Ethanol makers cut back production, idle some plants amid high corn prices, less demand

Source: Washington Post • Posted: Monday, July 2, 2012

WICHITA, Kan. — Ethanol makers are cutting production, and some are temporarily idling plants in the Midwest, as corn prices skyrocket and demand for gasoline falls because people are driving less.

More than 95 percent of the nation’s ethanol plants use corn starch as their basis for the biofuel. That makes these facilities especially vulnerable to high corn prices in a commodity market nervous about triple-digit temperatures and drought in major corn-growing regions. Most of the more than 200 ethanol plants in the United States are in the Midwest, where most corn is grown.

A glut of the biofuel is squeezing ethanol makers further. The poor economy and high gas prices have people driving less, and ethanol is primarily used in gasoline blends.

“It is no different than the oil industry when markets are tight,” said Matt Hartwig, spokesman for the Washington-based Renewable Fuels Association. “When the market is tight, oil refineries idle plants or reduce production, and ethanol producers are simply doing the same thing.”

The U.S. Department of Agriculture reported Friday that farmers planted 96.4 million acres of corn this spring. It’s the largest number of planted acres since 1937, when 97 million were planted. The revised estimate, based on early June farm surveys, is up from May’s estimate of nearly 92 million acres.

The report, however, didn’t do much to ease fears about damage from heat or drought.

“A lot of planted acres are going to be irrelevant based on weather conditions,” said Rick Kment, a Nebraska-based ethanol analyst for the agricultural data company DTN.

Unlike in the early years of the ethanol industry, when a downturn could mean widespread plant closings and bankruptcies, the recent cutbacks are adjustments being made to manage risk when profit margins are narrow, Kment said. About five ethanol plants have been idled off and on since the start of the year, while others have significantly reduced production, he said.

Among them is Valero Energy Corp., a major petroleum company that also operates 10 ethanol plants.

Valero temporarily idled plants in Albion, Neb., and Linden, Ind., because it was costing the company more to make ethanol than it could sell it for, spokesman Bill Day said. Each ethanol plant buys corn from farms within a 50-mile radius, and when the local price of corn rose too high, production was halted. The move came amid drought in both states.

“We expect this to be temporary. We don’t think this is a long-term thing,” Day said. “We are an energy company. We are well accustomed to the ups and down in the energy business, and we are a large enough, strong enough company that we can get through the downturns and benefit from the upturns.”

The company has kept the 60 employees at each plant working, doing maintenance projects and keeping the facilities in a state where they can be restarted quickly once market conditions improve, Day said.

He said Valero hoped the upbeat acreage report that came out Friday will quell some of the nervousness in the corn market and allow prices to drop, and that’s one reason it expects to have the idled plants back in production before harvest.

But as triple-digit temperatures continue to bake the Midwest, smaller ethanol facilities have become increasingly nervous.

Steve Gardner, manager of the East Kansas Agri Energy plant in Garnett, Kan., said it has been running at 80 percent of its capacity since the first quarter of this year. Corn costs are too high given how much the company is getting for its ethanol, and it has been reviewing the situation each month to determine whether to shut down.

“We have been fortunate we haven’t had to do that” so far, he said.

U.S. stocks of ethanol reached a record 23 million barrels in March and have been generally hovering above 20 million this year, said Sean Hill, biofuels analyst for the Energy Department’s Energy Information Administration. The nation ended 2011 with 18 million barrels.

Most ethanol fuel sold for passenger cars and pickups today is 10 percent ethanol and 90 percent gas. A new blend that boosts ethanol to 15 percent would be sold for use only in 2001 and newer vehicles.