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Too Many Ethanol Plants?

Posted on: Sunday, 19 August 2007, 12:15 CDT

By Nathan Leaf, The Wisconsin State Journal

JEFFERSON -- In October, Renew Energy will open Wisconsin's seventh and largest ethanol plant, producing 130 million gallons of the renewable fuel each year.

The offshoot of Utica Energy, which has an ethanol plant near Oshkosh, has nearly completed its $200 million renovation and expansion of the 374-acre property just north of Jefferson in the town of Aztalan, about 30 miles east of Madison.

With the capacity to store 10 million bushels of corn in silos that once housed barley for the former Cargill malting plant, Renew Energy will produce twice as much ethanol as any plant in the state and will be among the biggest plants in the country.

But while state officials are calling for more ethanol production and about a half-dozen other plants are either already under construction or in the planning stages, some analysts say the ethanol boom could be headed for a bust.

Market saturation?

David Swenson, an economist at Iowa State University who has written extensively on ethanol production in the United States, said the rapid expansion in Wisconsin and nationwide signals trouble for ethanol producers and investors.

Wisconsin produced about 210 million gallons of ethanol last year, and the state's yearly production capacity is expected to jump to more than 400 million gallons by the end of 2007. The increase will be driven mostly by Renew's new plant, United Ethanol in Milton, about 40 miles southeast of Madison, and increased production at Western Wisconsin Renewable Energy Cooperative in Boyceville, about 215 miles northwest of Madison.

"I would argue that the market, if it's not saturated, it's darn close," Swenson said. "Because prices are relatively low, the predictions that are coming out are saying they don't expect these plants to be making a profit in the next year. And if that's the case, it's because there's too much ethanol."

That overproduction could have dire consequences for the industry, Swenson argues.

"The existing plants across the board are going to have lower returns on investment," he said. "That's going to slow the rate of growth in these plants to somehow align in the growth of national demand, and that has yet to be determined. ... (There) is going to be more efficient, larger plants. Plants with much better scale of economies are going to be in much better position perhaps than some of these older plants."

Swenson believes the ethanol boom has been built on poor reasoning and without economic justification by politicians and industry backers.

"And they're using a mixture of national security and environmental benefits, which are questionable," he said.

James Williams, an energy economist with WTRG Energy Economics of London, Ark., also believes the ethanol market is nearing saturation.

"The outlook for the industry is that you have narrowing margins into the future," Williams said. "The survivors are going to be the ones with the lowest operating cost or the least leveraged."

Williams said the large amount of government subsidies combined with the increasing number of cars that can run on E85 fuel -- a mix of 85 percent ethanol and 15 percent gasoline -- are positives for the ethanol industry.

Williams said narrowing margins won't keep plants already under construction from being completed but will probably keep some of those in development from going forward. For those hoping for a long and prosperous life in the ethanol industry, Williams suggests waiting for things to get bad before getting in. Buying a faltering plant might be cheaper than building one yourself, he said.

"What you will see is a lot of these small mom-and-pop things being bought by larger concerns over the next five years," Williams said. "But you can be sure that at the rate these things are being built, margins are going to get cut. Some won't be making enough to service their debt and there will be some fire sales. I think we're getting close."

Room for growth

In Stanley, about 180 miles northwest of Madison, Ace Ethanol is expected to produce 45 million gallons of the fuel this year, up from 42.3 million gallons in 2006. Bob Sather, the company's chairman, said Ace is debt free, and he believes there is plenty of demand.

"The market isn't saturated because less than 50 percent of the low-grade gasoline is blended with E10," Sather said. "Plus, more E85 cars are coming online every year, it's far from being saturated. ... But right now we do have a glut of ethanol relative to the facilities out there to blend (ethanol into gasoline)."

Sather said education is the key to getting ethanol into the mainstream. "We have to promote it," he said. "We have to also work with our marketers to open new markets where they are not blending (ethanol)."

Judy Ziewacz, director of the state's Office of Energy Independence, agrees, saying more pumps for E85 are needed in the state. Ziewacz scoffs at the notion that the ethanol market is headed for saturation, saying to reach goals set forth by Gov. Jim Doyle for renewable fuels-production, more plants are needed.

"We need to be producing a billion gallons per year between ethanol and biodiesel (by 2025)," she said. "Anything that brings us to that goal is good. So I think the Jefferson plant is another huge shot in the arm toward that goal."

Ziewacz said corn ethanol will not be the only source for production as the technology for cellulosic ethanol advances. Cellulosic ethanol can be made from other organic material such as switchgrass and forest products.

"I know people are concerned about the pressure being put on corn and we're all trying to work as fast as we can to get to other feedstocks," Ziewacz said. "But I don't think we're even close to saturation of the (ethanol) market."

Increased efficiency

Officials at Renew Energy's Jefferson plant acknowledge that margins in the industry are getting tighter but believe they are well-positioned to be profitable.

"As almost any industry matures, that happens," Todd Foerster, the company's environmental, health and safety manager, said of tightening margins. "We expect to be a much more efficient operation. We're using significantly less (energy to produce) ethanol than even our sister plant up in Oshkosh."

Some of that efficiency will be gained through a "fractionation" process in which the corn is ground, separating the starch -- which is used to produce ethanol -- from the germ and bran.

"The benefit of this is that you don't have this stuff in your way using up valuable space in your fermenters," Foerster said.

The germ can then be sold for corn oil production while the bran can be used as livestock feed. Even the waste solids from the starch portion of the corn can be used as a high-protein feed. Plant officials are also considering using the heat generated from the plant and its former fermentation beds to develop a tilapia fish farm.

While some proposed ethanol plants around the state have run into opposition, Renew's Jefferson plant has had little, if any, negative response.

Many residents are happy to see the large plant operating again. It had been a malting facility for more than 100 years until Cargill closed it in 2005. Of the 74 employees who lost their jobs, 15 have been hired by Renew as part of its staff of 60.

"At least it's going to be used again and we're going to have some more jobs," said Paul Peachey, a member of the Jefferson City Council.

Joe Thorner, vice president and general manager at Renew, said a lot is riding on ethanol's acceptance by consumers.

Renew is addressing this by opening more of its own ethanol fueling stations. Most are located in the Fox Valley area but the company will be opening a new station in Watertown, about 40 miles east of Madison.

"We're seeing more of it going into fuel and if that continues to grow, the industry will continue to grow," Thorner said. "But it's not going to be at the rapid pace it's been the last couple years."

Source: The Wisconsin State Journal

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