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Too much ethanol?

This Has been a roller coaster year for the corn ethanol industry. Some of the largest ethanol producers delayed start-up of ethanol plants, and some analysts were predicting many small- and medium-sized ethanol plants would shut down.

A large part of the problem is that ethanol production capacity currently outstrips demand. Randall Doyal, CEO of Al-Corn Clean Fuel, Claremont, MN, notes that the industry has 11.5 billion gallons of capacity and just 8.5 to 9 billion gallons of ethanol demand.

“We'll see a variety of plants out of service until demand and supply come back into balance, probably two or three years from now,” says Logan Caldwell, president, Houston Biofuels Consultants, Houston, TX. “In the meantime, there will be many idle plants, large and small, new and old.”

Caldwell expects that overall the ethanol industry will keep growing and becoming more robust as some plants fall by the wayside. “Consolidation will play a role in reducing costs to keep the industry economically viable,” he states.

Monte Shaw, executive director of Iowa Renewable Fuels Association, notes that each ethanol plant is in a different situation — with its working capital and forward contracting of corn, for example. Some ethanol plants are looking at a tight year. But most plants that have been operating in these times of tight margins continue production according to plan, he says.

A handful of plants have ceased production, but this should not have much impact on corn growers other than those in the immediate vicinity of the closed plants, Caldwell says. As growers know, there are plenty of other markets for corn.

Doyal points out that it is more difficult for ethanol plants outside the Corn Belt to operate with high corn prices. Transportation costs are a primary factor. He adds that decisions on whether to continue producing depend on a company's debt load. Some ethanol producers have been around for several years now and have their debts paid down or paid off. Others do an exceptional job of marketing ethanol and distillers' grains.

Understanding the importance of marketing, Al-Corn Clean Fuel, owned by farmers and local investors, joined with some other ethanol producers to form Renewable Products Marketing Group, Shakopee, MN. Together, these producers sell 1 billion gallons of ethanol annually.

Postponed plans

While most existing facilities kept producing earlier this year, companies that had planned to start up new ethanol plants this spring postponed their plans.

Danny Herron, president and chief financial officer of VeraSun Energy Corporation, Brookings, SD, says that the company made some “tough decisions” during the second quarter not to start up three of its ethanol plants due to “extremely unfavorable” market conditions.

The accompanying chart shows the company's rationale for its decision. The chart shows ethanol prices per gallon and corn prices expressed as a per-gallon number, using 2.8 gal./bu. In June, the spread between the two prices got as narrow as $0.08/gal. The overall industry margin was a negative $0.50/gal. during this time, Herron adds.

This low point came just days before VeraSun was going to begin grinding corn at its new ethanol facility in Welcome, MN. Herron notes that corn prices rose about $2.00/bu. in about 60 days. Based on this volatility and market conditions, VeraSun chose to delay start-up of the Welcome plant as well as new facilities in Hartley, IA, and Hankinson, SD.

Since then, based on improved market conditions, VeraSun has started both the Hankinson and Hartley plants.

Despite rocky times for the ethanol industry in general, VeraSun reported record revenues for its second quarter — up 499% to $1.015 billion as compared to $170 million for second quarter 2007. The increase in total revenues was mainly the result of a 420.6% increase in ethanol volume sold and an increase in average ethanol prices of $0.38/gal. or 17.1% compared to 2007, VeraSun reports.

VeraSun has 16 production plants and is scheduled to have an annual production capacity of approximately 1.64 billion gallons of ethanol by year end. This large-scale production allowed the company to capture revenue in what Donald Endres, VeraSun CEO, called “a challenging operating environment.”


Mark Twain once wrote that the “report of my death was an exaggeration.”

Some might want to consider these words when hearing about the health (or lack thereof) of the ethanol industry. Iowa RFA's Shaw says that analysts sometimes need to be taken “with a grain of salt” because they benefit from volatility.

Speculators make money on volatility. While ethanol has helped raise the price of corn, so has speculation. Speculators have made money on volatility not only in the corn market, but in other grains, oilseeds and metals. “The motive of speculation is not to help corn find its market price,” Shaw says, adding that too much emphasis has been placed on the spot market.

Most ethanol producers plan well into the future, forecasting both corn and ethanol prices. Even if corn were selling for $1.80/bu., ethanol producers would not make money if ethanol was priced at $0.90/gal., Shaw says. “If corn had stayed at $7.25/bu. and the ethanol price hadn't moved, there would be problems,” he says. “But since that time, corn dropped and ethanol prices rose.”

Reports had been circulating that several ethanol plants were filing for bankruptcy. While this could send shock waves, Shaw points out the “bankruptcies” were on paper. The ethanol plants had not even been built.

“Even in the ethanol heydays of 2005 and 2006, there were still a dozen plants not making it,” Shaw says. “We're not expecting a widespread bankruptcy situation in Iowa.” He adds that the state is still on track to produce 2.2 billion gallons of ethanol this year, despite flooding in parts of the state earlier this spring. “Statewide, there are a lot of corn acres,” he says.

Shaw concludes that America's corn farmers have proven they are a more reliable fuel supplier than the Middle Eastern oil industry.

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