Ethanol margins to fall

Source: DAN PILLER • Des Moines Register  • Posted: Monday, November 28, 2011

Ethanol producers will lose about 25 to 30 cents per gallon on operating profits when the tax credit for blenders goes away after Dec. 31.

The December futures price for ethanol held in the $2.55 per gallon range last week, about the same as the futures price for gasoline.

But into January, the contract for delivery fell to $2.23 per gallon last week while gasoline stayed in the $2.55 per gallon range.

For Iowa’s ethanol plants, margins have been strong in recent months. Statistics by Iowa State University show the average plant has cleared a margin of 46 cents per gallon on ethanol production through October.

The strong demand for ethanol, generated by high crude oil prices, has made 2011 a good year for ethanol producers in what is normally a thin-margin business.

So there is some cushion for Iowa’s 41 ethanol plants, which account for about 3.7 billion gallons of the 14 billion gallons produced nationally. In Iowa, ethanol plants chew up about 60 percent of Iowa’s 2.3 billion bushels of corn, but they also produce a byproduct for livestock feed.

“Margins will tighten, no doubt about that,” said Walt Wendland, president of Golden Grain ethanol plant at Mason City. “When the blender credit goes away, there will be a compromise on demand.”

Wendland, who also is president of the Iowa Renewable Fuels Association, won’t shed tears on New Year’s Eve at the expiration of the tax credit.

The 45-cent per gallon tax credit went not to ethanol plants, but to oil refiners, pipelines or fuel distributors. But ethanol took the ever-growing political hit.

“We were getting tired of being beaten up politically over ‘subsidies,’ ” Wendland said. “The oil industry still gets tax breaks for production, and then took the ethanol credit as well.”

Wendland also thinks the price of ethanol was probably higher than was sustainable anyway. Ethanol’s market economics work best when it is priced below gasoline, giving retailers incentive to offer it as a lower-cost gasoline.

Wendland said Golden Grain will have its best year since 2006, when ethanol prices soared above $3.25 per gallon in the first blush of demand after passage of the renewable fuel standard a year earlier.

Since then, ethanol has had an up-and-down existence, as prices have shown the same volatility as crude oil. Ethanol futures prices have ranged between $1.60 per gallon and $2.80 per gallon in just the last year, and the cash prices often are higher.

In the days before Thanksgiving, Iowa’s rack, or cash, price soared above $2.90 per gallon as blenders put fuel into the system to accommodate holiday driving.

But some in the business think that demand for ethanol has been strong because blenders want to take as much advantage as they can before the tax credit expires Dec. 31.

“I wouldn’t be surprised at that,” said Wendland.

The anticipated discount for ethanol to gasoline should help maintain demand, Wendland said.

“ The price of ethanol has been a bit too high, anyway,” said Wendland.

The expiration of the ethanol tax credit was one of the few sure things in the politics of deficit reduction in Washington, D.C., this past year. Congress heeded complaints from livestock feeders, grocers and food processors and humanitarians with food vs. fuel concerns. Their complaints became louder when the price of corn doubled from $3.50 per bushel in mid-2010.

“The tax credit simply wasn’t worth the trouble any more,” said Wendland. Most ethanol trade and lobbying organizations said in 2011 they would give up the tax credit willingly.

More crucial to maintaining demand is the federal Renewable Fuel Standard, passed by Congress in 2005, that will require the use of more than 13 billion gallons of ethanol.

Fortunately for Iowa’s 41 ethanol plants, which generate about $14 billion per year in revenues, the renewable fuel standard will remain in place.

Ethanol plants will produce more than 14 billion gallons this year. The surplus will go mostly to Brazil, which has become an ethanol importer after problems with production of the sugar cane that is the feedstock for its biofuel.

The Renewable Fuel Standard raises that mandate to 36 billion gallons by 2022, although that target appears more distant because after the first 16 billion gallons, the next half of the mandate must be met with non-corn biofuels.

Those advanced biofuels are still mostly in laboratories such as Iowa State University’s Biocentury Research Farm west of Ames. Plants that make fuel from corn leaves and stalks in Emmetsburg and Nevada won’t come on line until 2013 at the earliest.

The political future of the Renewable Fuel Standard is murky.

This year a bill introduced by Rep. Bob Goodlatte, R-Va., would partially waive the ethanol goals when corn surpluses, which since mid-2010 have dropped from more than 2 billion bushels to less than 1 billion bushels, fall below certain levels. Goodlatte’s bill, if it were law, would trigger a 25 percent reduction in the Renewable Fuel Standard this year.

Ethanol backers counter by arguing that without the mandate, the alternative fuels industry could wither away if there is a too-long delay to the development of the next generation of biofuels.

That argument may get more heated with the possibility that natural gas may become a more widely used transportation fuel, at least for trucks, thanks to major increases in gas production.