More than ethanol in Green Plains’ tank: Company turns to adjacent businesses such as vinegar to smooth out wide swings in earnings

Source: By Russell Hubbard, Omaha World Herald • Posted: Sunday, October 23, 2016

Green Plains is in a bid to corner every use for a kernel of corn. It’s been spending aggressively on acquisitions as part of the effort — acquisitions shareholders will expect to soon pay off in higher profits and fewer stomach-churning downturns.

The new assets — three Midwest ethanol plants bought in September and a California-based vinegar producer purchased this month — have been around only a few weeks. Together, they cost $500 million; longtime employees remember just a few years ago fretting about spending just $10 million for what was then a major plant acquisition.

It will be too soon to get much of a view of how the newly acquired businesses will affect Green Plains’ bottom line when the company on Oct. 31 reports its third-quarter earnings.

But the vinegar producer Green Plains bought is part of a plan to compensate for the volatility of ethanol profit margins, which can take shareholders on a wild ride: In 2014, for example, Green Plains had net income of $160 million, and a high stock price that year of $46. Then ethanol supplies jumped, inventories at fuel terminals nationwide bloated, and profit margins plummeted: In 2015, Green Plains had profit fall 96 percent to $7 million. Shares fell to around $13 early this year. (They closed at $26.75 each on Friday.)

Now, Chief Executive Todd Becker is trying to even out all that bumpiness by investing in more predictable businesses — such as the vinegar company — and others related to ag: animal feed and complimentary commodities such as corn oil that are natural byproducts in ethanol production.

Craig Irwin, an ethanol-industry analyst for investment bank Roth Capital in New Jersey, said he can envision Green Plains — already the No. 2 ethanol producer in the world — acquiring another half-dozen ethanol plants in the next couple of years.

“But the growth will be in adjacent businesses — markets such as oils, feed and ingredients,” he said.

The $237 million paid in September for the three ethanol plants, one in York, Nebraska, and one each in Illinois and Indiana, vaulted annual production to 1.5 billion gallons, making Green Plains the owner of 16 plants and the second-largest producer in the world of the alcohol-based motor fuel additive that is in most cases made from distilling corn. The industry leader is Chicago-based Archer Daniels Midland.

An additional $250 million was spent this month on Fleischmann’s Vinegar Co., a producer of food-grade and industrial-grade vinegar that had been owned by a California-based investment partnership. Seen as complementary — the main ingredient in vinegar is ethanol — Green Plains hopes the vinegar business will smooth earnings that can swing wildly sometimes based on the highly volatile and interconnected markets for corn, ethanol, gasoline and crude oil.

Wall Street will be watching closely. Green Plains is expected to report earnings per share later this month of 23 cents a share, based on Wall Street analyst estimates compiled by FactSet.

Moody’s Investor Service, the credit-rating firm, said Green Plains’ business should be strengthened by the recent acquisitions. Still, it raised a word of caution, noting that the expansion was fueled mostly by debt.

CEO Becker told The World-Herald that the vinegar acquisition is part of the company’s strategy of seeking business connected to corn and ethanol but less subject to their volatile commodity cycles. Fleischmann’s, founded around 1870 and once part of the same company responsible for the baker’s yeast, has always been profitable, Becker said, a simple, stable business no one thinks much about.

The company makes the white distilled vinegar found in almost every kitchen, artisanal cider vinegars, balsamics for culinary use and other varieties used for beverage production, anti-microbial preparations and herbicides. Becker said vinegar is rapidly becoming super cool — as in the Twitter and Instagram sort — savored by connoisseurs who love to taste and rate it like wine, and green thumbs who prize its organic characteristics for cleaning and weed control.

“Who knew vinegar was on trend?” Becker said.

Better yet for Green Plains shareholders, it is on point. The main ingredient in vinegar — a fermented product — is food-grade ethanol. Becker said he witnessed at a Fleischmann plant (the company has them nationwide) ethanol enter through one door and 40 hours later exit as vinegar in 50-gallon drums. That is what biz-school types call “value added,” meaning taking an everyday commodity such as ethanol and transforming it for another use for which people will pay a higher price.

“What we have here is a company that takes our ingredients and adds value,” Becker said. “We aren’t going to be making our money anymore from just grinding corn into ethanol.”

There is a bit to go to reach that goal. Last year, ethanol production accounted for about two-thirds of the company’s entire operating profit of $61 million. But there are major ventures extant, including a cattle feedlot in Kansas — a great outlet for the protein-rich grains left over from ethanol production. Also, corn oil is getting big at Green Plains, blended with rations fed to chickens and beef cattle.

Or said another way, Green Plains is already making and selling ethanol, feeding the leftover grains to cattle on its feedlot, rations that are supplemented by the corn oil that is also a byproduct of ethanol.

“Yes, that is already happening,” Becker said.

As for ethanol itself, Bloomberg Intelligence wrote in a report this month that volumes are stagnating at around 10 percent of the U.S. fuel supply — the ubiquitous E10 blend available at most gas stations. A 15 percent blend is rapidly becoming available around the country, said Irwin, the New York analyst with Roth Capital.

He said ethanol blends are likely here to stay, regardless of criticism from motorists who don’t like the lower energy content than clear gas, small engine operators who say it clogs things up, and the oil industry, which objects to the Environmental Protection Agency requiring a certain amount of renewable fuel be blended with gas, about 14.5 billion gallons annually at present.

The reason, Irwin said, is that clean-air laws require gasoline to contain an oxygenating agent to make engines burn cleaner — and ethanol right now is the cheapest one available and unlikely to be replaced.

“The industry is no longer in its infancy,” Roth said. “I see several more years of high growth potential.”

As for Becker at Green Plains, he says the complementary activities the company can engage in related to corn and ethanol are “limitless” and that the internal business development team at headquarters that discovered the Fleischmann’s opportunity are under orders to keep searching.

“We are going to get bigger, we aren’t done,” said Becker, a veteran of commodities trading who previously worked at Omaha-based processed food company ConAgra. “We are looking for businesses all the time.”, 402-444-3133

Russell covers railroads, trucking, ethanol, energy, ag commodities, corporate finance and business lawsuits and bankruptcies for The World-Herald