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While the U.S. will have the capacity by the end of 2008 to produce 13 billion gallons of ethanol, the maximum ethanol the market can handle is 12 billion gallons, and perhaps considerably less, said an Extension agricultural economist from Purdue University in Indiana.
"Ethanol production capacity has grown tremendously fast, and it's going to almost double from its high level today to the end of 2008," Wally Tyner said. "It has grown so fast that the capacity to produce is bigger than the capacity to market."
As a result, Tyner and colleagues forecast a few possible changes in 2008:
* The price of ethanol will be lower.
* Some ethanol plants will have to reduce production or shut production down.
* Some ethanol may have to be exported.
However, Tyner said a combination of these factors is most likely.
"There will be a lot of pressure on ethanol prices in 2008 and with high corn prices, that means there will be a lot of pressure on profitability of ethanol during the next year," he said.
Corn prices will be soaring as a result of rapid ethanol development.
Terry Francl, an economist for the American Farm Bureau Federation, said prices for key U.S. crops such as corn and soybeans are likely to remain at high levels this year, as competition for acreage to plant these crops continues.
"Crop supplies in 2008 will remain tight, prices will remain high and strong competition will continue between corn and beans for acreage," Francl said. "The tight supply-and-demand balance sheet that's been in place for nearly all crops will continue for at least another year."
He said demand for U.S. corn and beans shows no signs of slowing, and that means prices are likely to stay high.
"There's a 90-percent chance that corn prices may match or exceed the old record of $5.54 per bushel that was set in 1996, and there's a 75-percent chance corn prices could reach $6 per bushel during the spring," he said.
Tyner said the challenge is that once all this ethanol is produced, it has to be made available to consumers at gas stations, and shipment of ethanol is an issue.
He said that in order to build the ethanol market to its maximum potential 14 billion gallons, or 10 percent of gasoline consumption the capacity has to exist to transport it by rail to the East Coast, the West Coast and the South. Because of its corrosive nature, ethanol can't be moved by pipeline.
"Once at its destination, there needs to be terminal blending capacity so the ethanol can be blended," Tyner said. "That means building new tanks and, in some cases, building new rail lines into the terminals.
But while ethanol supplies have exploded and corn prices are up, U.S. ethanol plants have generated hundreds of millions of dollars to local, state and federal governments through direct and indirect economic generation, according to a new report by Ethanol Across America.
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