Ethanol industry outlook on 2016

Source: By Holly Jessen, Ethanol Producer Magazine • Posted: Monday, December 21, 2015

Hal Reed, chief operating officer at The Andersons Inc. 

The high level of demand was the most positive note for ethanol producers in 2015 Reed says. The largest piece of that was exports, he says. “Our export markets were clearly needed, as we saw lower oil prices create some concern early in the year, wondering whether we would see the kind of export demand that we had seen in the past with the wide spread between gasoline prices and ethanol.” The fact that export demand held up well speaks volumes, he says. “It shows the value of the oxygenate and the octane that ethanol provides, that’s a huge deal for the industry.” On the domestic demand side, the upside to cheaper gasoline was the 2.5 percent increase in motor fuel demand this year from consumers driving more, thus increasing demand for E10.

Reed is one of six industry insiders Ethanol Producer Magazine spoke to for this issue. The list includes two ethanol producers, a corn producer leader, a financial services representative and two technology providers. Here’s what they had to say, looking back on 2015 and forward to the industry’s future.

Reed says that while the U.S. EPA’s recent announcement regarding the renewable fuel standard (RFS) renewable volume obligation (RVO) numbers fell short of the original mandates, it does increase the RVO for conventional ethanol by 1.6 billion gallons over the next three years. “It will continue to enhance the build-out of infrastructure that will allow ethanol blending beyond the blend wall,” Reed says. “As such, it is a positive event for the U.S. corn-based ethanol industry, the U.S. consumer and The Andersons.”

Though nothing like the past year, this year has been a good one for The Andersons. In the third-quarter earnings call, the company reported pre-tax earnings for the ethanol group of $20.8 million for the year to date. “We saw increases again this year in our total production and our efficiency and effectiveness rates. We also had a year with no recordable accidents, which is a big deal,” Reed says. “It’s been a good year, though margins weren’t what they were the year before.” Indeed, earnings for just Q3 2014 were virtually the same as the combined earnings for the first three quarters of 2015.

Margins were more normal this past year, given the history of the ethanol business, Reed continues. “But the ethanol business has been normal in a pretty wide range and we’re much at the lower end of that range.” Last year’s corn-versus-ethanol margins, based on front month futures, set a nine-year record in most months. 2015’s margins were at or below the nine-year average for all months except June. January 2015 was breakeven and the rest of the year on the positive side.

A publicly traded company headquartered in Ohio, The Andersons is a diversified agribusiness with five business units: ethanol, grain, rail, plant nutrient and retail. The Andersons operates four ethanol plants with a combined nameplate capacity of 330 million gallons, located in Logansport, Indiana; Albion, Michigan; Greenville, Ohio, and Denison, Iowa. Its average ownership share of those plants is 50 percent. One partner in three of the plants provides The Andersons with a unique perspective, Reed adds. “We have Marathon Petroleum Co. as our partner. They bring a perspective and a wealth of knowledge that is very helpful to us.”

The company’s decades of experience in its core business of grains is equally helpful for the ethanol business, especially in risk management. This year was a challenging one in the eastern Corn Belt, Reed explains. Generous rains in late spring and early summer helped drive the basis up, along with the farmer tendency to hold grain when prices are low. Basis, the difference between a local cash price and the nearby futures price, reflects local supply and demand. By mid- to late-harvest, the difference between the eastern and western Corn Belt was unusually large. “A 70-cent difference in basis is a huge deal,” Reed says. “Very seldom have we seen anything like that in our careers.”

In previous years, periods of tight ethanol margins were helped out by strong markets for distillers grains and corn oil, but that is not the case this year, Reed continues. Distillers grains prices relative to corn value are fairly low right now and corn oil prices are depressed. “We try to do everything we can to build the value of the process,” he says. “We’re trying to turn the dials on all the various pieces to make that gross sale value of that kernel of corn coming as high as we can make it.”

E85 is one of the long-term opportunities for the U.S. market, Reed says. The company blends and supplies E85, and in spite of the higher ethanol prices today relative to gasoline prices, The Andersons has seen its E85 market continue to grow in 2015. “We’re excited to be in the ethanol business,” Reed says, adding that it was 10 years ago when The Andersons started adding value to corn by producing ethanol. “We continue to grow and be more efficient,” he says. “We think the whole octane value and environmental nature that ethanol provides are both sound long-term. We’re still very excited about the business, the industry. We’re happy to grow the business and be part of a growing industry in the future.”

