Supply-demand crunch pinching ethanol industry

Associated Press  • Posted: Tuesday, February 14, 2012

(AP) SIOUX FALLS, S.D. — Falling fuel demand, an ethanol oversupply and high corn costs could lead some Midwest biorefineries to cut back or idle production until profit margins improve, industry analysts say.

Troy Gavin, general manager of the Midwest Renewable Energy ethanol plant near Sutherland, Neb., said the 28-million-gallon-per-year plant is halting production for a period of up to eight to 12 weeks because of the supply-demand imbalance.

“It’s got to work itself out of the system, and it will,” Gavin said Monday.

Ethanol futures on the Chicago Board of Trade have dropped nearly 50 cents over the past five months to $2.21 a gallon, and corn, the alternative fuel’s primary feedstock, is hovering around $6.36 a bushel.

Meanwhile, ethanol stocks as of Feb. 3 climbed to an all-time weekly high of 21.1 million gallons, according to the Energy Information Association.

“We went from some of the best margins we’ve ever seen to some of the worst in 30 to 45 days,” Gavin said. “That is volatility like no other industry.”

Rick Kment, a Nebraska-based ethanol industry analyst for agricultural data company DTN, said much of the lackluster demand is seasonal.

Ethanol is blended into gasoline, so a driver pumping fewer gallons affects both industries. And fuel demand typically drops during the winter months between the holiday travel season and their spring-summer road trips.

Kment said larger ethanol plants will likely cut back on production rather than go cold, as a shutdown can be more disruptive.

“That way they can jump back into it when margins improve,” he said.

Another contributing factor could be the Jan. 1 expiration of the 45-cents-per-gallon blender tax credit. Although it didn’t go directly to ethanol producers, it had been an incentive for oil companies to buy ethanol and blend it with gasoline, said Matt Hartwig, spokesman for the Renewable Fuels Association.

“Part of that might be a little market adjustment with the tax credit going away,” Hartwig said.

Last week, Archer Daniels Midland Co. announced it was closing its ethanol plant in the North Dakota city of Walhalla, ending 61 jobs. The company said the plant wasn’t profitable enough because of its geographic location and scale.

Kment said ADM’s announcement seemed to be more of a corporate strategic decision rather than one based on industry profit margins.

Volatility in 2008 led to the bankruptcy of VeraSun, then the nation’s second largest ethanol producer.

As skyrocketing corn costs began cutting into ethanol producers’ profits, many tried to control costs by hedging, which sets future prices for corn sellers while helping buyers avoid the risk of volatile price swings by letting them lock in at a set cost.

After VeraSun locked into prices for its feedstock, corn went into a sharp decline from almost $8 per bushel to less than $5 per bushel.

Gavin said the industry is now better equipped to handle volatility, as companies have reduced their debt and are a lot less exposed.

“The industry has become a lot more intelligent and has managed risk in a lot different fashion,” Gavin said. “Risk management has become a daily occurrence.”