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As drought withers US corn crop, ethanol industry feels the squeeze

As corn prices soar amid deepening drought, ethanol plants watch their margins evaporate. The industry is working at half-capacity, and some plants have closed. The slowdown is a blow to some rural areas.

By Richard MertensCorrespondent / August 9, 2012

Dried corn plants stand in a field near Mead, Neb., Thursday, Aug. 9.

Nati Harnik/AP

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Chicago

In late June, as drought gripped his state, Tom Utley saw a sign of trouble. The plume of steam that had billowed 24 hours a day high above the local ethanol plant – and fixed the location of his town from far across the fields of central Indiana – had vanished.

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“I think everyone in the community notices when stream is not coming out of the stack,” says Mr. Hutley, a resident of Linden, Ind., and county commissioner for Montgomery County. “It’s a reminder every day that something is amiss in ethanol land.”

The drought that has shrunken rivers and withered crops in much of the United States has begun to take a wider economic toll. A recent survey of Midwestern bankers in 10 states found declining retail sales, slowing equipment purchases, and increased borrowing, among other indicators.

“The numbers are not nearly as good as they’ve been,” says Ernie Goss, an economist at Creighton University in Omaha who surveyed bankers for the Rural Mainstreet Index.

The economic slowdown has extended to the ethanol business, which blossomed in recent years and now consumes about 40 percent of the nation’s corn crop. Drought-inflicted damage to the corn crop has driven up corn prices – now about $8 a bushel – and squeezed ethanol margins to the vanishing point, say agricultural economists and industry experts. As a result, many ethanol plants have cut production. In a few places, plants have shut down entirely.

IN PICTURES: Drought in the USA

“The price of corn got so high and the price of ethanol didn’t rise fast enough, that these plants were losing money on every gallon of ethanol we made,” says Bill Day, a spokesman for Valero Energy Corp. Valero, a petroleum refining company based in San Antonio, Texas, has closed two of its 10 ethanol plants, including the one in Linden. Overall the company’s plants are working at 50 percent of capacity. So far, Mr. Day says, Valero has not been forced to lay off any ethanol plant workers.

With 211 plants in 27 states, the ethanol industry produced 13.9 billion gallons in 2011. According to the Renewable Fuels Association, a trade organization based in Washington, ethanol production is down about 13 percent since early June.

“You’ve seen some pretty dramatic curtailing in ethanol production,” says Matt Hartwig, a spokesman for the association.

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