Questions about the corn ethanol industry's profitability are beginning to slip into news coverage that, on the whole, continues to be overwhelmingly positive.

Indeed, to an outsider, the industry's recent rapid expansion — and the seemingly unbridled enthusiasm surrounding it — might bring visions of a '90s-style dot.com bubble about to burst. But unlike the dot.com era, the corn ethanol industry's success is tied to one fundamental — strong demand for liquid fuels.

“In the U.S., we have had an insatiable demand for energy that isn't likely to change,” notes Chad Hart, an Iowa State University (ISU) economist with the Center for Agricultural and Rural Development. “Because of this, ethanol has strong potential for growth.”

To lend perspective to questions about the industry's future, we asked Hart, coauthor of a recent ISU study on the impact of the ethanol industry on agricultural commodities, to highlight challenges that could face the industry in the next few years. (The study, “Emerging Biofuels: Outlook of Effects on the U.S. Grain, Oilseed, and Livestock Markets,” is available at www.card.iastate.edu/publications/synopsis.aspx?id=1050.)

Hart identifies five factors, in order of their potential impact, that could affect the profitability of the corn ethanol industry in the next few years. The factors highest on the list, such as dramatically lower oil prices and reduced government support for ethanol, are wild cards. They're unlikely, but if they were to occur, they could have a major effect. Other factors, which are lower on the list, are likely to occur, but are unlikely to have as much impact.

Factor 1

OIL PRICES

According to the ISU study, the oil futures market suggests that prices are likely to remain in the $65/barrel range for the foreseeable future. However, Hart says that oil prices tend to be volatile and that prices in the $20 to $40 range are fairly recent. So although dramatically lower oil prices aren't likely, they are possible.

“If we were to return to $30/barrel oil, that would tend to put the brakes on the U.S. ethanol industry,” Hart says. A November 2006 ISU study calculated that, at $40/barrel oil, ethanol refiners could afford to pay $2.67/bu. for corn. “Today's corn prices couldn't be supported if crude oil was below $40/barrel,” he adds.

Factor 2

GOVERNMENT SUPPORT

Given recent energy bill deliberations, support for ethanol probably won't fall by the wayside. “The government is moving toward more support,” Hart says. But this wild card could have a big impact if it were to occur.

Factor 3

OTHER BIOFUELS

Political support for ethanol from cellulose continues to be strong, but this technology isn't competitive with corn-based ethanol at this point. (See “Suitable cellulose,” page 28.) If and when ethanol from cellulose becomes viable, the impact on corn-based ethanol could be substantial.

“Producing cellulosic ethanol is technically feasible, but it is not economically competitive at this point,” Hart says. “Right now it costs at least $1/gal. more to produce ethanol from cellulose than from corn.” Researchers around the world are working to improve the process, but getting breakthroughs from the lab to the pump could take years.

Biobutanol (butyl alcohol produced from biomass) is another technology to watch, though it also faces development challenges to improve its efficiency. If these challenges were solved, this fuel would have the advantage of being able to be shipped through gasoline pipelines, since it isn't as corrosive as ethanol.