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Ethanol: a smidgen of caution

Farmers who heretofore have had to look at energy prices as a cost of doing business are now evaluating them in relation to crop plans and potential investment.

Corn, which has always been basically a food/feed commodity, with some corollary industrial uses, is now the primary ingredient for the burgeoning U.S. ethanol industry. And now that farmers are producing corn both for traditional uses and for energy, they’re finding that the commodity market volatility they’ve always had to contend with now includes the volatility of the energy market.

Corn prices, which have reached all-time highs, and have had even the straight-laced Wall Street Journal pondering the impact on the price of corn flakes breakfast cereal, are likely to spur farmers to make major acreage switches this year in order to capitalize on the situation.

At the same time, everybody and his dog is jumping on the ethanol bandwagon — plants are springing up everywhere and dozens more are on the drawing board. Many are majority farmer-owned; many have so far made good money for their investors (thanks in part to a subsidy and tax exemption amounting to almost half the per-gallon price). Some investor groups have had purchase offers for their plants that would return millions over their original stake.

At the other pole, one biofuels company which includes a bigtime entertainer and a well-known movie star as major stockholders, has seen its stock plummet from a high of more than $7 a year ago to 55 cents this week.

As any experienced farmer knows, markets (and investments) are nothing if not changeable. Many remember the heady days of $12 soybean futures. Some, alas, also remember holding out for $15 and the gloom that followed as prices dropped like a rock.

Corn futures, which have zoomed from below $2 at the end of 2005 to more than $4 in January, have farmers salivating over crop prospects and for the ethanol that has driven the price run-up.

But the ethanol industry is less than ecstatic over now having to pay almost twice as much for its corn feedstock, particularly when the price of gasoline (and ethanol) has been falling.

Some analysts say long-term corn above $4 and ethanol at $2 or below could force many ethanol plants out of business. A significant drop in ethanol demand/prices would send corn prices into a nosedive. (We won’t even speculate on the ability of Big Oil to easily put a major price/profitability squeeze on ethanol, or on what would happen if tariffs on imports were lifted and cheap ethanol from Brazil and elsewhere flowed into the United States.)

The rosy picture President Bush painted for biofuels in his State of the Union address only heightened the interest in ethanol and alternative fuels, despite a glaring lack of any plan for an infrastructure to support that kind of production and usage.

Until there is a major commitment to that infrastructure, either by government or industry or both, the promise of alternative fuels will continue to flounder.

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