Storm clouds are gathering over the controversial ethanol industry, as the United States takes steps to remove massive subsidies at a time when high corn prices are hurting profits.
In fact, one company now says ethanol margins have grown so thin that it's making more money selling cattle feed byproducts than fuel.
The conversion of corn into ethanol has long been a highly debated industrial pursuit in North America, where companies have been questioned on their green credentials and on the wisdom of creating an energy product from food.
But the industry has benefited from governments that have mandated ethanol content in gasoline and provided substantial financial supports.
Now, however, those supports are increasingly coming under scrutiny.
In Washington on Thursday, the U.S. Senate approved a bill that includes an amendment to end the 45-cent-per-gallon subsidy on ethanol. The Renewable Fuels Associations dismissed the action, saying the bill was "unlikely to make it to the President's desk."
Still, Republicans - with the support of some non-farm belt Democrats - clearly have ethanol subsidies in their crosshairs as they look for ways to slash federal spending to rein in a $1-trillion (U.S.) deficit.
"In biofuels, the bloom is off the rose," Christopher Hurt, an agricultural economist from Indiana's Purdue University, said Thursday.
In one particularly striking example, El Dorado, Ark.-based Murphy Oil Co. says that what profits remain at its ethanol operations aren't being driven by the 120 million gallons a year of fuel the plant was made to produce.
Instead, "it's primarily being driven by the sale of the byproduct from the process, which is dry distillers grains - it's cattle feed," Kevin Fitzgerald, the company's chief financial officer, told an investor symposium in Calgary this week.
For every bushel of corn that ethanol producers buy, they produce roughly a third of a bushel of distillers grain, a concentrated feed product with substantial nutritional value that sells at a premium to corn. So as corn prices have gone up, so have prices for distillers grain, to the point where "you can actually make enough on the cattle feed now to pay all the cost of operations of the plant," Mr. Fitzgerald said, adding that margins are "very low."
The same is true at the Murphy's newly-opened Hereford plant, where despite a capacity of 105 million gallons a year, "the net income and cash flow is being driven by the cattle feed," he said.
The difficult times come after a period of massive biofuels expansion. In the U.S., the volume of ethanol output has more than doubled since 2007 to just over 13 billion gallons a year.
But that growth hasn't been easy, with some operators pressed into bankruptcy and fire sales in recent years. Industry figures show the boom is largely over. Just 10 plants are under construction or expansion, the lowest number since 2001.
Ethanol makers have been accused of using too much water and energy and buying up valuable food; companies contend that the water is actually rain, that ethanol is cleaner than oil and that the lack of food shortages in North America demonstrate that the use of corn has not been harmful.
The industry is grappling with increasingly tough economics, driven largely by the price of corn, which makes up some 80 per cent of the cost of ethanol. Rising corn costs have, of course, come amid a broader trend of higher commodity prices, and "as the price of crude went up, the price of corn went up and the price of ethanol also went up," said Kenneth Field, the chairman and founder of GreenField Ethanol Inc., Canada's largest ethanol producer, which is privately held.
"The industry is not much less profitable. The profit is down a little bit, not a lot."
Similarly, Gordon Quaiattini, president of the Canadian Renewable Fuels Association said, "ethanol companies in Canada continue to be profitable."
Yet the main price drivers suggest pressure is building. Since January of 2010, corn prices have more than doubled. In that same time period, ethanol prices are up only 50 per cent. The economic shift is placing greater importance on feed sales even in Western Canada, where ethanol producers use wheat instead of corn. Wheat is selling for roughly 40 per cent less per bushel than corn, and the cheaper input costs are driving strong profits at companies like North West Bio-Energy Ltd., located near Unity, Sask.
"It's contributing a larger percentage of your revenue than it would have been in the past," said chief executive officer Jason Skinner. "It's probably up about 50 per cent from what it would have been about a year and a half ago."