There is no secret that when corn becomes too high priced or there is an insufficient supply, ethanol will be refined from cornstalks, switchgrass, miscanthus, wood chips, potato peels or some other form of low value biomass. The bugs are being worked out of the processes, but since it is all in the experimental stage, what will be the financial support for the biomass ethanol industry to start up and go on line toward full scale production? Has the economy threatened such a start up industry? You and a lot of other farmers want to know when to deliver a truckload of corn stalks.

USDA grants in the past year provided over $10 million to speed up the cellulosic ethanol research, and some pilot plants are operating. But economist Cole Gustafson at North Dakota State University says financial constraints will interfere with the transition from experimental to commercial operation. His analysis casts doubt on the availability of industry capital and the uncertainty in the US financial markets. And he thinks Brazil and Mexico will be in a position to capture a share of the cellulosic ethanol market.

Gustafson says the US ethanol industry expanded rapidly with the help of federal mandated production goals and low cost corn, generating financial benefits for local and state economies. But he says research has shown that as local ownership declines by one percent, one less job is created in a local community.

When corn-based ethanol plants were at their peak of profitability in 2006, $2.25 per gallon was returned to investors, who had invested about $1 per gallon of capacity to build the plant. But he says those margins have steadily declined since mid-2006 as more ethanol reached the market and more ethanol plants competed for local corn. Gustafson says when plant margins diminish, external capital sources are no longer interested in the investment. He points to the decline and bankruptcy of Verasun Energy, and says some firms will struggle in the best of times and with capacity at 62%, new firms will have limited incentives to begin producing ethanol.

Additionally, Gustafson says construction costs have risen to $2 per gallon of capacity, tax credits and subsidies for ethanol are increasingly uncertain, public concerns over water consumption by ethanol plants, credit limitations placed on ethanol plants, and the emphasis being placed on development of technology for cellulosic ethanol have all converged as threats to the expansion of the corn-based ethanol industry. Despite the challenges, the financial stability of the ethanol industry remains solid, and one lender which has financed 44 ethanol plants says only 3 of them were in poor financial health.

Parallel to the industry’s challenges, the collapse of the international credit markets has resulted in some uncertainty, but the ethanol industry had halted expansion in summer due to high corn prices, so the failure of international financial markets had little impact. The economist says most plants had alternative lines of credit to use when commercial paper markets dried up.

Gustafson says the cellulosic ethanol plants will be eligible for a 50% tax credit, and they will become commercially viable in the next couple years. While rising construction costs are a problem, they are doubly difficult for cellulosic plants that cost twice as much to build as corn ethanol plants. However, the value of the ethanol will increase along with the nation’s path to reduce its carbon footprint, and cellulosic ethanol may command a premium price, if the carbon value can be calculated.

Summary:
The ethanol industry is in a transition phase from corn to cellulosic feedstocks, but at the same time there is a lack of capital available from investors to help it advance, and funding arrangements over the past several years have not allowed the industry to build any equity in its plants. Uncertainties in the ethanol industry include continuation of the tax credits and other subsidies, as well as the difficulty in establishing values for carbon trading that could potentially benefit cellulosic ethanol. The Wall Street turmoil is an additional challenge that could subdue the economic performance of the country for the next decade. Part of the solution will be the rising value of the dollar, which will increase importation of foreign refined ethanol. Mexico and Brazil have announced substantial expansion plans for sugar-based ethanol that will help the US meet its mandate for 36 billion gallons of renewable fuel production per year.