Ethanol industry recovering from ‘nastiest stretch of time’

3/31/2013
BY JON CHAVEZ
BLADE BUSINESS WRITER
Green Plains Renewable Energy ethanol plant in Riga Township, Michigan, stayed on its feet last year and generated $60 million in nonethanol businesses, said President Todd Becker. While its stock price dipped, it has since recovered.
Green Plains Renewable Energy ethanol plant in Riga Township, Michigan, stayed on its feet last year and generated $60 million in nonethanol businesses, said President Todd Becker. While its stock price dipped, it has since recovered.

Todd Becker pulls no punches when he talks about how bad the latter half of 2012 was for the ethanol industry.

An engine pulls cars at the ethanol plant. Things have improved since the latter half of 2012. Production as a whole fell from 13.9 billion of gallons of ethanol in 2011 to 13.3 billion gallons in 2012.
An engine pulls cars at the ethanol plant. Things have improved since the latter half of 2012. Production as a whole fell from 13.9 billion of gallons of ethanol in 2011 to 13.3 billion gallons in 2012.

“I’ve been in the industry since 2006. That was the worst, nastiest stretch of time I’ve ever seen in this industry. But we always knew it was coming,” said Mr. Becker, president and chief executive officer of Omaha-based Green Plains Renewable Energy, the company that owns and operates the 60-million-gallon Riga Township ethanol plant near Blissfield, Mich., in Lenawee County.

A combination of last year’s drought, which shrunk corn supplies, burgeoning stockpiles of ethanol, weaker consumer demand for gasoline, higher prices for corn, and increased ethanol imports from Brazil left ethanol makers in an unaccustomed state of sitting on too much of their corn-derived fuel additive.

“It was all a recipe for a cyclical downturn for the ethanol industry,” Mr. Becker said.

Production that reached 13.9 billion gallons of ethanol in 2011 dropped to 13.3 billion gallons last year, the industry’s first annual decrease since 1996.

Twenty of the nation’s 211 ethanol plants shut down indefinitely last year, with another 15 idled temporarily. Several of the plants shut down simply because they couldn’t obtain enough local corn supplies, according to the Renewable Fuels Association, the ethanol industry’s trade association.

“They could have brought corn in from somewhere else, but it wasn’t economical to do that. The whole point is you’re getting your corn locally and that’s what makes [a plant] economical,” said Geoff Cooper, an analyst with the Renewable Fuels Association.

ABOUT ETHANOL AS FUEL:

■ Ethanol is made by fermenting starches from corn or other products to create ethyl alcohol.
■ In the United States it is used as a fuel additive for automobiles, and is produced mostly from corn.
■ Most auto fuel is a mixture of 90 percent gasoline and 10 percent ethanol.
■ E15 is 85 percent gasoline and 15 percent ethanol.
■ E85 is 85 percent ethanol and 15 percent gasoline. It can be used in flex-fuel cars and trucks.
■ Some Brazilian cars can use 100 percent ethanol as fuel. Brazil produces ethanol from sugar cane.
■ Ethanol is also used in aircraft.

Prices for ethanol, which is made by fermenting starches to create ethyl alcohol, a highly combustible fuel, were down 12 percent from 2011. They averaged $2.23 a gallon last year, compared to $2.54 a gallon in 2011, according to the U.S. Energy Information Administration.

At $2.23 a gallon for ethanol, and with the average price of corn up 11 percent to $6.67 a bushel in 2012 compared to a year earlier, many ethanol producers found their profit margins squeezed significantly and in some cases, non-existent.

For example, local ethanol plant operator The Andersons Inc., of Maumee, which has investments in four ethanol plants in Ohio and Indiana, had a $3.7 million operating income loss in its ethanol division in 2012, compared to a $23.3 million operating income profit in 2011. In late September, the company ceased production for five days at two of its ethanol plants due to poor spot margins for the fuel additive.

But that was then. Since late January, the picture for ethanol producers is looking better.

Reducing some production of ethanol in late 2012 has meant that the flush inventories of last fall have begun to dwindle. Imports of ethanol from Brazil, made mostly from sugar, have slowed. Four U.S. plants that had been idled have returned to production. And corn supplies, while still tight, appear adequate enough to allow producers to operate up until the fall when the harvest from this year's expected 97.3 million acres of corn begin to trickle in.

“Things have improved, yes. They’re on a high level. But we’re still dealing with the effects of the drought and will be until we replace that corn this fall,” cautioned Neill McKinstray, president of The Andersons’ Ethanol Group.

“The corn situation is still the corn situation and that was a big factor in the industry’s [lack of] profitability in 2012,” he said.

Mr. McKinstray said the markets responded to low corn supplies, lower gasoline demand, and excess ethanol by lowering producers’ profit margins. And the industry countered by scaling back production.

“We’re now at a point where production has dropped and excess inventories have dropped. … Thus, margins are better,” the Andersons executive said.

Ethanol producers have known that corn supplies will be tight this year, so the market has responded again, Mr. McKinstray said. Corn exports have dropped and corn imports from Canada and South America having increased, he said.

“Other uses for corn have been curtailed, such as feed rations, so the market is at work attempting to ration the available crop we have until the new crop becomes available,” Mr. McKinstray added.

PLANTING MORE CORN

Farmers also apparently have gotten the message that a bigger crop is needed to offset the effects of last year’s drought, which was the worst since the 1930s.

