World-Herald editorial: Ethanol sector ups and downs

Source: By Omaha World Herald • Posted: Wednesday, October 28, 2015

The ethanol sector in the Midlands and nationally is entering a rough patch, economists report.

The slide in gasoline prices is putting “further downward pressure on ethanol prices,” University of Nebraska-Lincoln agricultural economist Richard Perrin writes in a new report.

“To make things worse for the plants,” Perrin says, “weaker crop prospects have recently sent corn prices on an upward path. Therefore, ethanol plant operating margins appear almost certain to go negative for many of Nebraska’s plants over the next few months.”

An analysis from CoBank, a Colorado-based bank providing financial services specializing in the ag sector, offers similar conclusions.

“Ethanol profitability will face headwinds in the coming 12 to 18 months,” CoBank reported, “from persistent pressure on ethanol prices, modest increases in ethanol production and capacity, flat domestic demand, and the risk that [distillers grains] exports to China will decrease.”

This analysis is important to Nebraska in light of how the ethanol industry has grown to such impressive size. Economic activity stemming from ethanol and distillers’ grain production reaches nearly $5 billion a year in Nebraska, according to a UNL report in March.

That exceeds the size of Nebraska’s $3.5 billion soybean sector and is equal to 67 percent of the value of Nebraska’s $6.6 billion corn industry.

Nebraska’s ethanol sector employs around 1,300 people directly and supports about 3,300 jobs indirectly, UNL economists report.

The average wage at Nebraska ethanol plants is 21 percent higher than the state’s average manufacturing wage. Many of the state’s 24 ethanol plants are in small communities where wages at that level provide a big benefit.

Kyle Nixon, manager of the Novozymes biofuels plant in Blair, notes in a Midlands Voices essay today that federal regulators’ proposed changes in the Renewable Fuel Standard pose an additional challenge.

Nebraska’s annual production of 1.8 billion gallons is the nation’s second-largest. Iowa is first, with 3.9 billion gallons produced by its 42 plants employing around 2,000 people.

The current stress on the ethanol sector needn’t be exaggerated. CoBank reports:

“Following 18 months of record earnings, the U.S. ethanol industry has rebalanced in 2015. As energy prices collapsed in late 2014, so did ethanol prices and plant margins. However, ethanol’s supply/demand has been well balanced in 2015.”

Ethanol prices will be volatile for the near future, the bank says.

The sky isn’t falling. Midlands biofuels plants have considerable strengths and in general have been well managed.

But we’re at the point where it’s appropriate to understand the magnitude of our region’s renewable fuels sector and pay ongoing attention to its fortunes, now and in the future.