Drought, ethanol interaction offers economic lesson

Monday, February 11, 2013

Ethanol has been a bright spot for Nebraskans, both in providing an alternative fuel for our cars, and as a source of income for those involved with corn -- growing it, providing fuel, fertilizer and chemicals to make it grow, transporting it to market, turning it into fuel and hauling that fuel to market.

But ethanol, like any manufactured product, depends on a reliable supply of raw material at a price low enough to make the final product competitive on the consumer market.

That hasn't been forthcoming, thanks to this year's drought, and that's the main reason 20 of the nation's 211 ethanol plans have stopped producing in the past year. That includes seven in Nebraska -- located in Sutherland, Atkinson, Albion, Aurora, York and Ravenna.

Some adjustments are inevitable as a new industry develops. In 2002, the American ethanol industry produced 2.1 billion gallons of the fuel, compared to 13 billion gallons at the current level, produced by plants in 28 states.

Today, about 10 percent of the U.S. gasoline supply is ethanol, and corn growers expected to produce a record amount of corn in 2012. Then, the skies closed up and 13 percent less corn was harvested last year.

It's especially important for ethanol plants to use locally produced corn, because transportation is too expensive otherwise. As it is, corn futures were $5.51 a bushel in May before the drought took hold, pushing prices to $8.34 before they settled to $7.46 last week.

But the drought can't shoulder all the blame for higher fuel prices -- there is plenty of ethanol in storage to meet demand until next fall, when producers hope to have enough corn again.

Like any industry, ethanol will adjust to changing factors like corn prices and availability, lower demand because of more efficient cars, and new sources like swithgrass and other inputs, as well as irrigation restructions along the Republican River.

But the fact that a lack of rainfall can have such diverse effects are a good lesson in the need to diversify and plan for changes in market conditions.

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