Ethanol profits slow to a drip

Source: DAVID SHAFFER and PATRICK KENNEDY, Star Tribune staff writers • Posted: Monday, June 18, 2012

The industry has been pinched by low demand and high production costs.

A drop of E85, a mixture of 85 percent ethanol and gasoline, hung at the end of a gas pump. Demand for ethanol is down partly because Americans are buying fuel-efficient cars and driving less in a weak economy. Many in the industry are hoping for more growth through a 15 percent blend, called E15.

It’s been hard to brew profits at Minnesota ethanol plants.

Three more Minnesota ethanol companies reported their quarterly earnings this week. Two of them lost money, and a third barely stayed in the black.

Six of Minnesota’s 21 ethanol plants are owned by companies that disclose detailed ethanol-related financial results. With three other companies already having reported, the score for their latest quarter is in: Five of six didn’t turn a profit.

“Ethanol has probably reached a plateau in usage in the United States,” said Brian Kletscher, CEO of Highwater Ethanol in Lamberton, Minn., which reported a $2.3 million loss for the quarter compared with a year ago.

Demand is down partly because Americans are buying fuel-efficient cars and driving less in a weak economy, industry officials said. The industry also has been hit with high corn prices and a glut of ethanol early in the year because fuel blenders stocked up before the 45-cent federal tax credit expired on Dec. 31. Most ethanol makers had a strong fourth quarter thanks to the buying spree.

While ethanol makes up nearly 10 percent of the nation’s fuel for cars and light trucks, many in the industry are hoping for more growth through a 15 percent blend, called E15, that could be approved for gas pumps in the near future.

“It’s a cyclical business,” said Larry Johnson, an ethanol consultant based in Cologne, Minn., who recently was honored with a “High Octane” award at an ethanol conference in Minneapolis. “You are dealing with commodities.”

And with commodity prices high, particularly corn, many ethanol producers are feeling the pinch.

Heron Lake BioEnergy, whose ethanol plant is 33 miles south of the Highwater plant in corn-rich southwest Minnesota, reported a $1.3 million loss in the quarter ended April 30. Granite Falls Energy, another ethanol plant in that region, saw its net earnings fall to $116,466 from $3.2 million in the same quarter a year earlier.

Three other publicly traded companies with Minnesota plants reported quarterly losses a few weeks ago. They are Omaha-based Green Plains Renewable Energy, the nation’s fourth-largest ethanol maker with a plant in Fergus Falls, Minn., BioFuel Energy Corp. of Denver, whose two plants include one in Fairmont, Minn., and Gevo of Englewood, Colo., whose sole plant in Luverne recently was converted to produce a new biofuel, isobutanol, but had been making ethanol.

Most of Minnesota’s ethanol companies are privately held and don’t disclose their financial condition. Two are owned by large, diverse public companies. So it is not possible to compare the six publicly reporting ethanol companies with the rest of the industry.

Data from 65 of the nation’s 200 ethanol plants tracked by Christianson Associates, a Willmar, Minn.-based consulting firm, indicate that one-fourth of them lost money in the first quarter, according to results presented at an industry conference this month. Those data use a different measure of financial performance, making comparison difficult

Robert Ferguson, general manager of the Heron Lake plant, said even highly efficient plants are having trouble making money. Indeed, he said, widespread gains in plant efficiency over the past few years have contributed to the excess of ethanol in the market.

“We’re looking hard at cutting back [production],” Ferguson said. “I think all the plants are when you are looking at negative margins.”

So far, no Minnesota plants have closed, but one in North Dakota shut down in April. Another plant in Nebraska said Friday it was suspending production.

Corn, the industry’s main commodity, has been high, about $6 or more a bushel, while natural gas, another major cost, has been low, he said. Market demand has been so weak this year that ethanol has sold for a $1 or more per gallon less than gasoline, and is now about 60 cents less, he said.

That made for tight margins in the ethanol industry. Companies that are well-run and have low debt are in the best position to succeed, he said.

“If they are well managed and make good business decisions, they will find a way through this,” Johnson said.

Commodities futures broker Alex Breitinger, whose Valparaiso, Ind., firm has advised ethanol producers on hedging and trading, said the industry may get help from a predicted record corn crop, which could send the price of corn to around $5 a bushel next fall.

Yet that won’t help boost demand, which could take another hit if the economy stalls, he said.