ADM sees U.S. ethanol plant construction slowing

CHICAGO (Reuters) - U.S. ethanol companies are taking a cautious approach to building new plants, even though profit margins have improved with oil near $100 a barrel and the government is mandating the use of more alternative fuels, an executive with Archer Daniels Midland Co (ADM.N) said Tuesday.

"If you look at all the plants on the drawing board, we're fairly close to the mandated number of 15 billion gallons from corn," John Rice, ADM's executive vice president in charge of biofuels, said at the Reuters Global Agricultural and Biofuels Summit.

"I can't see people going ahead and building and adding a lot more capacity right now," he added.

ADM is a leading producer of biofuels.

The new U.S. Energy Bill passed last month gave the industry a boost with its call for biofuel production to jump five-fold to 36 billion gallons by 2022, with 15 billion gallons coming from corn-based ethanol.

U.S. ethanol production capacity is currently 7.6 billion gallons and is forecast to rise to 13.3 billion gallons by the end of 2008, according to the Renewable Fuels Association, an industry trade group.

The mandate and crude oil flirting with $100 a barrel have helped ethanol profit margins improve from a low of $1.53 a gallon this fall to around $2.40.

"Right now, we're seeing very good demand," Rice said. "Short term, it's really going to be mandate-driven ... It just accelerated the blending a little bit."

In the United States, ethanol is blended with gasoline up to 10 percent. In other countries, such as Brazil, ethanol is blended up to 85 percent.

Yet the return to better ethanol profit margins is tempered by corn prices soaring to above $5 a bushel, from $4 a year ago, and expected volatility in ethanol pricing.

"All the commodities we deal with have a lot of volatility," Rice said.

The volatility of corn, ethanol and crude oil prices has not stopped construction on ADM's two new ethanol plants.

The first plant will open this year in Columbus, Nebraska. The second plant will open in 2009 in Cedar Rapids, Iowa.

Each plant will be capable of producing 275 million gallons a year and each plant could expand to produce up to 400 million gallons, Rice said.

ADM can currently produce 1.070 billion gallons of ethanol and the Columbus plant will boost capacity to 1.345 billion gallons.

Privately held POET, currently the top U.S. ethanol producer, can produce 1.1 billion gallons and expects to reach 1.5 billion by the end of 2008.

However, both would be eclipsed by VeraSun VSE.N, which has said its impending purchase of US BioEnergy Corp USBE.O would boost its ethanol output to 1.6 billion gallons by the end of 2008.

(For summit blog: summitnotebook.reuters.com/)

(For more on the Reuters Global Agriculture and Biofuels Summit see ID:nSP132831)