Ethanol Evangelist Shrugs Off Volatility to Build Powerhouse

Source: By John Lippert and Mario Parker, Bloomberg • Posted: Friday, February 7, 2014

Todd Becker, chief executive officer of Green Plains Renewable Energy Inc., has built… Read More

Todd Becker couldn’t stop checking prices on his iPhone as he prepared to speak at a Nov. 21 investor conference in Manhattan. Ethanol was rising, and corn was falling, he says, driving potential profits on the gasoline additive to one of their highest levels in six years.

Becker, chief executive officer of Green Plains Renewable Energy Inc. (GPRE), says he didn’t want to wait for a bank loan, Bloomberg Markets magazine will report in its March issue. Instead, he ordered deputies to wire a third of the company’s cash — $108 million — and buy two ethanol plants, in Nebraska and Minnesota, from creditors of Denver-based BioFuel Energy Corp. He says he worried that if he didn’t jump, rival Valero Energy Corp. in San Antonio would snatch the properties, robbing him of a chance to expand annual production by almost a third to 1 billion gallons.

Such is Becker’s confidence in a U.S. industry rocked by at least a dozen bankruptcies since 2008. Some investors are still spooked after BioFuel defaulted on its debt amid a 2012 drought, leaving David Einhorn’s Greenlight Capital Inc., its largest shareholder, a victim of ethanol’s volatility.

Political challenges are piling up, too. Big Oil lists minimum ethanol requirements as its top policy concern for 2014 and wants to completely eliminate them. Government officials are already backtracking. A week before Becker bought the BioFuel plants, the Environmental Protection Agency proposed lowering its 2014 requirement for corn-based ethanol in U.S. gasoline to about 13 billion gallons from 14.4 billion.

Green Plains’ plant in Shenandoah, Iowa, makes 200-proof ethanol. The plant, one of 12… Read More

‘Bad News’

Senators Dianne Feinstein, a California Democrat, and Tom Coburn, an Oklahoma Republican, want to scrap mandates for corn-derived ethanol entirely. Ethanol consumes 44 percent of U.S. corn only to inflate food prices, harm the environment and potentially damage engines, Feinstein says. Rising U.S. crude output diminishes the need for ethanol, says Scott Faber, vice president of government affairs for the Washington-based Environmental Working Group.

“Ethanol is bad news for anyone who eats, drives a car or cares about the environment,” Faber says.

Becker isn’t deterred.

“It’s a contrarian play,” he says, driving along I-29 east of the company’s Omaha, Nebraska, headquarters. “But the fundamentals of ethanol are as good today as we’ve ever seen them.”

‘Cheapest Molecule’

Becker says ethanol, a form of alcohol made by fermenting starch from corn and other crops, will thrive because it contains the octane that modern, high-compression engines need. Ford Motor Co. and others are designing cars to run on ethanol mixtures greater than today’s 10 percent. And at $1.92 a gallon, ethanol costs refiners 28 percent less than petroleum products used to make gasoline.

“We’re the cheapest molecule in the fuel tank,” Becker says.

As for the environment, growing corn for ethanol is less harmful than drilling, refining and using oil for gasoline, Becker says. The technology isn’t yet commercially viable to make ethanol from switch grass and other cellulosic sources, which would require less energy to produce and release fewer greenhouse gases during manufacturing, use and disposal, Becker says.

“I’m not a dreamer,” he says. “I want to make money.”

Two Strategies

In the six years ended in 2013, Becker built Green Plains into a company with $3 billion in revenue and 700 employees with two strategies: He buys plants on the cheap and converts them for low-cost manufacturing, says Matthew Farwell, an analyst at Imperial Capital LLC in New York.

Green Plains also deploys sophisticated futures, options and swaps to make fewer wrong-way commodities bets than such rivals as now-liquidated VeraSun Energy Corp.

As corn soared 66 percent during the first half of 2008, VeraSun, the industry leader at the time, stumbled. It bet prices would continue to rise with futures contracts that would require VeraSun to pay more for the commodity than rivals if prices fell, the company said in a statement.

Instead of rising, corn tumbled 61 percent and ethanol fell 51 percent. VeraSun lost $476 million on revenue of $1.1 billion in the third quarter of 2008 and filed for bankruptcy.

Becker keeps his grain purchases and ethanol sales in lock step. He rarely has more than a day’s worth of corn that hasn’t been sold and assigned a slot in his ethanol production. That helped him charge premium prices for ethanol when corn was expensive and protected him as values of both tanked.

No. 4

Green Plains lost a comparatively small $880,000 on revenue of $105.9 million during 2008’s third quarter and had enough cash to buy two VeraSun plants. Green Plains on Wednesday reported net income of $25.5 million, or 65 cents a share, for the fourth quarter of 2013, up 281 percent from the year-earlier period, excluding a one-time gain on the sale of grain elevators in 2012. For the full year of 2013, net income almost quadrupled to $43.4 million.

Companies that trade the commodities separately can wind up with big inventories and wide price swings, says Michael Cox, a Piper Jaffray Cos. researcher in Minneapolis. The survivors use Becker’s strategy now, he says.

Becker’s tactics made Green Plains, with its 12 plants, the fourth-largest U.S. ethanol producer by production capacity in 2013, behind Archer-Daniels-Midland Co. (ADM), a consortium called Poet LLC and Valero — and ahead of Flint Hills Resources, a subsidiary of Koch Industries Inc.

