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Ethanol: Hope or Hype?

Corn futures lost ground today after yesterday’s sell-off. Late last year the crop hit 10-year highs on speculation that ethanol demand would spike. Now a report from the Earth Policy Institute says that demand has been vastly understated. The result could be the highest grain prices in history.

Dylan Ratigan asked Environmental Group President Lester Brown if the critics were right about this whole ethanol craze being blown out of proportion. After all, ethanol costs just as much as fossil fuels to produce, and there isn’t supply enough to relieve the U.S.’s huge energy demands.

Brown says that a surge in the building of ethanol distilleries is causing the volatility. By the fall of 2008, these distilleries will be taking roughly half of the U.S. corn crop, he predicts. So there are real doubts that there will be enough supply for food processing, feeding, exports and these ethanol factories. “It’s going to be a tight corn situation in the next 12 to 15 months,” he says.

John Conolly of Advantage Futures also appeared on “Closing Bell” this afternoon. He says the government's push for alternative fuel development is playing a key role in the market's growth. As a result, prices are going up. If the trend continues, the demand for corn and other ethanol-creating products could be huge.

Ratigan questioned the logic behind a government-mandated spike in a soft commodity such as corn, especially when there’s no real proof it’s going to solve the U.S.’s energy problem.

Brown agreed, saying that the focus in the States should be on plug-in hybrids and wind farms. “We can do all our short-distance driving with electricity,” he says. Brown noted that the price of wind never increases.

Conolly said he personally knew people who were leaving the wind-farm business to start ethanol production facilities, adding that the government was paying a 51-cent premium for those that do.

“So the taxpayer’s subsidizing the whole process,” Ratigan quipped.

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  • With almost 30 years experience in business television, Bill Griffeth is co-anchor of the 3 p.m. ET hour of CNBC's "Closing Bell."

  • Kelly Evans

    Kelly Evans is co-anchor of CNBC's "Closing Bell."