Biofuels Take Heat from Flood Impact

VeraSun delays a major plant opening, and others are following.

Published on: Jun 19, 2008

VeraSun Energy is delaying the opening of at least two plants according to press reports, which some are calling an early victim of skyrocketing corn prices. The biofuels industry is going to be under more fire as consumer groups make their case that ethanol takes corn from hungry people. While that's not the truth, and changes in the demand picture for corn over the last 20 years is a major factor here, there are worries about the 2008 Great Flood's impact on the market.

Dow Jones reports this week that the VeraSun decision could be just the start as other corn-based ethanol producers announced plant delays. Earlier this year, facilities that had not moved to ground breaking were slowed, or stopped. The rising price of corn - now above $7.80 for most new-crop contracts - is a critical factor. A top-level ethanol plant can get 2.8 gallons of ethanol from every bushel. With corn at $7.80 or above, and ethanol trading on the market at $2.937 for the July contract, there's little room for profit.

Closing or delaying some plants could reduce the supply pressure on the market and boost the ethanol price. But rising corn prices are bringing talk of ending the renewable fuel standard, and other policies that promote ethanol production from corn. Policymakers will debate these issues in coming weeks.

In responding to questions about the flood, Renewable Fuels Association Presidnet Bob Dineen issued a statement noting that the floods of the Midwest are "adding yet another layer of worry for millions of Americans already trying to cope with record high oil and gasoline prices."

He adds that it's too early to assess the flood's impact and that the "unprecedented event will likely cause already high gain prices to remain elevated." This will put more strain on industries that rely on corn and other crops, including the ethanol industry. Dineen notes that last year's record crop and rising grain production worldwide will "help all users of corn to withstand these unprecedented conditions."

As or what this weather event could mean for ethanol, Dinneen adds: "Knee-jerk reactions to this unprecedented weather event would do even more harm to the nation against the backdrop of the current oil and economic crises it faces. Abandoning our commitment to ethanol and biofuels, as some would suggest we do, would do nothing to provide meaningful relief from high grain prices today or in the future. It would absolutely force the price of gas through the roof and require the import of more record-high foreign oil."