MELISSA BLOCK, Host:
The flow has stopped at Husker Ag, an ethanol plant in Plainview, Nebraska. The company has stopped taking deliveries of corn while it tries to renegotiate the price it's paying. It's a symptom of the big problems for the ethanol industry lately. Start-up projects are on hold. Some plants are in bankruptcy. Husker isn't one of them, but its troubles come from the same volatile market conditions. And Chris Hurt joins us to talk about that. He's professor of agricultural economics at Purdue University. Professor Hurt, welcome back to the program.
D: Always great to be with you.
BLOCK: If you had to give the ethanol industry a health assessment at the start of this year, what would it be? What kind of shape is ethanol in?
D: Well, the ethanol industry is in a period of excess capacity, a situation where there was, perhaps, over-optimism for biofuels, perhaps over-optimism that the gold rush days of 2006 would continue for a long time. And it's really a symptom of too much production capacity when we have crude oil, gasoline, diesel fuel prices much lower, and it makes it very difficult for some of these biofuels to compete with cheap gasoline.
BLOCK: Well, let's break this down just a little bit. And let's start by talking about corn prices. What's happened to that over the last year?
D: We've seen a Jekyll and Hyde kind of a year in 2008. The first half, absolute boom period for prices. Second half of the year, just an absolute bust. We saw futures prices drop from $8 a bushel at their very highs in the June time period all the way down to about $3 a bushel. So, massive, massive declines putting producers into loss situation. And those lows came about early December. So in the last month, we've actually seen some recovery in prices, but ethanol margins still remain negative.
BLOCK: But if I'm an ethanol producer and corn is cheaper than it was, that seems to me would be a good thing. I can get a lot more corn.
D: Well, they also are energy producers selling ethanol as a substitute for gasoline. And all of us know how dramatically gasoline prices fell. So, what they're facing is much lower revenues from the ethanol that they produce. And still, while corn is much cheaper, it hasn't been low enough for them to have a profitable margin.
BLOCK: So in other words, the ethanol producers are selling their ethanol - the price of the ethanol they're selling has gone down as well.
D: And unfortunately, right now it looks like the demand for ethanol will be about 10 and a half billion gallons. So this is potentially an excess capacity. That is, more production capacity than there is demand. It generally means there's going to be a lot of battling for those existing producers to try to maintain their production and probably have low margins, and you have to discourage out that 15 to 25 percent that the industry thought would be needed in '09. It's just not going to be needed.
BLOCK: Why were those projections out of whack? Why is demand lower than they thought?
D: With much lower gasoline prices, ethanol is priced high relative to gasoline. In other words, we would pay more per mile that we drive for that E85. So what we're going to see in '09 is, yes, the mandatory 10.5 billion gallons of demand will be there, but what we're not going to have, as long as energy stays relatively low-priced, as we see now, is - the demand for these higher blends, like E85, are going to be very, very small in 2009.
BLOCK: Well, Professor Hurt, thanks so much for talking with us.
D: It's been my pleasure.
BLOCK: Chris Hurt is professor of agricultural economics at Purdue University in West Lafayette, Indiana.