To encourage ethanol production,U.S. Congress has passed legislation that provides subsidies to ethanol producers and mandates oil companies to blend at least 4 Ggal of ethanol with gasoline annually. Furthermore, ethanol retail prices have been closely following gasoline prices in recent months, and boosting profits beyond expectations.

However, the ethanol market might be overheated. For example, a California company in the midst of constructing several ethanol plants, but still not operating, saw its stock prices quadruple over a period of five months.

Investors have experienced attractive returns in recent months, but share prices appear to have peaked as the supply of ethanol has begun to catch up with the strong demand experienced in recent months. Nevertheless, with the current cost of production of corn ethanol estimated at about US$1.10/gal and a government subsidy of US$0.50/gal, the net cost of ethanol to producers is US$0.60/gal, which is considerably less than the Chicago futures price of US$1.75/gal for the December contract. This provides some support for those who contend that the ethanol industry can be sustained without the government subsidies that expire in 2010. In the U.S., ethanol is made almost exclusively from corn, and Iowa is the leading producer. Currently, 4.8 Ggal of ethanol is produced annually in the U.S., using about 16% of the U.S. corn crop. Still, ethanol makes up only 3% of U.S. annual gasoline consumption, highlighting the limited ability of corn ethanol to reduce U.S. reliance on crude oil imports.

If the entire 10.7 billion bushels (Gbu) of corn that the U.S produces annually were to be used in ethanol production, this would displace about 20% of the total gasoline consumed in the U.S. each year. Technological advances have improved the efficiency of ethanol production from traditional feedstocks. A recent example is the new method of producing ethanol from corn developed by food science researchers at Purdue University. This new method produces about 2.85 gallons per bushel of corn, slightly higher than current methods. Another benefit of the new method is the biodegradable by-products that are safe to eat.

Researchers used machinery originally designed to make plastics to grind the corn and to liquefy the starch with high temperatures. This reduced the amount of water normally used in the wet milling process by about 90%, and electricity use was reduced by almost 50%.


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