Ethanol producers deal with low demand

Source: DAN PILLER • Des Moines Register  • Posted: Monday, February 13, 2012

Producers had lots left over after a federal tax credit ended. Also, exports to Brazil have decreased.

Ethanol has generated more than its share of detractors, but since Jan. 1 the biofuel’s real enemy has been the law of supply and demand, which has thrown red ink over Iowa’s 41 ethanol plants.

While the cost of ethanol’s feedstock, corn, remains above $6 per bushel, ethanol’s price dropped from $2.80 per gallon or more in mid-2011 on the Chicago Board of Trade to less than $2.20 per bushel since Jan. 1. Traders anticipated a drop in demand after a federal tax credit ended.

Demand for gasoline, to which ethanol is blended, fell by as much as 6 percent in January as motorists cut back. Ethanol exports to Brazil, a lucrative sidelight, dropped by 100 million gallons in January because of unfavorable exchange rate with the Brazilian Real.

“It’s safe to say that majority of producers are in the red,” said Rick Brehm, president of Lincolnway Energy in Nevada.

The losses came quickly for ethanol, which as recently as November enjoyed profit margins averaging 71 cents per gallon, highest in five years, according to Iowa State University reserach.

Walt Wendland, chief executive officer and president of Golden Grain Energy in Mason City, described ethanol’s dilemma as “an oversupply problem.”

Ethanol surpluses rose by 17 percent since Dec. 31, thanks to a flurry of production at the end of 2011 as oil companies and jobbers ordered and paid for more ethanol to take advantage of the last days of the 45-cents per gallon tax credit that expired New Year’s Day.

“Our industry didn’t cut back on production the way the oil refineries do,” said Wendland.

So ethanol producers have a lot of surplus product sitting in rail tankers waiting for buyers.

Meanwhile, ethanol plants have had to bid high cash prices to try to coax corn from farmers who saw $7 per bushel-plus prices last summer and think those prices might come again this year by spring or midsummer.

Brehm bears farmers’ stubborness no bitterness.

“If I had a bin full of corn, I might let it sit there for a while, too,” he said.

But Des Moines commodity broker Tomm Pfitzenmaier expressed concerns that losses could cause ethanol plants to cut back production or even close. Ethanol plants consume 60 percent of Iowa’s corn crop.

“The ethanol industry continues to be a concern for traders,” Pftizenmaier said. “The negative margins along with the fact that ethanol supplies are a record levels with exports beginning to fall away, is not a good situation going into the spring.”

Analyst Rick Kment of DTN in Omaha said he doesn’t think demand for ethanol will pick up significantly before spring.

“The problem for ethanol is less supply than demand,” said Kment.

What troubles Wendland and other ethanol producers is the widening spread between ethanol and wholesale gasoline.

Ethanol prices have dropped some 60 cents per gallon since last July. Meanwhile wholesale gasoline has gone in the opposite direction, rising from $2.50 per gallon in November to above $2.90 per gallon last week.

Wendland and other ethanol producers normally like to see their product sell about 45 cents per gallon below wholesale, to give oil companies, pipelines and distributors sufficient incentive to blend the cheaper biofuel with unleaded gasoline to ease prices.

“But an 70-80 cents per gallon spread between us and unleaded is too high,” Wendland said. “There’s just not much that can be done about it.”