Ethanol plant investments growing

Cattle Market & Farm Reports, Editorials
Dec 20, 2007
by WLJ
Investments in ethanol plants are growing across the nation—including areas where larger populations need a generous supply of ethanol, according to a new report, “U.S. Ethanol,” by Rabobank.

As the demand for ethanol rises, so does the need for processing plants. And, despite rising input costs—such as corn—profits remain obtainable, and investments are seen as favorable. By the first quarter of 2009, more than 200 ethanol plants are expected to be in production, which represents a capacity increase of more than 91 percent during a three-year time frame. Much of this growth in ethanol production is largely driven by demand created by government support. In fact, “government support for ethanol production, and increasing demand for ethanol in all states, will continue to foster growth of destination plants,” said Jennifer Cole, Rabobank Food & Agribusiness Research Associate. (The first ethanol plants—in the Corn Belt—are often referred to as origination plants, whereas plants outside the Corn Belt are often referred to as destination plants.) Investors are finding that the traditional areas for ethanol plants, in the Corn Belt, are becoming saturated, and are looking elsewhere.

“One of the main advantages to building plants outside of the Corn Belt is the ability to ship ethanol shorter distances,” said Cole. “It is more practical and less costly to transport corn compared to ethanol.”

By moving the final product closer to consumers, investors are able to keep costs in check. Because ethanol is a highly flammable substance, it incurs higher insurance rates than shipping raw corn. So the focus of investments in ethanol plants has shifted from corn producing states—Iowa, Illinois, Nebraska and Minnesota—to areas such as New York, Texas, Oregon, Arizona and Washington.

“However, growth in these new regions must be accompanied by investment in infrastructure, just like any new business that requires storage and transportation,” Cole said.

Additionally, “when looking at a potential ethanol plant site, the investment must be viable for the long term and perform in a sustainable manner. That is, by the time a plant comes online 12 to 18 months after breaking ground, the cost of production is likely to be different, and these uncertainties must be factored in.”

While destination plants are often smaller in capacity compared to origination plants, they are increasing capacity and technological efficiencies with each plant. As more are built, the necessary criteria to support the system is growing. For example, nearby plants must be near major highways or preferably railroads. They also need planned sources for corn, water and other resources necessary for production.

So far, the need for plants seems to only be increasing. By 2008, there will be better data available on the profit margins that ethanol plants earn which will determine the pace of growth through 2012.