Ethanol: Ingredients for success

Ethanol will succeed, but only if three factors continue working in its favor, says one expert. Those factors include the state of the petroleum market, government policy and technological development, says Pat Westhoff, program director of the Food and Agriculture Policy Institute (FAPRI) at the University of Missouri.

Technology is a big factor, he says. Westhoff believes ethanol’s prospects partly hinge on whether the industry successfully completes the transition to a new line of biomass feedstock, better known by some as cellulosic sources — forestry products, agricultural waste and switchgrass to name a few.

A lot of research is under way to make this happen. And if it does happen, it “could make a huge difference in what the industry will look like in the years ahead,” Westhoff says.

But that corner has yet to be turned and until it is, the industry’s fate will remain uncertain.

For now, ethanol production has spiked, totaling about 6 billion gallons and is likely to grow by another 6 billion gallons when new plants come on line.

“With that kind of return, it’s not surprising there has been a lot of investment in ethanol plants,” says Westhoff.

But raw demand alone doesn’t count entirely for this spike.

Government subsidies have played a big part too — the reason why government support will remain another critical ingredient in ethanol’s long-term success.

Even so, Westhoff says projections for next year may not be so rosy — possibly “only one-third or less than those of 2005-06.” And while conceding that there are still profits to be made with ethanol, he says that ethanol is “not quite the lucrative thing it appeared to be only a few months ago.”

In fact, futures prices for ethanol “have been trending downward in a pretty serious way,” he says.

Up to now, tax credits have been another factor in ethanol’s success, and loss of these credits could lead to revenue declines for ethanol and biodiesel plants alike and, along with this, price increases. The end result could be a smaller ethanol industry. And while ethanol production could drop as much as a third, biodiesel production could dry up entirely, Westhoff warns.

The federal government has set a mandate for 15 billion gallons of biofuel use by 2015, with a further increase to 36 billion by 2022. But Westhoff says this expansion will depend to a considerable degree on the success of biomass-derived ethanol, stressing the bulk of the supply after 2015 will come from these types of sources.

Meanwhile, two Alabama Cooperative Extension System experts hold slightly different views on ethanol’s future prospects.

Jim Novak, an Extension economist and Auburn University professor of agricultural economics, agrees that the success of biomass-derived sources, such as switchgrass, will be a crucial measure of ethanol’s long-term success.

On the other hand, he’s not convinced that low-priced oil necessarily will deal ethanol a serious setback. There is a substitution effect to consider. Low-priced oil means lower farm production costs. And since transportation is a big issue in ethanol production, lower oil prices also could be a positive factor in that respect too, he says.

As for government policy, Novak also believes ethanol’s prospects will hinge on the shape of the next farm bill — namely how the feds choose to support major crops in the future.

“A less favorable policy with regard to price supports, acreage restrictions and so forth, and subsidies for some crops compared with others could shift farmer preferences to planting the more blessed crop,” he says.

Novak believes subsidies for research on various aspects of ethanol production, for example, ethanol plant construction and other types of support, also will influence the ethanol picture over the long term.

Novak’s Alabama Extension colleague, Mark Hall, a renewable energy specialist, is even more optimistic. He believes that federal incentives already in place comprise the linchpin of energy self-sufficiency. And as long as this linchpin remains in place, Hall believes the transition to more profitable forms of ethanol and other renewable forms of energy will occur.

“I’m procapitalist, and despite some of the challenges associated with biomass ethanol, I believe the American entrepreneurial spirit will see us through, providing the federal mandates for ethanol production remain in place,” Hall says.

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