U.S. ethanol output is not expected to drop, despite crude oil prices hitting a new low for 2006 on Wednesday, said Keith Collins, chief economist of the U.S. Agriculture Department.

"I really don't foresee any decline based on lower oil prices," said Collins at the Advancing Renewable Energy conference in St. Louis.

"Oil prices are not that low and the rate of return on ethanol production is still very strong," he added.

The monthly rate of return on invested capital in early summer for a typical dry mill ethanol plant, with 40 percent equity, was 200-250 percent, Collins said.

Even with lower oil prices reducing the return, the rate of return would still be substantial, he said.

U.S. crude oil fell fell sharply on Wednesday with November delivery crude on the New York Mercantile Exchange falling 93 cents to close at $57.67 a barrel as markets awaited a formal OPEC cut agreement, sources said.

Perform Instant Background Checks

Ethanol production is profitable as long as crude oil prices remain above $40-$45 per barrel, said venture capitalist Vinod Khosla, another speaker at the two-day conference that attracted 1,500 participants.

"I believe ethanol is competitive with gasoline at any price of oil up to $40-$45 a barrel," said Khosla, co-founder of Sun Microsystems. "If prices do fall below that level for a while, then in fact there is a danger."

Most forecasts call for oil prices to stay well above $40 a barrel.

The fall in crude oil sent ethanol futures at the Chicago Board of Trade down 1 to 7.5 cents per gallon, with the November contract down 4.5 cents at $1.85 per gallon.

When crude oil was trading above $78 a gallon earlier this year, companies were scrambling to build new ethanol plants to meet the growing ethanol demand fueled by high oil prices, government mandates and the phaseout of the water-polluting additive MTBE.

The amount of U.S. corn used to make ethanol is forecast to rise 34 percent to 2.15 billion bushels this year, according to USDA.

"I think it's a forecast that is still on track," Collins said.

With more corn being used to make ethanol, corn ending stocks are forecast to fall 40 percent to 1.22 billion bushels. Tighter supplies have helped drive corn prices at the Chicago Board of Trade to a 2-year high.

USDA will issue a monthly report on ending stocks and production on Thursday morning.

About 1,500 people are attending the two-day alternative energy conference, sponsored by USDA and U.S. Energy Department. A speech by President George Bush will wrap up the event on Thursday.