This week is the 22^nd annual Fuel Ethanol Workshop in Milwaukee, WI and judging by the number of attendees, it is a popular topic.  With 37 plants under construction (compared to over 100 that exist), there is no shortage of new ethanol plants being built.

However, with high fuel prices and relatively cheap corn, there still needs to be careful consideration when building a new plant. One of the key costs for a plant is corn, which can account for over 50% of all plant operating costs. Therefore, carefully weighing your local market for corn can be crucial for a new plant.

In the next few columns, I will focus on some valuable lessons for locating an ethanol plant as it pertains to corn markets. The columns are from a speech I will be giving at the upcoming Fuel Ethanol Workshop and the results are based on over 30 different analyses we have conducted for new ethanol plants.

Since corn is a key cost, it’s not surprising that locating the plant next to cheap corn supplies is important for the bottom line. Current ethanol plants have been drawn to areas of cheap corn, such as Iowa, Minnesota, South Dakota, and Nebraska. New plants under construction continue to be built in these areas, but they are also being sited in the Eastern Cornbelt and Western Plains.

With a high concentration of these plants in low-cost corn markets, the result has been fewer available supplies in these regions as well as relatively higher prices. This makes it difficult for potential new plants to come in.

The bottom line is new ethanol plants are quickly taking more and more corn out of local markets. In the table below, we have estimated the percent of corn usage by state relative to total production by state. This includes livestock feed as well as ethanol usage. In essence, this can be thought of as free supplies that are available for potential new plants.

Corn Usage as Percent of Production

What’s interesting is the big jump in one year as a result of new plants. For example, Nebraska will use 16 percent more of its corn for new ethanol plants in 2006/07, making its total usage at 72% of state production.

What is even more alarming is that if you take these key states for corn production, then there is only enough free corn at current production to feed an additional 12 billion gallons of ethanol production. When you consider that in 2006/07 there will be approximately 2 billion gallons of added, then this leaves little room for continued expansion at current supplies.

So, if you are considering locating a new plant do you locate in areas of heavy corn production but a high concentration of ethanol plants? Or, alternatively, do you go to an area with less corn but limited competition from existing plants?

The table below shows the results of some ethanol feasibility studies for select sites by state or region. In Iowa, for example, the plant site was within 50 miles of 5 major ethanol plants. Under these conditions, the competition from nearby plants causes a relatively large impact of 15 cents a bushel. However, the long-run 10year average price for the plant is 232. If you compare this to other areas with less corn, the impacts vary but by and large prices are still higher at these regions.  

Price Impact of New Ethanol Plant*

*Based on individual plant analysis for specific locations. Impacts may not be representative for other areas within a state or region.

What this all means is that prices are still driven by supplies. As such, there is still room in some of the key corn producing states to locate new ethanol plants. However, with new plants entering the marketplace at such a rapid rate, conditions could change in a year or two to favor areas with less corn.

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