."

Even though it's relatively static when it comes to a demand driver, corn for livestock feed use should become an even smaller market segment because of the growing availability of distillers grains as an alternative feedstock, meaning less demand-driven corn price pressure.

"The idea that increased usage of corn for ethanol will increase food costs does not take into account the feed value of distiller's dried grains with solubles," the authors write. "More than half of the corn fed to beef could be replaced by [distillers grains]."

All in all, Danielson and Cooper say if current trends for corn consumption and production remain, the corn price picture will touch familiar trend-lines in the future.

"It is our belief that the use of corn for ethanol will not significantly affect the price of corn, provided that production increases at an adequate rate. The additional value captured will result from the value added nature of ethanol and not impact corn price," Danielson and Cooper write. "The pressure that might result in higher corn prices will be ameliorated by increases in production, slow or no growth in other major markets and displacement of corn as a feed by [distillers grains]."

What a non-issue. The present energy recovery from corn runs from abotu 1.7:1 to 3:1 meaning the refined alcohol yields and appropriate amount
of energy above what is required for production. The ratio for biomass is running about 11:1 and with three large plants running or close and
and a good many more within a year the reign of corn as the booze king is going to be rather short. So what, you all would rather buy foreign oil
than locally grown alcohol, you probably drive Toyotas too, end of rant.

Another downside "byproduct" of ethanol/bie diesel is a shortline who handles no hazmat (there are a few) and arent required to have a hazmat program in place are suddenly confronted with having to have one plus the increased insurance costs of having to handle hazmat. No small item to the shortlines.

EMDSW-1 Wrote:
-------------------------------------------------------
> are suddenly confronted with having to
> have one plus the increased insurance costs of
> having to handle hazmat. No small item to the
> shortlines.

If the shortlines don't pass along this cost to the customers, they won't be in business for long... This is why hazmat rates are higher than other rates.

-Justin

There are always people who see the risk or downside in new markets. The horseless carriage was a curiosity in 1890. Nobody thought it would control the economy in the future.

I think ethanol will have a strong place in the market for a good while. Remember, it is mainly used to replace MTBE right now. We are also paying farmers to leave land fallow. That land will be put into corn production soon.

With a million or so E85 Flex-Fuel vehicles on the road the supposed glut will evaporate very quickly. We're already getting our first E85
station in Phoenix (85% alcohol 15% gasoline) with more coming shortly. Any new refineries being built, such as the new one outside of
Yuma, will quickly suck up any neighboring supplies.

You realize with E-85 you will have to fill your tank 3 times to go as far as you go on 2 tanks now?

OliveHeights Wrote:
-------------------------------------------------------
> You realize with E-85 you will have to fill your
> tank 3 times to go as far as you go on 2 tanks
> now?

And likely pay more per gallon? It would be cheaper in the long run to put some of the fallow oil patch fields back into production. But the folks would try to say certain politicians are trying to enrich their Texas oil buddies. As opposed to the politicoes that tried to get the corn farmers rich. Looks like nobody is really going to win in the ethanol games.

As a replacement for mtbe/mbte (?) it probably makes sense, that stuff is nasty. Replacing gasoline in high percentages the numbers are going to be a long time coming.

If I have to pay more, I'd rather pay a farmer in Iowa than a Saudi prince.

Pepperidge


n6nvr Wrote:
-------------------------------------------------------
> OliveHeights Wrote:
> --------------------------------------------------
> -----
> > You realize with E-85 you will have to fill
> your
> > tank 3 times to go as far as you go on 2 tanks
> > now?
>
> And likely pay more per gallon? It would be
> cheaper in the long run to put some of the fallow
> oil patch fields back into production. But the
> folks would try to say certain politicians are
> trying to enrich their Texas oil buddies. As
> opposed to the politicoes that tried to get the
> corn farmers rich. Looks like nobody is really
> going to win in the ethanol games.
>
> As a replacement for mtbe/mbte (?) it probably
> makes sense, that stuff is nasty. Replacing
> gasoline in high percentages the numbers are going
> to be a long time coming.

Most shortlines do not set prices but accept a "handling carrier" or "switch carrier charge" from the Class I's. They could, however, surcharge the movements to at least recoop some of the loss.