U.S. ethanol producers feeling the pinch from Trump trade war

Source: By Jarrett Renshaw and Michael Hirtzer, Reuters • Posted: Tuesday, November 13, 2018

NEW YORK/CHICAGO (Reuters) – U.S. ethanol producers drew a bleak picture of their industry in quarterly filings and analyst calls this week, detailing how the critical farm belt business has been devastated by President Donald Trump’s trade war with China and biofuels management policies that they say have tilted toward oil refiners.

The ethanol business had grown for years at breakneck speed but its outlook has dimmed due to Washington’s aggressive protectionist stance and the administration’s unpredictable management of its renewable fuel program.

No. 4 U.S. ethanol producer Green Plains Inc reported a net loss of $12.5 million in the third quarter. The company has idled plants to trim soaring inventories and boost margins, it said Thursday. The company recently sold three plants and a vinegar business to help pay down debt. CEO Todd Becker and others noted that China had been expected to import 200 million gallons of ethanol this year but has instead been out of the market for months due to Trump’s trade war. Becker said Chinese buying would wipe out the U.S. supply glut, which he estimated at about 120 million gallons.

Archer Daniels Midland Co and Pacific Ethanol Inc, other big producers, also reported problems related to the trade fight.

As recently as February, China was the No. 2 global market for U.S. ethanol, which consumes about a third of the domestic corn crop. Then Beijing boosted import tariffs on several high-value American agricultural goods including ethanol, soybeans and pork, pressuring prices for each.

U.S. ethanol futures of $1.26 per gallon are near the lowest in more than a decade. Current stockpiles of 23.150 million barrels (972.3 million gallons) are just below a record from earlier this year, according to the U.S. Energy Information Administration.

The ethanol industry “is in a negative margin position. I wouldn’t say there are many plants that would be positive, even our best plants,” Becker said.

Pacific Ethanol, the No. 6 U.S. ethanol producer, told investors last week that it idled 10 percent of its production capacity to battle high inventories and slumping margins. Its shares have sunk to less than $2 each.

The economic run cuts will likely last into next year and may be expanded, Pacific Ethanol CEO Neil Koehler warned.

“With China in the mix, it would be a very different market and margin environment today,” Koehler said in an earnings call.

The Sacramento-based company recorded a loss of $7.5 million in the third quarter. It slashed its 2018 capital budget, deferred portions of debt payments and restructured loan terms to help preserve cash, according to its recent quarterly financial filing.

ADM CEO Juan Luciano, the No. 2 ethanol producer, said its carbohydrate division did well, with one exception: “The issue continues to be ethanol. And recently, we have seen people (taking) some capacity down, but probably still not enough,” Luciano told analysts.

Other major ethanol producers, like Flint Hills Resources [FHR.UL] and top producer POET LLC, are privately held and do not release financial details.

The ethanol industry’s view of Trump’s biofuels policy is a mixed bag. It has generally praised his recent decision to lift a summer ban of gasoline blended with 15 percent ethanol, or E15. That move could expand the domestic market for the corn-based fuel.

Still, ethanol producers have blasted the U.S. Environmental Protection Agency under Trump for granting waivers exempting a record number of refineries from federal ethanol blending requirements. Biofuel companies have complained that the move is an expensive political gift to the oil industry. “The truth is that the waivers capped domestic demand growth for ethanol and really hurt the industry,” said Geoff Cooper, head of the Renewable Fuels Associations.

The ethanol industry and corn state lawmakers have urged the EPA to stop issuing the waivers and to compensate for lost ethanol blending volumes by requiring non-exempted refineries to blend even more.

The EPA is in the process of finalizing its 2019 biofuels blending volumes requirements under the Renewable Fuel Standard, and is expected to unveil them by the end of the month.

Reporting by Jarrett Renshaw and Michael Hirtzer; Editing by David Gregorio