On Thursday a U.S. Department of Agriculture forecast indicated farmers will plant 97.3 million acres of corn in 2013, up 1 percent from 2012 and 6 percent above 2011. If that occurs, it will be the highest planted acreage in the United States since 1936.

But the crop won’t materialize until the fall, so analysts say the first three quarters this year will be tough for ethanol producers.

Last year’s drought cut U.S. corn production by 13 percent and left inventories (as of Dec. 1) at 8.03 billion bushels, the lowest post-harvest figure since 2003.

Currently, corn supplies are being devoured at the fastest pace in nearly four decades.

A report by Bloomberg News Service said corn supplies from December through February fell 38 percent to 4.995 billion bushels.  Some analysts have speculated that at least one of several groups that depend heavily on corn — ethanol producers, livestock producers, or exporters — likely will run out of corn this summer.

Already, corn futures on the Chicago Board of Trade have gained 4.5 percent this month to $7.3525 a bushel, reaching a seven-week high recently, the Bloomberg report noted.

OUTLOOK IS BETTER

But compared to eight months ago, the current situation for the ethanol industry is rosy.

“The outlook late last summer and into the fall was pretty gloomy. But I think what we’ve seen happen since then is the market has rationalized and there have been a number of plants that shut down late last year in response to the high corn prices and the drought and that has helped us reach break-even margins,” Mr. Cooper said. “We have seen the supply come back and the industry is profitable again,” he added.

The Renewable Fuels Association is “cautiously optimistic” about this year’s corn crop, Mr. Cooper said. “The expectation is a lot of acres plant and that we get a more normal weather year and don’t see the kind of drought conditions we saw last year. I think the expectation is this could be a good recovery year for the industry.”

While the industry as a whole is looking to recover, not everyone was hurt last year.

Green Plains’ Riga Township operation continued to operate normally, and the company as a whole was profitable, although its stock price, which began 2012 trading around $11 per share, dipped to a low of $3.61 in mid summer. It has since rebounded to nearly $12 a share.

“We were profitable for 2012 because we are diversified. So we ended the year in the best shape we’ve ever been with $280 million in cash and our lowest debt balance ever,” Mr. Becker said. The company generated $60 million in non-ethanol income from its different businesses, including grain elevators, crop market distribution, and the sale of corn oil by-product from ethanol production.

STAYING OPEN

Another company that did well was Poet bio-refining, of Sioux Falls, S.D., which operates three Ohio ethanol plants in Leipsic, Fostoria, and Marion.

Mark Borer, general manager of Poet’s Leipsic plant, said despite the drought, the 68-million gallon a year plant he oversees in Putnam County, never shut down even temporarily in 2012, thanks in part to a continual upgrade of its technology, which makes the plant more efficient, and annual “tweaks,” like the addition of a facility to recover corn oil from processed corn.

“Three years ago there were very few plants that were extracting corn oil, but we have seen two-thirds to three-quarters of ethanol plants now have added that capability,” Mr. Cooper said. “In many cases that has added 5 to 7 cents per gallon profit.”

The industry should also benefit from increased oil industry need for ethanol because of the Renewable Fuel Standard, which is a federal mandate that requires oil refiners to use 36 billion gallons of renewable fuels annually in its gasoline products by 2022. Part of that 36 billion must be 15 billion gallons of ethanol.

Currently, gasoline producers use 13.2 billion gallons, and that will increase to 13.8 billion this year, and 15 billion by 2015.

“They have to put more ethanol into their products to comply with the law,” Mr. Borer said.

The additional ethanol is being used to create a fuel mixture known as “E15” — which debuted last year — that is 15 percent ethanol and 85 percent gasoline.” Currently, most gasoline used by consumers contains 10 percent ethanol.

But the Renewable Fuel Standard is under attack by the oil industry, and certain segments of the auto industry, who both want it repealed.

The EPA has stated that E15 doesn’t harm vehicles made since 2001, which is about 70 percent of the vehicles now on the road. However, several automakers have said using E15 in vehicles other than flex-fuel cars and trucks (which run on gasoline or an 85 percent ethanol mix called E85) won’t be covered by warranty or could void a car’s warranty.

Ethanol makers say the oil industry’s main beef with E15 is it replaces another 5 percent of gasoline, thereby diminishing their profits.

“The reasons for them being against E15 are fairly straightforward — they have lost 10 percent of their market to the ethanol industry and they’re not real excited about giving up that additional 5 percent,” Mr. Cooper said. “What’s different now for them is the gasoline market is a declining market. In the past, they weren’t terribly opposed to using a little more ethanol if they were going to sell a little more gasoline. But that’s not going to be the case going forward,” he said.

Both industries are lobbying legislators intensely for and against the fuel standard, and the oil industry recently funded a study that claimed E15 has harmful effects on all vehicles that are not flex-fuel. The ethanol industry quickly denounced it as biased and flawed study.

Mr. Becker, the Green Plains CEO, thinks the oil industry eventually will lose the battle.

“The oil industry has been trying to kill us from the beginning and they will defend vigorously their market share,” he said. “But I don’t think this administration will allow [a repeal of the RFS] to happen,” he said.

“You can’t get rid of ethanol, because if you do, then you have no octane. Eighty-four octane doesn’t work. You need 86 octane, and ethanol is the cheapest octane on the planet,” Mr. Becker added.

Contact Jon Chavez at:
jchavez@theblade.com
or 419-724-6128.