—Susanne Retka Schill

Randall Doyal, CEO of Al-Corn Clean Fuel

For Doyal, one of the highlights of 2015 was seeing the vast spectrum of people in Kansas City in June,  show their support for the RFS. It was encouraging to see people from all walks of life and representing multiple business types there to testify and participate in a rally for rural America, prior to an EPA hearing about the proposed RFS RVO numbers.

Doyal was especially impressed by the number of Future Farmers of America members in attendance. “One of the things that really moved me personally, was seeing the number of young people in their blue jackets, helping,” he says. “That’s a particular soft spot of mine. I enjoyed my time in FFA and we continue to support it today.”

Of course, certain aspects of 2015 have been very frustrating as well. The RVO proposal and the lack of support from the administration for biofuels have been big challenges. However, Doyal is a positive person and says he believes, as a whole, it was a good year for the ethanol industry.  One of the positives is the ongoing efforts to increase exports of distillers grains and ethanol. Increasing consumer access to higher blends around the U.S. is also vital to the industry and groups like Prime the Pump are doing good things in that area. “I think that’s been a great effort,” he says.

Yes, margins are thinner these days, especially compared to the previous year. “We are a commodity business, and commodity businesses have swings,” he says. “That’s the nature of the market. 2014 was phenomenal. As a matter of fact, there was a 16, 17 month period where we were generating profits that I have never seen before and I have been in the business for over 30 years. It was huge.”

Things slowed down in 2015. The price of oil and gasoline went down and the industry produced at a rate that resulted in growing ethanol stocks. “All of that has an impact on your margins,” he says, “but there are margins to be had, that’s for sure. We are making income. Not like 2014 but not the worst year ever by any means. It’s, I would say, pretty steady.”

Al-Corn Clean Fuel has a growth strategy and is currently looking at ways to expand its facility, hinting at possible future announcements. “We’ve got interesting things coming down the pike,” he says.
Looking ahead for the industry as a whole, there’s likely to be some additional consolidation, while work to increase export markets and infrastructure is put in place domestically for higher blends. “We have the ability to produce more than the market today, and that always puts the industry in a squeeze,” he says. “So there may be a little bit of weeding out that occurs. And we’ve gone through periods of time like that before.”

One thing Doyal thinks will change is that the creativity and the ingenuity of ethanol producers will finally be recognized outside the industry. Ethanol plants are producing more gallons of ethanol from the same amount of corn, reducing energy consumption and water use as well as diversifying coproducts. “We continually strive to improve,” he says. “And we do.”

—Holly Jessen

Michael Franko, vice president of business development, 
Fluid Quip Process Technologies LLC

When people find out Michael Franko works within the biofuels industry, they often assume business must be bad. But Fluid Quip, which Franko is vice president of business development, is actually in a position of needing to mitigate its growth, which tells the opposite story.

“Although we got into some uncertainty later in the year on the RFS and profit margins going down for [producers,] the highlight for us was we still had a lot of people pull the trigger and sign the contract on some pretty large capital projects,” he says. “Really, I think that’s a testimony to looking long term and not just living by what does next month look like, what does next week look like.”

Fluid Quip has installed its Wet Fractionation System, which includes selective milling, front-end corn oil, fiber separation and protein recovery at a sugarcane ethanol production facility in Brazil. It’s a game changer, Franko says, which will allow the production facility to maximize capacity year round by blending corn at off-peak times and running sugarcane during the two harvest seasons. The system includes its Maximized Stillage Co-Products Protein Recovery System which is also under construction at United Wisconsin Grain Producers LLC and has been in operation at Badger State Ethanol LLC for several years.

In addition, the company will commission its fourth Fiber By-Pass System early next year. The system, which separates corn fiber prior to fermentation, was first installed at Ace Ethanol LLC a year ago. Additionally, the company was commissioning its 11th Selective Grind Technology and fourth front end oil separation system by the end of the year.

Fluid Quip’s success is a bellwether for the industry as a whole. “It shows that there is a strength in the industry,” he says. “It’s not going away and, even as margins fluctuate, people still see the value in the industry and investing in their plant.”

Certainly 2015 came with some difficulties, such as lower margins and uncertainty about the outcome of the RFS RVO announcement. But the overall reaction wasn’t one of fear. “I don’t feel the doom and gloom that we saw a couple years ago,” he says. “I think in some ways, going through that adversity in the past has thickened people’s skin a little bit. Was this the best year ever for ethanol? No. But I don’t see people running for the exit.”

