Corn Husks

When a company has their best sales year and then files for bankruptcy, it signals a major shift in the underlying fundamentals of that business.

In his WSJ Cross Country column, Max Schulz reports on several Iowa ethanol plants that have closed or will close soon because of the steep drop in the price of ethanol. In 2006, “ethanol producers made $2.30 per gallon.” A few months ago, they made 25 cents.

Corn prices rose sharply in response to increased demand from ethanol producers. Demand for gasoline fell dramatically, causing producers to curtail capacity by 20%. In 2005, they had invested heavily in new plants in response to U.S. government guarantees and tax credits.

U. of Minnesota researchers calculated that it can take more than 1000 gallons of water to make a gallon of ethanol, yet ethanol replaces only 3% of U.S. oil usage. Two other researchers estimated that dedicating all 300 million acres of cropland to ethanol production would only replace 15% of the oil we consume each year.

President Obama is an ethanol advocate and is leaving current policy in place. Large food producers and oil refiners with deep pockets are looking to pick up some of these closed facilities for a song.

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