Is tortilla boom around corner? Ethanol glut depressing prices

NY Times:

The ethanol boom of recent years — which spurred a frenzy of distillery construction, record corn prices, rising food prices and hopes of a new future for rural America — may be fading.

Only last year, farmers here spoke of a biofuel gold rush, and they rejoiced as prices for ethanol and the corn used to produce it set records.

But companies and farm cooperatives have built so many distilleries so quickly that the ethanol market is suddenly plagued by a glut, in part because the means to distribute it has not kept pace. The average national ethanol price on the spot market has plunged 30 percent since May, with the decline escalating sharply in the last few weeks.

“The end of the ethanol boom is possibly in sight and may already be here,” said Neil E. Harl, an economics professor emeritus at Iowa State University who lectures on ethanol and is a consultant for producers. “This is a dangerous time for people who are making investments.”

While generous government support is expected to keep the output of ethanol fuel growing, the poorly planned overexpansion of the industry raises questions about its ability to fulfill the hopes of President Bush and other policy makers to serve as a serious antidote to the nation’s heavy reliance on foreign oil.

And if the bust becomes worse, candidates for president could be put on the spot to pledge even more federal support for the industry, particularly here in Iowa, whose caucus in January is the first contest in the presidential nominating process.

Many industry experts say the worst problems are temporary and have been intensified by transportation bottlenecks in getting ethanol from the heartland to the coasts, where it is needed most. And even if some farmers who invested in the plants lose money, most of them are reaping a separate bounty from higher prices for corn and other commodities, which are expected to remain elevated for some time.

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I think a tortilla boom maybe the cure. It is hard for me to believe that transporting ethanol to the coast can be done at prices that are competitive with straight gasoline. All of this would make more sense if we did not have adequate supplies of oil and gas bottled up because environmentalist hate drilling for it. If we permitted off shore drilling in a commercially reasonable site as well as sites in Alaska it would be a better energy policy that would provide fuel at reasonable prices and lower the world price of petroleum. By starving the supply of petroleum and subsidizing inefficiency we are pushing up the cost on consumers and harming the economy. There are some suggestion that we are also harming the environment.

Reducing the subsidy for ethanol would probably help reduce the glut.

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