Low oil prices drying up ethanol producers’ profits

Source: By Christopher Doering, Des Moines Register • Posted: Thursday, March 17, 2016

WASHINGTON, D.C. — Ethanol producers across the Corn Belt are being battered by tumbling gasoline prices and a glut of the corn-based fuel, pushing some companies to consider scaling back production or merging with another plant to save money.

Still, the industry is better prepared to withstand the downturn than four years ago, when a widespread drought forced plants to shutter their doors or suspend production.

Plants around Iowa are mostly expected to remain open, experts say, the result of an improved bottom line and support from the federal government’s ethanol mandate that has helped spur nationwide demand for the largely corn-based fuel.

That’s important in Iowa, the nation’s largest producer of ethanol. The industry says ethanol and biodiesel contributes billions of dollars to the economy each year.

“No industry likes to be barely hanging on, but the ethanol industry … will continue to operate and continue to cover their” costs, said Bruce Babcock, an Iowa State University economist who closely follows the ethanol markets.

“That outlook isn’t very good for making a lot of money, but it will keep them going” until things improve, he said.

Babcock sees few plants shutting down, given the continued support of the government’s ethanol mandate, known as the Renewable Fuel Standard — a 2007 law that requires an increasing amount of alternative fuels be blended into gasoline.

Babcock said ethanol producers will benefit from the EPA’s expected increase in the Renewable Fuel Standard going into 2017, as the agency moves closer toward Congress’ ultimate target of having 15 billion gallons of the fuel come annually from corn.

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A game of chicken

Ethanol producers, in general, are in “very solid financial shape,” said Todd Becker, CEO of Green Plains Renewable Energy, an Omaha-based ethanol company that has 14 plants nationwide, including in Iowa.

That’s both good and bad for an industry facing a surplus of ethanol. Larger cash reserves mean a better chance of surviving the downturn and less incentive to decrease production.

“It’s almost like a game of chicken that the industry has to play — to see who’s going to slow down production first,” said Becker, whose company has trimmed output 10 percent.

Green Plains posted a $3.6 million fourth-quarter loss but a year-end $7.1 million gain. That’s significantly less than the $160 million the company earned in 2014.

Ethanol is key in Iowa, which relies on ethanol production for jobs, income and to help farmers by increasing demand for their corn. Iowa’s 43 ethanol plants produced a record of just over 4 billion gallons in 2015, about 27 percent of the nation’s production.

The renewable fuels industry contributed $4.6 billion to the state’s economy last year, according to an industry-supported economic analysis. But it was a 5.6 percent pullback from 2014 because of falling oil prices and uncertainty surrounding the renewable fuel mandate.

At the start of the year, the average ethanol producer faced “deep losses,” said Heather Jones, an analyst at BB&T Capital Markets in Virginia.

Since then, conditions have improved, ranging from as much as a 4-cents-per-gallon loss to break-even, she said.

“We’re seeing improved, but not stellar, conditions,” Jones said.

Delayne Johnson, CEO of Quad County Corn Processors in Galva, Ia., said the industry saw “pretty significant losses” in January, while February was mostly around break-even and “March is somewhere in between.”

The privately held western Iowa company has been in black so far, Johnson said, thanks in part to agreements around its cellulosic ethanol technology.

A boom-and-bust industry

At Redfield Energy, a South Dakota ethanol producer, CEO Tom Hitchcock said the downturn is the latest in the boom-and-bust cycle that has besieged the renewable fuel industry for years.

Just four years ago, when the Corn Belt was being battered by a drought, Redfield, a plant that produces 60 million gallons a year, was losing about 5 cents on each gallon of ethanol it produced.

In 2014, that jumped to a record profit of $1.14 a gallon, when oil prices were more than $100 a barrel. But today, the plunge in crude has pushed that back down to a loss of about 7 cents a gallon.

Redfield and other producers used the favorable market for ethanol in 2014 to improve their financial picture, paying off debt and boosting their cash in the bank to help withstand challenging times.

“In a lot of the industry, the plants have been paid for,” Babcock said.

Becker said the industry has struggled with a glut of ethanol at a time when exports and demand have been sluggish.

“We have to find a place to sell more — or the industry needs to produce less,” said Becker, adding that ethanol is unlikely to see the bankruptcies plaguing the oil industry. ”It will fix itself. .… It’s not a big broken industry.”

Possible consolidations

Still, Jones and Becker expect the downturn could drive more consolidation within the industry.

For example, Archer Daniels Midland is studying whether to sell its dry-mill ethanol plants, including one in Cedar Rapids, given shrinking margins.

Becker believes farmer-owned plants might be more likely to consolidate than corporate facilities, with growers facing poor returns on both grain and ethanol investments. So far, though, few plants are on the market.

“It will be interesting to see if it drives any farmer-owned plants to market for consolidation,” said Becker, who expects investor-owned Green Plains to be “an active acquirer.”

Falling oil prices have helped the U.S. economy and consumers but has pummeled oil and ethanol industries.

A decline in gasoline prices typically pulls down ethanol with it, putting further downward pressure on corn prices, farm economists said.

Gasoline and ethanol are competing energy sources, so when gas prices fall, ethanol prices drop to remain competitive. That squeezes income at ethanol facilities, waffling between profits and losses.

Profitability through efficiencies

The industry has been helped with gains in efficiencies, producing more ethanol and livestock byproducts corn oil and dried distillers grain from the same amount of corn.

Dried distillers grain and corn oil are boosting producers’ bottom line, experts said.

At Absolute Energy, a 125 million-gallon-a-year ethanol plant in St. Ansgar, Ia., the company plans to maintain its normal volumes. The plant, which first started producing the renewable fuel in 2008, expects to be profitable this year in large part because of dried distillers grain, a byproduct from ethanol production that is highly valued as livestock feed, particularly for cattle.

“They’re helping,” said Rick Schwarck, Absolute’s president. When asked if his operation would be profitable without the byproduct in the face of the economic slump, he said: “No, nobody would be.”

Ethanol producers say closing for a long period can be more damaging than keeping open when profits are scarce.

An ethanol plant has all sorts of fixed costs, such as insurance, labor, rail car leases and taxes, along with variable inputs that are changing more frequently, including pricing for corn, natural gas and enzymes.

‘You keeping making ethanol’

The thinking goes that if a facility has fixed costs, it’s going to have to pay anyway, so it’s better off getting some type of income by producing ethanol.

“You can still lose money. If you slow down, you’re probably going to lose more cash,” Redfield’s Hitchcock said. “As long as we have a positive variable margin, you just keep the foot on the accelerator, you keep making ethanol.”

Becker and others expect a robust driving season, sparked by low gas prices, improved exports and greater adoption of higher-blends of ethanol will push demand higher.

Gasoline producers use ethanol and other oxygenates to reduce dirty air emissions during the summer.

Combined with lower levels of production, industry leaders expect the ethanol glut to decline and prices to climb by year’s end.

Jones, the BB&T ​analyst, said she expects improved conditions by 2017.

“No one believes that oil will stay this depressed,” she said. “I don’t expect a robust environment, but it will be better than now.”

Contact  at cdoering@usatoday.com or reach him at Twitter: @cdoering