Colorado Corn Cultivating Opportunities

WASHINGTON (DTN) -- Ethanol producers are in town this week and are pushing Congress to complete work on an energy bill that would substantially raise the nation's Renewable Fuels Standard.

Prices have dropped steadily since early summer, leading some to speculate about a "glut" as ethanol production reaches 6.5 billion gallons and could top the national 7.5-billion-gallon Renewable Fuels Standard mandate by year's end -- a full five years ahead of schedule. Ethanol producers said even with lower prices, the oil industry has lost its motivation to buy ethanol, which could be fixed with a much higher RFS.

The Renewable Fuels Association backs the Senate energy bill that would establish a 36-billion-gallon Renewable Fuels Standard. The House version of the bill passed with no increase in the RFS, which concerned the ethanol industry.

"The Senate version would be very good and that's what our members are telling members of Congress," said Monte Shaw, executive director of the Iowa Renewable Fuels Association.

There is aggressive lobbying on the energy legislation right now because the House and Senate have yet to schedule a conference committee to meet and hash out differences in their bills. That won't happen until at least later this month, and it's unclear if a conference report would be ready for a final vote before Congress adjourns for the year.

Shaw complained that in the oil industry there is clearly resistance to buying ethanol given the cost savings right now. The economics suggest oil refiners should be buying more ethanol, considering ethanol is priced about 50 cents cheaper per gallon than gasoline and the blenders also receive a 51 cent tax credit. That effectively allows oil refiners and gasoline distributors to buy ethanol at $1 savings over gasoline.

"We feel we have shown that the oil companies are not going to respond to market forces," Shaw said. "If they aren't going to use us when we are $1 cheaper, then Congress has a decision to make."

Shaw said oil companies are making excuses that they cannot distribute ethanol well because the infrastructure hasn't been developed. He noted that the same oil companies were able to inject ethanol into the gas pumps in areas such as the northeastern U.S. in just a matter of months after MTBE was banned.

"That was when it was in their best interests, their economic interests, to do so," he said. "Now, they are saying it would take years to put this infrastructure in place."

Acting Agriculture Secretary Chuck Conner spoke to a packed room of ethanol-company representatives Tuesday. Conner said executives at the lunch table with him expressed their concern about the lower ethanol price and perception of a glut, but USDA economists overall have a positive outlook for the industry.

"In terms of the long-term market situation, the investment is still occurring there," Conner said. "I think our numbers show that even with the 10 percent ethanol blend you are going to get the 12- to 14-billion-gallon range. We still see some pretty strong growth potential there and that's reflected in the fact that these investments in plants are even much higher this year than last year ... The industry is still going forward and that tells me there is still room in this marketplace for additional production."

But lower prices are having an impact, Shaw said. Companies are talking about backing down their production and some are idling development of plants until conditions improve, he said.

Sen. Charles Grassley, R-Iowa, one of the major ethanol backers in the Senate, said the industry really only has taken off since states banned MTBE, so ethanol remains an infant industry that is going to have fits and starts as production and usage expand. There are transportation issues, but those can be fixed.

"There is plenty of demand for it right now if we can just get it out," Grassley said.

Grassley noted there is hardly any ethanol fuel used in the southeastern U.S. and there needs to be more incentives to get those governors to use ethanol blends. He also expects a strong energy title in the final farm bill that will focus on cellulose to take some of the pressure off the "food or fuel" debate.

Another sensitive area for ethanol companies right now is the food supply. On a daily basis, critics are blaming ethanol for higher food prices. After Conner finished speaking Tuesday, the first and only question he was asked pertained to a story in the Wall Street Journal blaming ethanol for increased costs of ketchup and what can be done to get accurate information about the food and fuel debate out into the public. Conner said it's clear ethanol is having "some impact" on food prices, but other factors such as higher oil prices and transportation costs play bigger factors.

"The data clearly shows that the impact has been overstated," Conner said.

Conner also spoke about the need for investing heavily in this new farm bill on research and development. The Bush administration proposed $1.6 billion dedicated to cellulose research, but the House bill did not have funding for the proposal. Conner said such work will be needed to help entrepreneurs advance cellulose into the market.

"They are investing heavily in this and things are moving very, very rapidly," Conner said. "So I'm not sure I would underestimate their ability to move into this market very quickly, but obviously they are not there yet on any kind of commercial scale at this point."

"There is always going to be market forces at work in any sector like this," Conner said. "I think with the demand potential out there for the blends we have not reached yet, there is a growing market out there."

Chris Clayton can be reached at chris [dot] clayton [at] dtn [dot] com.

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