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.
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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