Colorado Corn

By Craig A. Johnson

The rhetoric surrounding ethanol production in the United States is as troublesome to investors as it is vitriolic toward producers. The ethanol industry's staunchest detractors continue to propagate the "food-versus-fuel" debate—a myth effectively debunked by the industry but popular with the media—as cause for this discourse. In reality, experts agree that expensive energy has a much stronger correlation with the rising cost of food than higher crop prices. With oil above $80 per barrel, the high cost of that nonrenewable energy can't be dismissed. According to Rick Tolman, chief executive officer of the National Corn Growers Association, ethanol replaces as many as 200 million barrels of imported oil per year.

However, ethanol prices combined with talk of market saturation certainly haven't helped the industry in the past month. The New York Times recently published an article that stated "companies are already shelving plans for expansion and canceling new plant construction." For example, VeraSun Energy Corp. halted development of its ethanol project in Reynolds, Ind., "due to current market conditions.” The company expects to restart the project in 2008, depending on more favorable market conditions. Likewise, Missouri Valley Energy LLC "temporarily suspended" its construction project in Vermillion, S.D. "We do not believe today's construction costs and valuation climate are conducive to completing the financing on this project on terms favorable to our shareholders," said plant CEO Tom Branhan.

How this plays out for future ethanol projects is difficult to predict. However, construction hasn't altogether stopped. Bridgeport Ethanol LLC in Bridgeport Neb., started construction in September. The plant, affiliated with Yuma Ethanol LLC in Yuma, Colo., is expected to produce 50 MMgy of ethanol when it comes on line in October 2008.

Perhaps by the time the number of corn-based construction projects has peaked, cellulosic ethanol production will have entered the commercial market. Verenium Biofuels Louisiana, a 1.4 MMgy cellulosic ethanol plant under construction in Jennings, La., that is slated to begin operation in early 2008, is one such project striving toward that milestone on a demonstration scale. According to the U.S. government's recently implemented renewable identification number (RIN) system, one gallon of cellulosic ethanol will be valued as 2.5 gallons of ethanol. Time will tell if the industry will see any of these valuable cellulosic RINs on the market in 2008.

While current corn/ethanol margins are cause for consternation, North America's newest ethanol producers are not deterred. Three plants recently overcame the challenges of construction. Gateway Ethanol LLC started production at its 55 MMgy facility in Pratt, Kan., in August, while Husky Energy began commissioning at its 130 million-liter-per-year plant in Minnedosa, Manitoba, in September. Pacific Ethanol posted on its Web site that Pacific Ethanol Columbia LLC in Boardman, Ore., started production in April, as well.