Shares Rise

The top five now control 45.2 percent of the industry, up from 39 percent in 2008, the Washington-based trade group Renewable Fuels Association says. Unlike the others, Becker relies exclusively on corn-based ethanol. ADM is 30 times bigger than Green Plains, and its unit that includes ethanol accounts for 13 percent of the company’s revenue.

Green Plains shares more than doubled to $19.38 in 2013, outpacing the 30 percent rise for the Standard & Poor’s 500 Index. The stock closed at $22.85 on Feb. 6.

“Todd has a disciplined approach to maintaining margins and growing through acquisitions,” says Sam Halpert, manager of a Van Eck Associates Corp. fund that owned 407,600 shares in September. “He’s got a fair amount of stock, which we like.”

In January, Becker had options on 250,000 shares he can buy at any time for $12 or less apiece on top of the 509,584 he already owns.

Green Plains’ headquarters is humming on a 14-degrees-Fahrenheit (minus-10-degrees-Celsius) Tuesday in December. Becker, who’s 6 feet 3 inches (1.9 meters) tall, thrusts his hands as if throwing a basketball to emphasize a point during his 30-minute strategy session.

Grilling Traders

He grills his two dozen traders on corn hoarding in Nebraska and animal-feed demand in China. Back at their desks, they pore over potential plant-by-plant profit breakdowns using futures contracts covering a matrix of commodities and time frames.

Becker doesn’t waste time when deals pop up. After his subordinates wired cash to buy the BioFuel plants on Nov. 22, Becker took control of the Wood River, Nebraska, facility at 5 p.m. that day. By lunchtime the next working day, his traders had sold most of the ethanol and animal feed Wood River would produce in December and purchased most of the corn it would need, plus natural gas to heat it.

In half a day, they generated an operating profit of as much as $10.2 million, a 10th of the plants’ purchase price, says Jason Ward, a Northstar Commodity Investment Co. analyst in Minneapolis.

‘Another Bottom’

Becker bet big in 2011, when he sold ethanol and bought corn futures for most of the following year. Corn had dropped as Europe’s debt crisis cut demand and Ukraine tripled exports. Becker figured he could earn 20 cents per gallon of ethanol, a third more than usual. He got lucky when a drought pushed corn from $5.50 a bushel to $8.24 in July 2012 and he didn’t need any.

Green Plains earned $11.8 million in 2012; Becker got a $4.3 million paycheck. Valero (VLO)had an operating loss of $47 million on ethanol that year.

Becker started a separate Green Plains hedge fund that had $55 million in assets as of early February. He hopes to reach $1 billion in assets, declining to say when.

“There’s always another bottom coming in the commodity markets,” Becker says. “We prepare for that, and when margins turn, we can generate significant amounts of cash.”

Grandfather’s Lesson

Jim Barry, now chief investment officer of renewable power at BlackRock Inc., the world’s biggest money manager, recruited Becker for a forerunner to Green Plains in 2007. Becker took charge at the Chicago startup that later bought out Green Plains, gaining its name and stock listing.

“Since what we were really doing was playing in commodities, we needed a guy who could do that,” says Barry, a Green Plains director whose various BlackRock funds own 1.3 million shares.

Becker learned to temper risk with caution after watching his grandfather, a Russian immigrant who ran a scrap yard and grew soybeans before opening a Los Angeles delicatessen.

“Millions of dollars passed through his hands, but he died with nothing,” Becker says.

The first of his family to attend college, Becker chose the University of Kansas for its scholarships. He interned at what’s now CBOE Holdings Inc. in Chicago.

Becker experienced what he calls a perfect trade in 1993. He was working at Kansas City, Missouri–based Farmland Industries, then the biggest U.S. farm cooperative.

‘A Trifecta’

Farmland sold so much wheat, it convinced competitors the company had huge reserves. In fact, Farmland’s traders were also shorting wheat, or selling borrowed grain with hopes of profiting when prices later fell. Becker says the sheer volume of wheat they were selling threw rivals off.

When competitors started dumping their reserves amid what appeared to be Farmland’s massive holdings, Farmland was the only buyer. It resumed wheat sales and made huge profits, Becker says.

“It was like a trifecta,” he says.

Becker modeled Green Plains after Farmland. Rail cars, storage elevators and shipping terminals complement his trading desk and ethanol plants.

Fifty miles (80 kilometers) southeast of Omaha, in Shenandoah, Iowa, Green Plains produces 65 million gallons of ethanol a year in towers that emit a sweet beerlike scent. The company wrings 175,000 tons of animal feed from leftover parts of the corn. It converts some feed to corn oil, adding a nickel to its typical 15 cents–a-gallon ethanol profit. It saves three cents a gallon by grinding corn thoroughly.

Becker promises to pressure presidential candidates to support ethanol when they pass through Iowa in 2016 — even though he’s sure lawmakers will scrap minimum requirements. “It’s just a matter of when,” he says.

Becker says Green Plains is ready for that day — and for the once-in-a-lifetime trading opportunity that will multiply revenue.

“Green Plains hasn’t had an event like that, but we will,” he says. “We could grow quickly into a $10 billion or $20 billion company.”