Ethanol producers face continued challanges on both costs and revenues.

Implications: Lack of infrastructure is creating price-gluts, and low or negative margins for ethanol producers.  This situation could continue for another two years, as improvements in infrastructure struggle to keep up with expansions in production of ethanol.  Corn acreage is already at its highest level since 1944, and with the current price relationships, will have a hard time gaining more acres in the US.  Regardless, expansion of ethanol capacity continues in the US, as there are more plants online, under construction, and in planning stages, than there was just 3 months ago.  Iowa continues on the part to become a "corn deficit state", and basis levels have been turned on their ear all over that state.

Analysis:

Infrastructure for moving ethanol to the south, and to the east and west coasts has not been able to expand enough, fast enough, to handle the increases in production of ethanol, which has caused wholesale prices of ethanol to trade at a large discount to gasoline.

It looks like it could be another 2 years before infrastructure catches up with ethanol production capacity to improve this situation

An expansion of allowed ethanol blends to 12-15% could expand ethanol demand in the US Midwest by 20-50%, which could significantly reduce the transportation-driven low ethanol prices there.

US corn acreage is the highest it has been since 1944, and in the previous crop, stole acres from cotton (-29%), soybeans (-16%) and wheat (-8%). Given the currently significantly higher prices for soybeans and wheat, it will be difficult for corn to steal additional acres from those crops, and it may in fact lose ground to them in the coming crop. The situation for the cotton market in terms of area, is less clear.

The current price situation for ethanol has plants operating at a deficit, but projected numbers reported here indicate that between July and November, the number of plants operating in the US increased by 5 to 139, the number under construction increased by 2 to 91, and the number in some stage of planning increased by 14 to 242.

Also according to this report, if all the ethanol plants currently planned to be built in the state of Iowa are built, ethanol alone, not counting the demand for feed and exports, would consume 159% of Iowa's 2006 corn crop. A quick look at the ethanol draw-map included in this report reveals a storm of competition brewing in this state, and the results of that can already be seen in basis levels in that state. Northwest Iowa farmers have typically been the recipient of some the widest basis levels in the US. However this past summer, prices in that northwest region were actually positive.

I concur with this analysis by Prof. Wisner, and feel that the US ethanol industry continues on an over-building frenzy, even after the popular press had hailed the end of the boom in plant building.

Again according to this report, 60-66% of GLOBAL corn exports will be needed just to satisfy the new demand created when the ethanol plants under construction come online. That's not even taking into account keeping the plants already online supplied, nor does it consider the 343 plants that are in planning stages.

Ethanol producers appear to be facing multiple years of low prices, and will be challenged to find profitable margins, especially given the high prices for the primary feedstock of corn, which will keep corn farmers, land owners, and producers of all manners of agricultural inputs and machinery smiling for some time as well.