From the August 01, 2008 issue of Futures Magazine • Subscribe!

Shake-out in ethanol

The push for renewable energy sources sparked a surge in the biofuels industry, but a significant number of smaller ethanol plants have recently filed for bankruptcy or been scrapped before completion. Rising corn and energy prices and slimmer margins are central factors.

“There are supply contracts that these biofuels plant operators signed with farmers or co-ops. Such contracts were often written and signed years ago, even before construction,” says Alex Moglia, president of Moglia Advisors. With rising commodity prices, farmers are sometimes unable to fulfill their contracts. “What at one time was a viable plant is no longer,” Moglia says.

Rick Schwarck, CEO of Absolute Energy LLC, a 100 million gallon facility in St. Ansgar, Iowa, says the price of corn and soybeans is closely linked with the price of crude oil. “If oil goes down to $100 a barrel, ethanol goes down and plants shutter. More corn is released back into the market place and prices go down,” Schwarck says. “If it goes to $200 a barrel, plants that have gone off line would come back, demand [for corn] would go up, and the price of corn would go up.”

According to Moglia, there will be a short-term shake-out in the industry, eliminating some of the weaker players but sees continued long-term growth .

“[Traders] have to understand that the biofuels industry is still a very closed circle. It’s going through some wrenching changes, and they might not be easily discerned,” Moglia says. “They should assume they are not seeing the complete picture.”

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