Ethanol Profits May Shrink on Supply Glut

Some analysts are saying the ethanol industry will stumble soon thanks to a big supply and lagging transportation capabilities.

As ethanol production expands rapidly and efficient systems for distributing biofuels are lacking, some Wall Street and university analysts say in an Associated Press report that a supply glut and shrinking profit margins will cause a stumble in the ethanol industry.

"It's going to be a little bit of a bumpy ride, I think, but in the long run we are bullish on renewable fuels and believe that they are going to be a part of our domestic fuel stream for a long time to come," says Ommen, chairman, president and CEO of US BioEnergy, in the report.

Analysts at Lehman Brothers predict a 1 million gallon per day surplus starting later in 2007, partly due to a boom in plant construction and even more because of transportation issues.

"The supply is coming online and there isn't really an efficient way to get it to the demand centers on the East and WestCoasts," says Michael Waldron, co-author of the Lehman Brothers report.

The Renewable Fuels Association estimates that the U.S. will produce about 7 billion gallons of ethanol this year, up from nearly 5 billion last year.

In a report late last month titled "The Ethanol Floodgates Have Opened," Bank of America analyst Eric K. Brown downgraded ratings on several ethanol-related stocks.

"We expect the relentless supply of new ethanol production capacity will lead to a 70% decline in margins by 2009," he writes.

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