The ethanol bubble popped, now what?



2008 was not kind to ethanol. In early to mid-2008, rising commodity prices, higher gasoline prices and spiking grocery prices were all blamed on ethanol.



Comments like, "we shouldn't be growing our own fuel," or "there's not enough corn for food, feed and fuel," were commonplace.



As the economy took a nosedive this fall, so did commodity prices, oil and ethanol. Nearly any and all "bubbles" burst, leaving corn below $4 per bushel, soybeans below $9 per bushel, crude oil below $45 per barrel and ethanol under $2.



Time magazine even ranked the ethanol bubble bursting as its number six story out of 10 for green stories of the year. According to the article, "Although government subsidies ensure that ethanol isn't going anywhere, the dream that the U.S. would replace oil fields with cornfields is surely dead."



The short-term future for ethanol isn't looking particularly bright either. The Agriculture Department's World Agricultural Supply and Demand Estimates (WASDE) released in mid-December placed corn used for ethanol production at 3.7 billion bushels, down 300 million bushels from the November estimate.



"The most dramatic change in the December WASDE report was the big drop in corn used for ethanol production," said Terry Francl, senior crops economist with the American Farm Bureau Federation (AFBF). "I am surprised that corn use for ethanol dropped by that much. Demand for ethanol is down, just like demand for gasoline is down, but I just don't think the decline is that large. I believe 3.8 billion bushels to 3.9 billion bushels is closer to the mark."



Francl went on to say that he expected corn exports in 2009 to weaken further due to the worldwide economic slowdown. As a result of weak demand, ethanol plants are expected to remain idled, which is likely to put a damper on plants being constructed.



One significant change in the commodity markets is that corn is now looked at as a fuel instead of food. At the Agricultural Retailers Association 2008 Conference & Expo in early December, company leaders at Mosaic, Cargill and Monsanto all stressed that the price of corn is now tied to the price of oil. Therefore, corn prices are not expected to recover until oil prices rise again. As a result, the ethanol industry is going to be facing some very difficult times especially as the Renewable Fuels Standard targets 3.8 billion bushels of corn for ethanol production in 2008/09.



The bearish economy already has impacted farmers, many of whom chose not to apply crop nutrients this past fall, and they are waiting to see if retail fertilizer prices drop since wholesale fertilizer prices except for potash dropped to about half of July highs. With everyone holding their breath and their pocketbooks, something is going to have to give and give soon.



Another impact on the corn market will be seen when planting intentions come out. With corn commodity prices below $4 and input costs and seed costs up, will there be a drop in corn acres this year?



The impacts to the ethanol industry from the burst bubble are likely not finished. Like the effects to Main Street, the current recession won't leave the ethanol industry untouched. Unless and until oil prices and commodity prices rise, expect major restructuring and reorganization for the ethanol industry in 2009.