Converting sugar cane to ethanol is a money maker today but may not be for long if ethanol prices decline as expected.

That's the conclusion of a U.S. Department of Agriculture study released yesterday, which raised questions about the state-backed push to produce ethanol from sugar cane in Hawai'i.

However, several companies that plan to produce ethanol in Hawai'i said the USDA report doesn't affect their decision to move forward because it ignores several factors that will reduce the cost of producing ethanol in the state, such as the most generous ethanol tax subsidies in the country.

At current market prices of about $4 a gallon for ethanol, converting sugar cane, sugar beets, raw sugar and refined sugar to ethanol is profitable, the department said in a report. However, the report added that those market prices are expected to drop as more ethanol is produced, mostly from corn.

"At this high, unusual price, I can conclude that it's economically feasible to produce ethanol from sugar cane and sugar beets," the USDA's chief economist, Keith Collins, said at a news briefing in Washington, D.C. "However, I would not want to pour concrete based on $3-a-gallon ethanol prices" because the future market predicts ethanol will drop to $2.40 by next year.

At that price, converting sugar cane to ethanol would not be economically feasible because it costs about $2.40 a gallon to produce ethanol from cane, according to the report. The report, however, didn't take into account several factors particular to Hawai'i. In addition to savings achieved through tax credits, Hawai'i ethanol producers can defray production costs by selling electricity created as a byproduct of ethanol production, said William Maloney, president of Maui Ethanol LLC.

Maui Ethanol plans to build a 12 million-gallon-a-year ethanol plant on Kaua'i that could help quench a 40 million-gallon-a-year thirst for ethanol created by a state mandate that requires most gasoline sold in Hawai'i to contain 10 percent ethanol.

Unlike on the Mainland where electricity rates are cheap, the sale of electricity could generate an added 70 cents per gallon of ethanol produced in added revenues for Hawai'i ethanol makers, Maloney estimated.

"That's the difference, and that's why we're doing this in Hawai'i and not in Louisiana or Florida," he said.

So far no ethanol is produced locally, though there are a half-dozen ethanol production facilities under consideration in Hawai'i. Maui Ethanol doesn't expect to begin production until late 2007.

The USDA report did find that molasses, a byproduct of sugar cane and sugar beets, could be used to produce ethanol at a price in the neighborhood of corn, which is the main source of U.S.-produced ethanol. Alan Kennett, general manager for Gay & Robinson, which is partnering with Maui Ethanol, said it plans to use molasses to produce ethanol, then possibly corn if needed.

The report was put together through a cooperative agreement between USDA and Louisiana State University.

State officials hope the switch to ethanol-blended gasoline will reduce Hawai'i's dependence on imported oil while simultaneously boosting the state's struggling sugar sector.

"Long term I think there are multiple ancillary benefits in converting a crop such as sugar cane to ethanol," said Maurice Kaya, chief technology officer for the Department of Business, Economic Development and Tourism. "So we're still confident it will prove out in the long term."

Reach Sean Hao at shao@honoluluadvertiser.com.