The Andersons Sees Slow Adoption of Higher Ethanol Blends

Source: By Ian Berry, Wall Street Journal • Posted: Thursday, August 29, 2013

Limits to U.S. ethanol use are requiring ethanol companies to rely on byproducts and more efficient production to succeed, a senior executive at The Andersons Inc. (ANDE) said.

The Andersons and other ethanol producers are counting on increased use of E85, or motor fuel consisting of 85% ethanol, and E15 to boost demand over the long term, Neill McKinstray, president of The Andersons’ ethanol division, said in an interview this week.

But for now, most consumers are forced to use E10, due to a lack of new fuel-pump infrastructure and opposition within the automotive industry to a 15% ethanol blend.

The company, whose operations including grain-processing and rail shipping, is focusing on byproducts such as corn oil to supplement its profits from ethanol.

“Firms are left with no choice but to squeeze more gallons out of the kernel,” Mr. McKinstray said.

The Maumee, Ohio, company, which had $5 billion in sales in its latest fiscal year, is currently enjoying strong ethanol profit margins, Mr. McKinstray said. But company officials say that as ethanol producers ramp up production in the months ahead, increased use of E15 and E85 won’t be able to absorb the supply, which will squeeze margins.

Although U.S. regulators have approved use of fuel blends containing 15% ethanol in vehicles made after 2001, few areas have pumps that serve the higher blend. This has limited growth in ethanol use, even as federal mandates requiring more ethanol use increase.

The adoption of E15 will only happen “slowly,” Mr. McKinstray said. The higher ethanol blend is opposed by some in the automotive industry out of concern it harms engines.

Ethanol producers are also counting on growth in use of E85, which can be used in flex-fuel vehicles, but that growth will also be slow, Mr. McKinstray said. The company has said the growth won’t be fast enough to overcome an expected increase in production over the next few months.

Mr. McKinstray, who is chairman of the board at the Renewable Fuels Association, an industry trade group, said the industry needs more clarity from the government on its energy policies. The Obama administration’s emphasis has shifted away from ethanol, and toward electric cars in recent years, he said.

Renewed support for high-compression, turbo-charged engines that can use E85 blends would give automakers confidence to invest more in those vehicles. The good news for the industry, Mr. McKinstray said, is that E85 is currently at a large discount to regular gasoline at the pump.

“We need more flex-fuel vehicles, but we also need people driving flex-fuel to use E85,” he said. “Until recently we haven’t had the economic incentive to do so.”

The Andersons, a regional company which has in the past year expanded beyond the Great Lakes region with purchases of grain elevators and ethanol plants in Iowa and Tennessee, reported net income of $29.5 million in the quarter ended June 30, up slightly from $29.2 million the prior year.

The company’s ethanol division swung to a profit of $10.6 million from a loss of $2.1 million a year earlier. It operates four ethanol plants and is one of the larger publicly traded ethanol companies by volume. The company’s shares have risen 55% this year.

While a recent heat wave across the U.S. corn belt has sparked concerns about the size of the crop and pushed up grain prices, Mr. McKinstray said the situation isn’t nearly as dire as it was a year ago, when the worst drought in decades decimated the crop, leading to the smallest harvest in six years.

“After last year, I don’t think anything can scare me,” he said.