A speed bump in ethanol country
Construction of new ethanol plants in Illinois has stalled, a sign that the ethanol boom that's fueled a Farm Belt renaissance has peaked.
Falling ethanol prices, combined with rising costs for financing, construction and the corn used to make ethanol, have forced developers to put dozens of plants on ice.
Since 2006, the state has issued permits for 38 new plants. So far, just five are under construction. Observers doubt the remainder will be built anytime soon.
"None of the new projects are going to go forward in this environment," says Chet Perry, CEO of ITEC Refining & Marketing Co. in Barrington, whose plans to build an ethanol plant in Downstate Princeton are now on hold. "It's not even a situation where the banks have to tell us" to stop, he says. "We see the red ink."
The slowdown in plant construction signals, at best, a cooling of the ethanol-driven transformation of the perennially dicey farm economy.
Rural towns plagued by population loss and disinvestment over the past three decades had in the past two years started attracting dollars and new jobs as investors rushed to capitalize on ethanol and build plants.
Demand for corn as an ethanol feedstock has driven prices to record highs, filling farmers' pockets with cash that they spent on new tractors, pickup trucks and equipment. Land values have risen with the price of corn, further boosting farmers' wealth.
The USDA is projecting that net farm income nationwide this year will increase 48% over 2006, to $87.1 billion.
"It's a huge increase and ethanol has been a big part of it," says Robert Wisner, a professor of agricultural economics at Iowa State University.
"The capacity build out has overrun the market," says Will Babler of First Capitol Ag, a commodity brokerage and consultancy in Galena. "I think a lot of ethanol plants will be shelved."
The threat of a glut has pushed ethanol prices down to about $1.64 per gallon, 35% below last year's average price of $2.52. Many existing plants are operating at break-even, according to industry experts. For the plants still on the drawing board, though, the price is simply not high enough to cover construction and financing costs.
Construction costs have increased as much as 50% in the past year and interest rates have climbed. Tom Hauser, a vice-president for Denver-based CoBank, says lending has slowed to a trickle and is only being done "on an extremely exclusive basis" for established ethanol producers.
"If it's somebody new on a 'greenfield' site, I'm extremely skeptical about how many of those will be able to get the debt and equity to do a plant," says Mr. Hauser, whose bank has been involved in financing about 50 ethanol plants.
Developers say they're not throwing in the towel on their plans. ITEC Refining's Mr. Perry says he's hoping construction costs will fall enough to begin building next year in Princeton. American Ethanol Inc., which has permits for six plants in Illinois, hopes to begin construction on at least one next year. Nevertheless, Andy Foster, chief operating officer for the California-based company, says raising money is a struggle.
"There's still an appetite for renewable fuels, but I won't say it's exuberance like it was," Mr. Foster says. Excerpts from ChicagoBusiness.com