For ethanol, demand rise is matter of time
Anybody who has bought a gallon of milk lately is experiencing what ag economist Christopher Hurt warned us about 18 months ago.
The rush toward ethanol production in Indiana and across the country has driven up demand for corn. And even though farmers responded with record plantings and are in the midst of a huge harvest, the price for corn remains about 50 percent higher than last year.
In turn, feed prices are higher, and that's why you're paying more for milk and meat.
Hurt, a Purdue University professor, predicted the higher prices in this space in May 2006. It's a basic economic premise: supply and demand -- and demand is far ahead.
"This is nothing more than capitalism," Hurt said last week. "It's no reason to be bearish on ethanol. No business has a golden day every day."
A lot has happened in the state's ethanol industry the last 18 months. Seven new plants are either online or nearing completion here. Several other plants, including one just outside BioTown USA -- also known as Reynolds, Ind. -- are on hold as the market shakes out.
Ethanol got white hot for two reasons: Congress outlawed the fuel additive MTBE, so refiners switched to ethanol and that increased demand. Congress also set a goal of producing 7.5 billion gallons of ethanol annually by 2012, giving investors confidence in the market.
Did it ever. The industry already more than tripled its annual output to nearly 7 billion gallons, according to the Renewable Fuels Association. When the expansions and new plants come online in the next year or so, the output will be more than 13 billion gallons.
Refiners have more than enough ethanol to replace the MTBE, so it's a matter of building demand among consumers. The high price of oil, which touched $90 a barrel Thursday, makes ethanol look good.
But the wholesale distribution network, from plant to service station, doesn't have enough capacity yet to move all the ethanol produced. It will take years to develop a better system than the current reliance on trains and trucks to ship ethanol.
Then there's the fact there are fewer than 100 pumps at Hoosier service stations that dispense E85 fuel. "It's a lot like the chicken or egg question," said Scott Imus, head of the Indiana Petroleum Marketers and Convenience Store Association. "Is E85 going to be widely available first, or are consumers going to demand it?"
Sustained high oil prices will boost demand for ethanol. But gas station operators remain reticent to spend a lot of money to install pumps to dispense what's essentially a competitor to their main product -- gasoline.
What does this mean for the price of milk? You can expect to pay the higher prices until capitalism kicks in. When that happens, distribution problems will be solved and the ethanol industry will use something besides corn for its basic ingredient.
That's years down the road.
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