Ethanol makers feel the squeeze

Source: DAVID SHAFFER , Minneapolis Star Tribune • Posted: Thursday, June 7, 2012

The end of federal subsidies at the end of 2011 left ethanol plants struggling to make money in a glutted market early this year.

One ethanol industry executive called it the “hangover effect.”

About three-fourths of U.S. ethanol plants either lost money or merely broke even in the first quarter after federal incentives to blend the corn-based fuel expired, according to data released at an industry conference Tuesday.

The slide in profit margins, after a strong fourth quarter in 2011, happened mainly because oil companies and gasoline suppliers stocked up on ethanol to capture the 45-cent-per-gallon federal blender subsidy before it expired Dec. 31 — then slowed their buying, industry officials said.

“We had margins actually plummet,” John Christianson of Christianson & Associates, a Willmar, Minn.-based consulting firm, said at the conference in Minneapolis.

About 600 industry officials are attending the Fuel Ethanol Workshop & Expo this week at the Minneapolis Convention Center. The conference is put on by Ethanol Producer Magazine and BBI International of Grand Forks.

Mark Marquis, president of Marquis Energy, which operates ethanol plants in Illinois and Wisconsin, said the end of the subsidy created a glut of ethanol early this year.

“We had a great fourth quarter, then in the first quarter we had the hangover effect,” Marquis said.

Financial results collected by Christianson & Associates from 65 of the nation’s 200 ethanol plants show that the most efficient 25 percent are still making money, though the margins are lower than in the past.

Christianson, a partner in the firm, said the middle 50 percent of ethanol plants generally broke even in the first quarter, while the “laggards,” or the least-efficient 25 percent, lost an average of 25 cents on each gallon of ethanol they produced.

“We are entering a new era where the government incentives and credits are gone,” said Christianson, who noted that another federal tax credit to support small ethanol plants also has expired, along with a Minnesota producer subsidy.

The nation’s ethanol industry, including 21 plants in Minnesota, produced more than 14 billion gallons last year, nearly 10 percent of the gasoline sold. About 1.1 billion gallons were exported.

But the industry faces barriers to expansion. Drivers are using less motor fuel overall, industry officials said, and exports slowed in the first quarter.

Some executives said the industry has weathered tough times before and survived, and predicted the same will happen with the end of the $6 billion annual blender’s credit, known as the Volumetric Ethanol Excise Tax Credit (VEETC).

“The loss of VEETC was really inconsequential to the ethanol industry,” said Randy Doyal, CEO of Al-Corn Clean Fuels in Claremont, Minn., one of the state’s longest-running ethanol plants. “It makes more difference to the oil industry than the ethanol industry. We anticipated that transition.”

With the subsidy gone, the ethanol industry is fighting to retain the federal mandate to blend ethanol with gasoline. The industry is also pushing for a higher blend of 15 percent, or E15, for newer cars and light trucks. Pumps now dispense 10 percent ethanol except at stations that sell higher concentrations for use in flexible-fuel vehicles.

Industry officials said the most efficient ethanol plants are cutting energy costs, successfully hedging their risks, making additional products like industrial corn oil and trying to get as much ethanol as possible from a bushel of corn, whose price has risen dramatically.

Jeff Broin, founder and executive chairman of ethanol maker Poet, which operates four plants in Minnesota, said some of its 26 plants had “some difficulty” but declined to offer financial details.

“It separates the weaker players from the stronger players in the industry,” Broin said.

Ethanol executives said E15 and exports are important to the future of the industry, whose ownership is likely to get more concentrated.

“Consolidation is going to occur and that is natural with any industry,” Doyal of Al-Corn said.

But Doyal said his company, which is farmer-owned, hopes to retain its connection to agriculture. “That is what we are working for — to retain that farmer-owned structure,” he said.