As more and more ethanol plants went online and started buying corn, the price naturally shot up. In 2005 when a lot of new ethanol plants were planned corn was under $2.00 a bushel. By mid-2008, corn peaked at over $5.50 a bushel. Many ethanol plants had locked in futures contracts for corn at high prices to make sure they had enough supply. Then the price for ethanol dropped, and the plants were in bad financial condition paying more for their raw material and getting much less for their finished product.
As we've seen, when we adjust corn prices for inflation, the spike in 2008 was not as great a change as during the agricultural boom of the 1970s.
As the demand for ethanol shot up because of rising oil and ethanol prices plus governmental mandates and incentives, construction of new plants shot up as well.
Troy Otte (left) was one of those producers who invested in the ethanol boom. When he was interviewed in 2007, the Advanced BioEnergy plant at Fairmont was getting ready to start producing ethanol. "I was at the right spot at the right time, or the wrong spot at the wrong time, one of the two," Troy said with a smile. He made a substantial investment in the plant and sits on its board of directors. It's good for the local community," he said. "If corn [price] is high, the farm wins. If corn is low, the ethanol plant wins. So, one way or the other, it kind of puts a synthetic floor under the corn price."
Agronomy professor Don Lee (right) sees the advantages of ethanol for producers, but he also sees the dangers. "Political decisions have really driven the ethanol industry," Don says. "If you're a [agricultural] producer I have a tough time seeing where ethanol is a bad thing. The only way a producer or a farmer could be at risk is if they invest a lot of their own money in that ethanol plant and it really isn't a well-thought-out longer-term economic decision. So, we'll see how it goes. My own prediction is that it [ethanol] will find its place in our production systems."
The boom in plant construction peaked in 2007, and then dropped as low ethanol prices and high corn prices put many of the new plants into financial difficulty. Also, the recession of 2008 and '09 decreased demand for gasoline, ethanol and corn.
The ethanol boom was in danger of becoming a bust.
Yet, ethanol advocates insist that, over the long term, renewable energy sources are good for the country and the rural economy. In 2009, new president Barack Obama reassured the ethanol industry about his administration's support. Some of the huge economic stimulus money was set aside for biofuels, and the production mandates were still in place.
Written by Bill Ganzel, the Ganzel Group. First published in 2009. A partial bibliography of sources is here.