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By Fanna Haile-Selassie

The economics of ethanol

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PRESTON, MN (FOX 47) -- The volatile futures market for corn and petroleum has played a large role in the collapse of VeraSun and the struggles many other ethanol plants are dealing with today.

It wasn't too long ago that dairy farmers and consumers were complaining about high corn prices due to the rise in ethanol production. Plants popped up all around the country. And then just about one month ago, a major ethanol company filed for bankruptcy.

"These are very challenging times for the ethanol industry compared to just a couple of years ago. Which I would probably described as a gold rush period of time," says Poet Biorefining general manager Richard Eichstadt.

One of the problems can be found in the commodity futures market, the matter of supply and demand.

"Any time you have a new demand for a product, you're going to raise the price of the product. People want it more and they say, well I'll give you two buck. And somebody else says, well no, I want it for my ethanol plant. I'll give you three bucks," explains Steve Taff, a University of Minnesota agricultural economist.

As corn prices continued to rise with no telling how far it would go, ethanol producers decided to lock down corn prices by buying bushels years in advance. Now, corn prices have split in half from what they were at the beginning of the year, but so have ethanol prices.

"We know the price of ethanol tracks the price of gasoline. When people want gasoline, they need ethanol too," says Taff.

So, ethanol plants are left with high-priced contracts they need to pay up, and low costing product. While many ethanol plants may be worried about the future, officials with Preston's ethanol plant Poet says their company will do just fine.

Eichstadt says Poet engineers have created proprietary technology which can produce more ethanol out of corn than other plants. However, Eichstadt says things will get worse for the industry before they get better.

"This next year could be a very challenging year for a lot of the ethanol plants, a very challenging year."

Eichstadt says he is confident that while major automakers will look into electrical and battery-operated cars. He says ethanol technology is ready and available now and will continue to do well.

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