Ethanol Makers Losing Money Due to Hurricane Ike Damage and Rising Corn Prices

U.S. ethanol producers are being hit by a one-two punch: Hurricane Ike-related damage is softening demand for the alternative fuel while rising corn prices are increasing operating costs.

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Last week, Hurricane Ike left many US oil refineries hobbled in its wake — including the nation’s largest biodiesel refinery. As a result, oil production is down.

Demand for ethanol in the US is closely tied to oil production because of the federal ethanol-gasoline blending mandate. So as oil production has fallen, so has ethanol demand.

At the same time as Hurricane Ike was downing oil refineries, corn futures — essentially the betting on whether or not the price of corn will rise or fall in the coming months — have risen dramatically due to the volatile financial markets and a general upward trend.

When you combine these two issues — weakening demand and rising raw materials costs — with the fact that US production capacity for ethanol has increased by 60% since this time last year, it seems that it’ll be a relatively long time before making ethanol becomes a profitable venture again.

In a Reuters article, Rick Kment, an analyst at DTN, says that ethanol production will be a money loser for the next 6-12 months and most ethanol producers will probably take a 25 cent per gallon hit during that time.

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Image Credits: Corn field from antaean‘s Flickr photostream. Oil refinery from hassan abdel-rahman‘s Flickr photostream. Both used under a Creative Commons license.

Source: Reuters (via Biofuels Digest)

Nick Chambers

Not your traditional car guy.