Although Franko admits he’s biased, he feels strongly that coproduct diversification is essential for the future of the industry. “We’ve been kind of lucky, in a way, to do so well for so long with basically two products, ethanol and DDGS,” he says. “And the DDGS basically goes back to corn, which is your input price, relative to corn.”

Following some of the difficult times the industry has been through, ethanol producers do have very strong interest in diversification. “People are realizing that you can’t just sit and hope that the RFS stays forever and the margins stay good and corn is cheap and oil stays high,” he says. “We’re going to have to diversify.”

The ethanol industry is well-positioned to produce new, high-protein distillers grains, new fuels, specialty chemicals or other coproducts. Exactly how that will look at an individual ethanol plant will be influenced by factors such as where the facility is located geographically and what partnerships or co-owners it may have, within other industries. “Right now we are all kind of in the same boat and I think we’ll see people start to get into different, smaller boats and spread out as an industry,” he says.

—Holly Jessen

Jason Johnson, vice president of renewable fuels for AgStar Financial Services

The extraordinary margins of 2014 put the ethanol industry in a good place for the tighter margins of 2015. “I don’t think anybody in the industry expected 2014 to happen. But it did and it did great things for the industry,” Johnson says. The bank saw extraordinary amounts of debt service paid off during the 18 months of record margins in 2013-’14, Johnson says. “A massive amount of debt was paid down. Then you saw shareholders getting returns and you saw plants balancing that with increased working capital positions. Towards the end, a lot of plants have started looking at different capex projects to modernize the plants where needed or debottleneck.”  Based in Minnesota and part of the Farm Credit System, AgStar has helped finance a number of ethanol projects across the Corn Belt.

There may be a few outliers that sent out too much in cash distributions, at the expense of building working capital and making continued improvements, Johnson adds. “I would say by and large the management teams that we work with did a pretty good job of balancing those different factors.”

Strong management, healthy working capital and investment in efficiency are the keys to getting through the cycles the industry faces, Johnson explains. “In any five-year period, you could have a couple of good years, a couple of break-even and you’re going to have a low- to negative-margin year. And, you don’t know what order those are going to come in.”  In looking ahead, Johnson says corn has moved from a short supply scenario to ample ending stocks. “I don’t see anything that’s going to change that significantly,” he says, pointing out the USDA’s five-year outlook supports that view. On the energy spectrum, Johnson expects the outlook for oil prices and ethanol margins to be more like 2015 than 2014. The calendar year 2015 started off very slow, with a low- to negative-margin environment that improved in the second and third quarters. “The year has turned out to be more of a break even scenario for some, but overall we’re seeing a year that is pretty strong historically for the plants.” There are regional differences, he adds, with the financial performance of eastern Corn Belt plants affected by the significantly higher basis.

Looking further ahead, some ethanol producers are facing big decisions. For aging plants, the question is whether they’ve held enough cash back for ongoing capex to keep the plant competitive. And, there’s the question for smaller plants on how they compete on efficiencies with the larger plants, he says.  “If you are a smaller plant, how do you stay competitive long-term? Do you need to get to that 100 MMgy?  That’s a very fair conversation that each one of the plant’s management and boards probably already have discussed or need to discuss. How you get there is a whole different piece.”

Being set up for the future requires a strong working capital position, Johnson says. “That is the one thing that has shown the ability to get through the down times, low-margin periods—having a strong working capital position.  Second, you need to be an efficient plant.” Keeping up on maintenance, investing in debottlenecking and modernization are all needed to maintain a level of efficiency that allows a plant to stay online during a down margin environment.  “That’s where we see a lot of discussions happening right now. What will we do?  Not just maintenance capex, but what will be need to do to modernize our plant or look at other value-added products?”

“Overall AgStar has been a supporter of the industry and it continues to be, based off the management teams we work with,” Johnson says. “We will go forward despite the noise of an RFS.  I think the plants that have figured out long-term supply and demand will manage through that. There are very strong management teams out there.”

—Susanne Retka Schill

Chris Novak, CEO of the National Corn Growers Association

There’s a lot to celebrate about what happened in 2015, according to Novak. The first on that list is the cooperation between corn farmers and ethanol producers to protect the RFS. “We’re working more closely together on political outreach, consumer marketing, and communication strategies that emphasize the importance and value of providing more consumer choice at the fuel pump,” he says.

