The Verasun announcement last week that they were slowing construction of a plant in Indiana is being pointed to as the harbinger of similar news across the biofuel industry.
In other words, the lion's share of inducements have gone to production—call it supply-side energy policy. But crudely stimulating this ethanol is actually the cause of the ethanol backlash. As production increases, the price of the commodity used in the process (corn) rises. So does the price of the expertise and materials needed to build capacity. During the railroad boom, the cost of steel and the salaries of engineers rose. During the dot-com boom, the cost of fiber-optic capacity and the salaries of Web programmers rose. The Wall Street Journal reported that the cost of building a new ethanol plant has risen from $1.50-per-gallon last year to $2.20 per gallon today.
The combination of rising commodity prices and production costs and a glut of product makes it more difficult for the manufacturers to turn a profit. In the second quarter, Verasun's gross margins shrunk to 19.2 percent, compared with 41 percent in the same quarter the year before. In its second quarter, Aventine gross margins shrunk from 11 percent to 6.9 percent. Verasun said earlier this week it would suspend construction of a refinery in Indiana. [More]
I'm not so sure.
I think this is more simply pushback against a construction cost squeeze, and a convenient way to reinforce the need for a larger RFS mandate in the energy bill. And given the relative ease with which the Senate seems to find money for ag, I think Congress will ponder for only a few seconds before raising the mandates.
Reform of any kind in Congress is playing about as well as the Cubs in postseason.