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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.

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It’s a significant setback for an industry that until recently was thriving. Ethanol production had been rising, thanks to a strong export market and a federal mandate that requires petroleum companies to blend ethanol in their gasoline. Last year ethanol plants were spending millions of dollars to expand plants, make improvements, and invest in allied businesses, like fish and shrimp farms, which use some of the byproducts of the ethanol-making process, says Todd Sneller, administrator for the Nebraska Ethanol Board, a public agency that promotes ethanol.  

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“It was really evident there was a lot of cash around,” he says.

Now, plants in Nebraska, the second largest ethanol-producing state, have cut production between 20 and 30 percent, says Mr. Sneller, and the Ethanol Board is getting calls from investors looking for “distressed” plants to buy.

But many more people in rural communities are keeping an eye on the industry’s slowdown.

“Broadly, it creates uncertainty across the rural landscape,” says Chad Hart, an economist at Iowa State University in Ames. “Ethanol was seen as one of those industries that was reinvigorating rural communities ... bringing some economic activity back to the countryside, helping to hold people in rural areas.”

The difficulties for the ethanol industry also come as the federal ethanol mandate falls under increased attack. Livestock farmers and the meat industry want the US Environmental Protection Agency to suspend the mandate, arguing that it is driving up the price of corn and squeezing ranchers and other farmers who buy corn to feed their chickens, pigs, and beef cattle.

Agricultural economists say that suspending the mandate may not make much of a difference in either ethanol production or the price of corn. Indeed, last year’s production exceeded the mandate.

Drought is not the only factor affecting the ethanol business. Ethanol prices are low in part because petroleum companies stockpiled ethanol last year. Meanwhile, demand for gasoline has ebbed because of the worldwide economic slowdown and improved fuel efficiency in the US.

The ethanol industry has endured difficult times before. In 2008, some ethanol plants went bankrupt when the price of corn spiked. “I think most ethanol producers learned some lessons in 2008,” says Mr. Hartwig.

Economists expect the current slowdown to be temporary and business to revive as inventories shrink and ethanol prices rise. Chris Hurt, an agricultural economist at Purdue University, in Lafayette, Ind., says margins seem already to have improved. In late June and early July, he says, plants were losing about 70 cents for every bushel of corn they turned into ethanol. Today, he says, they’re closer to the break-even point. And as Kyle Phillips, an Iowa corn grower who has invested in three ethanol plants, says, “Next year’s another year.”

Still, estimates of this year’s corn crop continue to disappoint. With new Agriculture Department figures coming out Friday, Mr. Hurt says the US corn crop is likely to have decreased 20 to 22 percent from earlier expectations.

“Anybody that uses corn is worried,” he says.

IN PICTURES: Drought in the USA 

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