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September 30, 2007
Something happened on the way to bio-fuel heaven for farmers and producers of ethanol.
A little thing called the law of supply and demand:
The ethanol boom of recent years -- which spurred a frenzy of distillery construction, record corn prices, rising food prices and hopes of a new future for rural America -- may be fading. At least it shows that capitalism is alive and well in America in the 21st century. It's pretty impressive that after a just a couple of years, industry and entreprenurs have constructed so many ethanol plants that the glut has driven down the price of the fuel so precipitously. Of course, it also means that so much corn is being diverted to ethanol production that the price of processed food dependent on corn for important ingredients has gone up.
A Glut of Ethanol Only last year, farmers here spoke of a biofuel gold rush, and they rejoiced as prices for ethanol and the corn used to produce it set records. But companies and farm cooperatives have built so many distilleries so quickly that the ethanol market is suddenly plagued by a glut, in part because the means to distribute it have not kept pace.
The average national ethanol price on the spot market has plunged 30 percent since May, with the decline escalating sharply in the last few weeks.
The real danger lies with the coming bust causing Presidential candidates to want to out promise their rivals in promising relief from those who have overinvested in ethanol:
While generous government support is expected to keep the output of ethanol fuel growing, the poorly planned overexpansion of the industry raises questions about its ability to fulfill the hopes of President Bush and other policy makers to serve as a serious antidote to the nation's heavy reliance on foreign oil. Read the rest of the article in the Times for some excellent background on the ethanol boom and bust.
And if the bust becomes worse, candidates for president could be put on the spot to pledge even more federal support for the industry, particularly here in Iowa, whose caucus in January is the first contest in the presidential nominating process.