Monday, July 09, 2007

Ethanol trends

A story posted today at Bloomberg regarding the ethanol industry contained quite a bit of information that I was not aware of.

-"Ethanol tumbled 43 percent in the past 12 months, making the corn-based fuel additive cheaper than gasoline for the first time in two years"...

-"corn prices dropped 27 percent from a 10-year high in February. U.S. farmers planted more corn than in any year since World War II. Every $1- a-bushel decline in corn lowers the cost to make a gallon of ethanol by 25 cents"...

-" Ethanol touched its all-time high of $3.98 a gallon on July 3, 2006"...

-"Distillers built new mills, boosting annual capacity to 4.9 billion gallons by the end of 2006, more than double what it was four years earlier. Ethanol makers plan to add another 6 billion gallons of capacity by the end of next year"...

-" A glut from those new mills caused ethanol to fall to $2.20 a gallon at the end of last week"...

It appears that restrictions on building new ethanol production facilities are significantly less than those for oil refineries. Also, basic agricultural economic forces are at work; it is relatively easy for farmers to switch crops depending on market prices for different crops. This means that farm prices have typically been quite volatile. So, once the push for ethanol as a fuel got under way, it is not surprising that there was a massive increase in corn production.

I think that food price increases due to fuel usage of corn crops will be a temporary phenomenon. We will see consistently high production of corn going forward compared to historical levels.

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