Ethanol industry could take a hit

Source: Written by Peter Harriman, Argus Leader • Posted: Sunday, July 15, 2012

But leaders took lesson fromVeraSun in 2008

Low oil prices coupled with high corn prices set up a perfect storm for the ethanol industry — a perfectly bad storm.

Valero already has cut production at its ethanol plant in Huron and it has idled a plant in Nebraska, according to Lisa Richardson, executive director of the South Dakota Corn Growers Association.

The price of crude oil opened 2012 at $101.56 per barrel. It mostly remained above $100 until late April. Since then it has declined to about $85.

Routine maintenance scheduled for later in the year can be pushed up to allow ethanol plants to cut back production when the profit margin of biofuel shrinks, according to Brian Jennings, executive vice president of the American Coalition for Ethanol.

However, “the truth is these plants were built to run at full throttle. That’s where they run efficiently,” he says.

The ethanol industry learned a painful lesson in 2008. VeraSun, then one of the country’s largest ethanol producers, aggressively bought high-priced corn futures in the belief the market would continue climbing. It didn’t, and VeraSun went bankrupt.

“The lessons learned by ethanol producers in 2008 continue to be practiced today,” Jennings says. “It’s understanding the difference between speculating and hedging, being careful about risk management strategies.”

The industry is much more capable of dealing with high corn prices brought about by the dramatic drought this year, according to Jennings. However, “we are all on pins and needles wanting to see the weather turn around,” he says. “Not just the ethanol plants but the corn farmers do not like to see a crop drying in the field. But we know we don’t control these things.