Ethanol's future looks brighter, but there's still a long way to go for the gas alternative

ON THE FARM

October 08, 2006|By TED SHELSBY

A group of Maryland grain farmers who have been trying to push ahead with plans to build the state's first ethanol production plant can be forgiven for feeling as if they are pursuing an elusive objective.

"We thought we would be further along than we are at this time, but we are working at it," Eastern Shore grain farmer Robert Hutchison said of plans for a $90 million plant capable of converting corn or barley into 50 million gallons of a gasoline alternative each year.

Hutchison, who farms about 3,000 acres near Cordova in Talbot County, is president of Chesapeake Ethanol, a company established in December to build the plant. It is something that he and other farmers involved in the project have envisioned for more than five years.

But the farmers should take heart, federal agriculture officials say, because the industry they are trying to develop is clearly on the rise.

National production of ethanol is exceeding most analysts' expectations, including those of the U.S. Department of Agriculture, said Keith Collins, the federal agency's chief economist.

In a presentation last month to the U.S. Senate Committee on Environment and Public Works, Collins said that ethanol production increased by 150 percent between 2000 and 2005. Nearly 5 billion gallons of ethanol are expected to be produced this year, an increase of 25 percent over last year's output.

And the future looks brighter. More than 100 plants are operating in 22 states, most of them in the Midwest, according to the Renewable Fuels Association, a Washington-based trade group. And 42 plants are under construction.

When the new and expanded facilities come on line, Collins said, ethanol capacity will be boosted to 7.7 billion gallons a year.

But there's a long way to go. Despite the rapid growth in national production, Collins said, the 4 billion gallons produced in 2005 was equal to only about 3 percent of the 140 billion gallons of gasoline used last year.

"However, ethanol's economic importance to agriculture is quite significant," he told the committee.

In 2000, about 6 percent of the U.S. corn production was used to produce ethanol, Collins said. Last year, 14 percent of the corn crop was converted into ethanol, and the percentage is expected to jump to 20 percent this year.

Collins said a number of factors contributed to the rapid increase in ethanol production, including the 51 cent per gallon federal tax credit provided to blenders, high crude oil and gasoline prices, and low corn prices.

A federal requirement that oil refiners use 7.5 billion gallons of ethanol annually by 2012 and the sharp reduction in the use of MTBE (methyl tertiary butyl ether) - ethanol's main competitor as an additive to make gasoline burn cleaner - added to the appeal of made-from-grain fuel.

Collins told the committee that the improving economics of ethanol production also have fueled its expansion. Higher yields of ethanol from a bushel of corn, a lower cost of enzymes required for the conversion, and production automation had brought the cost of producing a gallon of ethanol down to 95 cents, he said.

In recent years, the rising cost of electricity and natural gas had pushed the cost of making a gallon of ethanol to $1.10.

The ethanol boom is showing no signs of slowing down. Industry analysts say that 60 more plants, including one in Maryland, are in varying stages of planning.

Industry sources are predicting annual production of more than 10 billion gallons by 2010.

Collins cautioned that ethanol's future is related to the world price of crude oil. He said that as long as the price of crude remains higher than $50 a barrel and corn prices don't rise considerably, ethanol would be used as a fuel extender because it would be competitive with gasoline.

But with crude selling for about $30 a barrel, he said, there would be no incentive to produce corn ethanol beyond the federal requirement of 7.5 million gallons a year because it would be unprofitable to produce and market as a fuel extender.

He said that a plant producing ethanol for $2.25 a gallon could pay $5 a bushel for corn and still cover its operating costs.

This bodes well for farmers in Maryland, where corn has been selling in the range of $2.25 to $2.50 in recent weeks.

"We're not the silver bullet that's going to break our ties to expensive imported oil," said Hutchison, the Chesapeake Ethanol president. "There is no silver bullet, but maybe there is a silver buckshot. Ethanol is just part of the solution. Maybe the production of ethanol, along with biodiesel fuel and nuclear energy and other alternatives fuels, will free us from imported oil."

Lynne Hoot, executive director of the Maryland Grain Producers Association, said the group has been negotiating to obtain an ethanol plant site along the Baltimore waterfront for about seven months.

She said it would take two more years to build a plant once a site was selected.

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