For more than 15 years ethanol producers have been on a joyride, watching as their industry continued to beat market expectations. Now those same producers are in for a year in which production remains flat year-over-year and potentially even decreases.
The Ethanol industry was pushed along from 2005 through 2011 thanks to government mandates which helped subsidize the industry while requiring the use of ethanol based gas additives. During that six-year period ethanol production tripled to nearly 14 million gallons in 2011. Based on that production schedule ethanol was making up 40% of US corn production which in turn pushed up corn prices.
Now according to the Wall Street Journal gas demand in the United States is down by 6.7% from its 2007 peak. In the meantime US capacity is outstripped demand as consumers buy less gas.
This is not the first bump in the ethanol paved road, in 2008 producers were hurt and in some cases forced to close down ethanol producing plants when a surge in corn prices cut too deeply into profits.
The decline in gas consumption throughout the United States this time around seems to be having a more adverse reaction, according to one economist:
“A lot of people are rethinking their assumptions on the ethanol industry and the potential size.”
While most agricultural based states are expected to weather the storm the effects specifically in corn communities are already being felt and will likely worsen if gas consumption remains low and supply continues to outstrip demand.
Are you surprised by the sudden fall of the ethanol industry?