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By Robert Rapier on Sep 7, 2007 with no responses

Where Your Tax Dollars Are Likely Headed

I have said before that a shakeout in the ethanol industry is inevitable. As I wrote here:

When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980′s.

And here:

“Capacity was being built well in excess of the mandated amounts. This ends up squeezing producers on both ends. I have been predicting for at least a year now that there will either be a massive shakeout of ethanol producers—or more likely there is going to be a massive bailout by the government. I also see a high probability that the mandated numbers will be increased to help the producers.”

I recently got the following story via e-mail:

Study: Without more government help ethanol plants could go bust

It spells out the scenario I have envisioned:

Ethanol producers have friendly government policies to thank for the current boom in the corn-based alternative fuel and will need more help from Washington to keep from going belly up in a few years, says a new study.

Without a federally mandated increase in ethanol consumption, small plants could stop being profitable by 2011 and be operating in the red in 2013, according to the study by David Peters, an agricultural economist at the University of Nebraska-Lincoln.

Large plants, meanwhile, could see profits cut in half in four years before losing millions of dollars in seven or eight years and being forced to rely on reserves to cover losses.

Well, we can’t have that, because then Osama wins! Would you rather send your money to a sheikh in the Middle East, or a hard-working farmer in the Midwest? Easy choice. (Think of Lee Greenwood’s “Proud to be an American” as you read that).

More government-driven demand could be particularly important for Corn Belt states such as Nebraska and Iowa where plants have sprouted quickly and are seen by politicians and others as a way of revitalizing struggling rural areas.

But Peters said financial projections for a fuel whose demand “is entirely government driven” show that plants shouldn’t be counted on as a reliable tool for rural resurgence.

The study found that a combination of high corn prices, rising energy costs, lower demand for ethanol in coming years and expiring government tax credits in 2011 could cause a 40 million-gallon plant to lose $1.4 million in 2011 if the current requirement for ethanol consumption isn’t increased. And the slide could begin soon: In 2009, net profits for such a plant could slip from a high of $45 million last year to about $3.6 million, with most of that coming from government tax breaks.

Revenues at larger plants, meanwhile, “will experience a slow decline over the coming decade as the 7.5 billion-gallon fuel standard is met,” the study says. The study says that By 2013, 100 million-gallon plants might only break even.

We are never going to reach energy independence unless we keep subsidizing these ethanol plants and mandating more ethanol usage. After all, we are too close to turn back.