Ethanol takes a thrashing in Minnesota

Source: DAVID SHAFFER , Star Tribune Updated: September 21, 2012 - 9:35 PM • Posted: Monday, September 24, 2012

A driver for Kwik Trip filled his tanker truck with ethanol..

Minnesota’s ethanol makers are caught in an unprofitable squeeze.

Seven producers tracked by the Star Tribune have reported net losses for the quarter ending in June or July, the second bad quarter in a row.

Across the industry, companies are pressured on two sides — high prices for corn, their single largest cost, and lagging prices for ethanol, their main product.

“The conditions are tough at best,” said Brian Kletscher, president of the Minnesota Biofuels Association and CEO of Highwater Ethanol, whose plant in Lamberton, Minn., posted a net loss of $1 million in the second quarter.

In a major shift, the production of ethanol alone — not counting byproducts — is no longer a break-even proposition, according to a Willmar, Minn., firm that tracks 60 ethanol producers.

“The big story is that the cost of the corn is higher on a per-gallon basis than what we can sell the ethanol for,” said John Christianson, principal in Christianson & Associates, which recently published its annual Biofuels Benchmarking Industry Report. “That dynamic happened in the first two quarters of 2012.”

To break even, or stave off bigger losses, ethanol producers now rely more heavily on sales of an animal feed byproduct, called distillers’ grains, and industrial corn oil. Some plants also sell carbon dioxide captured from fermentation.

These byproducts accounted for 23 percent of average ethanol plant revenues in 2012, up from 16 percent in 2008, Christianson said. Yet even when those revenues are added in, the least efficient ethanol plants still didn’t make money, he said.

One of the hardest hit in the Star Tribune’s survey of Minnesota-affiliated ethanol producers is the owner of a Fairmont, Minn., ethanol plant, BioFuel Energy Corp. It reported a nearly $11 million loss on revenues of $123 million. The Denver-based company owns a second plant in Nebraska and sells its ethanol through Minnetonka-based Cargill.

The nation’s No. 4 ethanol maker, Omaha-based Green Plains Renewable Energy, whose nine plants include one in Fergus Falls, Minn., had a second consecutive negative quarter. The $7.6 million loss was down from the first quarter’s.

Minnesota also has smaller, single-plant producers often with farmer investors, such as Granite Falls Energy, based in Granite Falls. It slipped to a $566,000 loss in the second quarter, after being the only company to report a profit in the Star Tribune’s first-quarter survey. Two other single-plant companies also reported losses.

Effects of corn prices

Producers are facing high corn prices, which in August exceeded $8 per bushel during the worst Farm Belt drought in decades. Corn now represents 95 percent of an ethanol plant’s costs, Christianson said. One bushel of corn makes about 2.8 gallons of ethanol.

Ethanol has been selling at prices down 13 percent to 16 percent compared with the year-earlier quarter, according to company financial statements. Part of the decline is explained by a one-time event: Fuel blenders went on an ethanol-buying binge in late 2011 to collect a federal tax credit before it expired Dec. 31. That created an oversupply in the market that lingered into the second quarter, industry officials said.

One bit of good news for the industry is that lower natural gas prices have cut production costs. And plants that have improved efficiency — extracting a little more fuel per bushel of corn — are doing better than others.

Industry officials said that many plants, especially those with low debt, can keep going in tough times even as operating margins shrink.

“These plants are not all losing money every day– some may still be operating in positive cash flow,” said Larry Johnson, an ethanol industry consultant based in Cologne, Minn. “You don’t want to turn your employees away. There is a cost for not operating.”

Johnson said corn prices recently have dropped below $8, and the futures outlook is good. To save money on corn, more ethanol makers are buying directly from farmers and adding corn storage facilities to hold it, said Paula Emberland, an analyst for the Biofuels Benchmarking report.

In a sign of improving margins, Valero Energy Corp., the No. 3 U.S. ethanol producer, announced this week that it restarted two ethanol plants in Nebraska and Indiana. Valero, whose 10 plants include one in Welcome, Minn., reported a $5 million ethanol operating profit in the quarter.

Minnesota has 21 ethanol plants, including one that is shut down. Most don’t publicly report financial results because they are privately held. The newspaper tracks seven companies with Minnesota ties that are primarily ethanol makers and report their results publicly.

Kletscher, of the Biofuels Association, said it could take a full year before the ethanol industry gets past the current corn and ethanol market squeeze. That assumes 2013 won’t bring another drought in the Corn Belt.

“You are in that mode where you watch absolutely everything you spend,” Kletscher said. “You watch every move that you make. You are going to have some good months and you are going to have some months where you look deep inside.”

Staff writer Patrick Kennedy contributed to this article. David Shaffer • 612-673-7090