Analyst sees 'looming glut' in ethanol

U.S. ethanol supplies will rise by more than 90 percent by the end of 2008, outstripping even the most aggressive forecasts by industry groups, Fimat Energy analyst Antoine Halff said in a report published on Monday.

"Surging capacity ... poses daunting challenges for the ethanol industry, including heightened competition for feedstock and the logistical headache and costs of shipping ethanol from the Midwest to the main gasoline markets," said Halff.

The huge increase in ethanol output is likely to crimp the profitability of the entire industry, which has attracted huge capital inflows this year, Halff noted.

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Fimat expects 4.49 billion gallons per year of new ethanol production capacity to be constructed by the end of 2008, far more than the 2.43 billion gallons predicted by the Renewable Fuels Association, an industry lobby group.

The surge in capacity means that ethanol production will exceed the 2012 renewable fuel standards imposed by federal legislation by early 2008, leading to possibly severe downward pressure on ethanol prices in the Midwest.

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Industry groups and farmer lobbies are already pushing for an increase in the ethanol mandate to avoid the coming crunch, but Halff suggests the solution to the problem will likely be the wider adoption of E85, a blend of 85 percent ethanol and 15 percent gasoline in the Midwest.

By the end of 2008, ethanol production capacity in the Midwest will be sufficient to replace 25 percent of Midwestern gasoline demand, Halff said.