It is apparent that, when considering the growth in the ethanol industry as of late (there is currently twice as much manufacturing capacity under construction in the U.S. than is currently online), the industry could be heading for severe overcapacity.  So why do these refineries continue to get built at such a rampant pace with no apparent regard for the potential consequences?

Well, perhaps it’s because rampant building needs to happen in order for the industry to advance.  Confused?  Yep, this could indeed be the first step (well, as long as the production doesn’t get too out of control…). 

It has already been established that the ethanol industry has a long way to go before it reaches “critical mass”.  But by focusing on the technologies that we have right now and emphasizing them to the public, word of the industry’s virtues will spread.  A 2006 report issued by the World Resources Institute, anticipates that people may catch on and create a “tipping point” that sets the stage for the second phase of the development of the industry; a phase that focuses on higher blends of ethanol and new infrastructure investments required to allow for their consumption.   

So it’s not that new capacities need to be built, it’s that something needs to be done with these new capacities.  In effect, although they’re largely focused on the profit opportunities right now, ethanol producers may be positioning the industry for the next step.  E10 ethanol is being delivered to the gasoline pump, but do people really make a conscious effort to use it over traditional petroleum? 

The virtues of ethanol-based gasoline do not seem to be making a connection with the American public.  The supply side may be ramping up, but it is debatable whether demand will keep pace.  This puts pressure on the advertising departments for ethanol producers.  Personally, the only time I see advertising for ethanol is Sunday mornings on “Meet the Press” when commercials for U.S. market leader Archer Daniels Midland (ADM – $33.75) are aired.  Most other times I read about ethanol, a new plant is being constructed. 

Once this “tipping point” has been reached, financiers will likely feel more comfortable providing funds for the advancement of the current corn-based technology.  Some investors, such as prominent Silicon Valley venture capitalist Vinod Khosla, have already boarded the ethanol train and see a bright future for it.  He is pouring a lot of money into the development of next-generation ethanol technologies, such as a closed-loop processing system. 

Unfortunately for us, the rest of the country has not caught up, and it may be a while before it does. 

Disclaimer: I do not own any stocks mentioned above. I do not give investment advice.  Do your own research.  Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security. 

Disclosure: I do not own ADM and have not in the last two years. I do not plan on purchasing this security at the current prices in the near future.