The building boom in ethanol plants will go bust by the end of this year, scuttled by increased supplies of the fuel, falling prices and reduced return on investment, according to researchers at Iowa State University.
If they're right - and some who follow the industry and invest in it believe their forecast is off the mark - ethanol may not bring the same level of profits that plant investors have enjoyed in recent years.
"We think the expected returns to an ethanol plant are zero or negative in 2008," said Bruce Babcock, economist and director of the Center for Agricultural and Rural Development at Iowa State, in Ames.
At last count, 78 ethanol plants were under construction nationwide. Meanwhile, corn-based ethanol output has been growing fast; this year, U.S. plants will yield about 6 billion gallons.
"As we move beyond six, seven, eight billion gallons, we think the price will drop," Babcock said. "As the prices drop, the margins drop. We think that will turn off investment."
Babcock and his colleagues forecast that ethanol production will reach 11 billion gallons next year and peak at 14 billion by 2010. They foresee almost no growth in production in the six years thereafter.
The U.S. ethanol industry, with the help of billions of dollars in government subsidies, has brought a cascade of riches for investors. Some of the 16 ethanol plants in Minnesota, for example, paid for themselves in less than two years. Little wonder that five more are under construction in that state.
But even with a 51-cent-a-gallon federal subsidy, Babcock said, profits will be hard to come by in the years ahead - especially for newcomers that have yet to pay off the cost of building an ethanol production plant.
Some producers acknowledge as much.
More states may follow Minnesota in requiring that gasoline contain a 10 percent blend of ethanol. But ethanol producers will be making more than enough fuel to meet that demand, said Gerald Tumbleson, a Sherburne, Minn., farmer, ethanol plant investor and chairman of the National Corn Growers Association.
"As far as the ethanol market, we'll hit a blend wall," he said. "We could hit that in a year."
Corn growers' groups, despite resistance from automakers, have been lobbying Congress and state legislatures to require even higher proportions of ethanol blended into gasoline. Automakers contend that higher mixtures of ethanol can reduce vehicle performance or damage engines, a claim that corn growers are countering with their own research.
Whatever the outcome of that debate, Babcock said the demand for ethanol is not likely to rise substantially soon, despite the fact that millions of E85 vehicles - those that can run on blends up to 85 percent ethanol - are on the road.
"Most of them are located where there's no ethanol," he said.
The leader of the Renewable Fuel Association, however, believes the Iowa State researchers are overstating the case for an ethanol glut in the years ahead.
"Looking at a static marketplace, Professor Babcock might be right. But this is not a static marketplace," said Bob Dinneen, president and chief executive of the Washington trade group.
As many as 4.5 million new E85 vehicles are being sold every year, and half the nation's cars and trucks will be rated to use E85 by 2020, Dinneen said. The growing number of E85 vehicles will spur demand for service stations to sell the fuel, he said.
"Consumers are looking for options and flexibility," Dinneen said. "They're looking to be empowered, to be able to power their vehicles with something other than petroleum."