Specifically, Novak points to efforts in increasing ethanol exports overseas as well as bringing higher ethanol blends to consumers across the U.S. Farmers have been working with state corn checkoff organizations to support Prime the Pump, an initiative to increase the number of E15 pumps. He also pointed to USDA’s Biofuel Infrastructure Program grants, which will install nearly 5,000 E15 pumps at more than 1,400 U.S. gas stations. “These new pumps will ensure long-term demand for corn ethanol as we continue to build and develop the fuel infrastructure of the future,” he says.

NCGA also started promoting legislation and regulatory action that may help increase the Reid vapor pressure threshold for E15. “Our progress on this front is slow,” he says, “but corn farmers and the ethanol industry are continuing to work together to eliminate an artificial barrier that is restricting consumers from year-around access to E15.”

Of course, there were some challenges as well. At the top of the list is the EPA backing down on the RFS, starting with the RVO proposal that came out in the spring. The final rule that came out the end of November was a step forward, yes, but didn’t go far enough, the NCGA believes.

No. 2 on the list of challenges is the escalation of attacks by a desperate oil industry, Novak says. “On the one hand, it is understandable—we’ve displaced more than 10 percent of a fuel market they dominated and controlled. It is easy to understand that the oil industry does not like competition. At the same time, it is hard to believe the oil industry continues to perpetuate the myths around food vs. fuel when we’ve just produced three of the four largest crops on record in the United States.”

The challenge facing corn producers is growing profitable demand for corn. “With much of the livestock industry still in recovery and a slowdown in corn exports, our corn farmers have needed ethanol growth to help restore profitability to the corn market—and that hasn’t happened,” he says. “We remain optimistic for the future—based upon the growing export demand and the increasing number of mid-level blend pumps—but we desperately needed faster demand growth to ensure a full recovery from our current market situation.”

Although heavy rains in the Southern and Eastern Corn Belt meant another national record wasn’t set, overall, 2015 was a good corn production year. In fact, many in the Upper Midwest told Novak this was their best crop ever. “Very few farmers I know will complain about a full grain bin,” he says.

Holly Jessen

Ron Beemiller, president and CEO of WB Services LLC 

In general, most ethanol production companies are cautious while also taking a long-term view of the market. “If it is prudent for a plant to be more efficient or expand or add products in higher margins, it is also true in lower margin times,” Beemiller says. “The challenge for WB and for many of our customers is that it is difficult to make long-term strategy decisions when there are so many moving parts and uncertainties.”

The Sedgwick, Kansas-based company provides the ethanol and biodiesel industries bolt-on technologies for production of biodiesel or renewable diesel.  WB is currently at work on two 3 MMgy renewable diesel plants under construction at two Kansas ethanol plants, with East Kansas Agri-Energy LLC expected to begin operations in early 2016 and the project at Prairie Horizon Agri-Energy LLC expected to wrap up in the second quarter. In addition, construction is complete on a 2 MMgy biodiesel plant integrated into the Adkins Energy LLC facility in Illinois, Beemiller said.

In the past decade, the ethanol industry has survived two dramatic drops in energy prices, one of the worst droughts in recent history, which resulted in high corn prices, and wild changes in export markets for ethanol and its coproducts. Then there’s the unfavorable regulatory pressures and attacks from Big Oil. “In spite of that, the ethanol industry is strong, more efficient and more forward thinking than ever,” he says. “Generally, the industry is conservative, financially stronger than ever and better able to come out of tough years like 2015 without being in trouble.”

Although margins were thinner in the past year, it helped tremendously that the industry had brought in phenomenally high margins the previous year. “The good news is that, generally, the ethanol industry is healthy and much better positioned to weather periods of lower margins,” Beemiller says. “In addition, we see that much of the industry does not overreact to margin swings, having been through them before.”

The current financial state does prove the ethanol industry can be competitive even in a low-margin environment. “Regardless of margin, RVO uncertainty and blend economics, ethanol is still the very best, most efficient and cleanest octane available to the fuel market,” he says.

Beemiller is interested to see what the ethanol industry will look like in five or 10 years. One thing he says he feels certain about is that the industry will remain strong. “We see the industry now driven more by things like carbon intensity, efficiency, diversifying products, creating niche advantages and moving more towards an industry of diverse biorefineries rather than simply ethanol plants,” he says. “As a company, WB is moving more towards an engineering and technology company, focused on the above; helping our customers improve and achieve carbon intensity, product diversity, increased yield and efficiency.”

—Holly Jessen

Author: Holly Jessen
Managing Editor, Ethanol Producer Magazine

Co-author: Susanne Retka Schill
Senior Editor, Ethanol Producer Magazine