Expanding despite difficulties
September 01, 2008
by World Grain Staff
The U.S. ethanol industry that just two years ago was eying what appeared to be unending potential and broad political support has in the last few months witnessed record high corn (maize) prices, tightening credit and ongoing — if not growing — negative public and political opinion. As a result, it is showing signs of stress amid slim margins, construction delays and even bankruptcies.
Further clouding the outlook for ethanol are record high and now falling crude oil, gasoline and diesel prices, rising food costs and continued strong opinions for and against the use of crops for food and fuel, all in the setting of a U.S. presidential election year in which energy prices, especially gasoline, have become a hot political issue.
"The industry is doing what we expected it to do," said Mary Holmes, director of biofuel programs and business development for the National Corn Growers Association (NCGA). She considered the current situation a "correction" for the ethanol industry.
But while the bloom appears to be off the ethanol "rose," new facilities still are under construction, output continues to grow, imports are increasing despite a 54¢-per-gallon duty, and demand still outpaces production.
Perhaps the pivotal point this summer was a ruling in early August from the U.S. Environmental Protection Agency (EPA) on a request from the state of Texas to halve the Renewable Fuels Standard (RFS). Texas on April 24 requested the EPA suspend 50% of the RFS for alternative fuels made from grain because of the impact of high grain prices on that state’s economy. The 90-day period in which the EPA was to have ruled passed July 24. The EPA said it needed additional time to "adequately respond to the public comments and develop a decision document that explains the technical, economic and legal rationale of our decision." The agency said it received more than 15,000 submissions during the 30-day comment period.
The usual groups for and against the use of corn to make ethanol voiced opinions on the Texas waiver petition, including the National Pork Producers Council (NPPC) and the National Cattlemen’s Beef Association (NCBA) supporting the waiver, and the NCGA, the Renewable Fuels Association (RFA) and the National Biodiesel Board (NBB) against the waiver.
"By granting this waiver, EPA would accelerate the development of advanced biofuels that do not rely on food or feed as a feedstock," said Terry Stokes, chief executive officer of the NCBA.
NPPC President Bryan Black said, "The U.S. government’s intervention in grain markets, through the RFS, has created one of the most severe economic crises to ever hit pork producers."
Weighing in against the waiver, NCGA President Ron Litterer said, "A waiver from the RFS would undoubtedly result in higher gasoline prices and it seems very improbable that grain prices or food prices would be reduced." Additionally, the waiver would send a signal to farmers to plant less grain, he said.
The NBB noted in its comment to the EPA that all renewable fuels qualify for the RFS and that granting the waiver would cut all by half, including biodiesel and advanced biofuels such as cellulosic ethanol, even though the Texas request focused only on corn ethanol.
State governments that once were unanimously for ethanol and biodiesel still mostly favor alternative fuels, with only a couple backing Texas in its request for the RFS waiver. Several Midwest states, where most ethanol plants are located, voiced strong opinions against the waiver. The U.S. Departments of Agriculture and Energy also opposed the Texas request.
The government-mandated RFS for 2008 is 9 billion gallons (34.1 billion liters), or about 6% of gasoline used, which is projected by the EPA at nearly 145 billion gallons this year.
The impact of renewable fuels, ethanol in particular, on grain prices and ultimately on food prices, remains hotly debated.
No shortage of studies for, against and "neutral" to the use of grains and oilseeds to make fuel continue to flow from universities and private consultants. The most recent study, "What’s Driving Food Prices," was released in late July by the Farm Foundation, Oak Brook, Illinois, U.S., that defines itself as a "catalyst for sound public policy." The study, conducted by three Purdue University economists who reviewed 25 studies, identified "growth in the production of biofuels" as one of the three broad sets of forces driving food prices higher, along with "the depreciation of the dollar" and "global changes in production and consumption of key commodities." While the focus of the study was food prices, not ethanol, the researchers said, "The ethanol blender credit (51¢ per gallon), tariff (54¢ a gallon) and Renewable Fuel Mandate are factors causing increased corn prices, but quantitatively most of the increase has been driven by higher oil prices."
CORN PRICES RECEDE
Corn futures prices rose to record highs, near $8 a bushel and above in some deferred contracts, at the end of June, but have since plunged more than $2 a bushel, or 33%, as the late-planted and partially flooded crop has shown strong recovery so far this growing season. Soybean prices hit record highs over $16 a bushel in the first week of July and also have dropped significantly.
In its July World Agricultural Supply and Demand Estimates, the U.S. Department of Agriculture projected 3.95 billion bushels of corn would be used to produce ethanol in 2008-09 (September-August), up 34% from 2.95 billion bushels in the current year, which was up 39% from 2.117 billion bushels in 2006-07. But projected use of corn for ethanol in 2008-09 already has been trimmed 50 million bushels from the initial May projection of 4 billion bushels. Use for the current year (2007-08) initially was projected at 3.4 billion bushels in May 2007 but was cut four times, with the latest 50-millionbushel reduction in July "based on reported delays in plant startups and construction, as well as lower expected plant capacity utilization as indicated by the most recent ethanol production data," the USDA said.
Although use of corn for ethanol production in 2008-09 is expected to increase sharply, next year’s use of corn for ethanol as a percentage of corn production increases even more dramatically because of a smaller 2008 corn crop. Based on the July USDA projection of an 11.715-billion-bushel corn crop in 2008, projected use for ethanol would equal 34% of the crop, compared with 23% of the record-large 13.074 billion bushel 2007 crop.
Total corn use in 2008-09, projected at 12.495 billion bushels, is down 300 million bushels from the current year. Use next year is expected to exceed 2008 production (but not the total supply of 13.328 billion bushels) with the only increase in use expected in the ethanol sector as other use categories stay the same or decline. Projected use of corn for food and seed in 2008-09 was 1.345 billion bushels, unchanged from 2007-08; corn exports were projected at 2 billion bushels, down 450 million, or 18%; and feed and residual uses were pegged at 5.2 billion bushels, down 850 million, or 14%.
PRODUCTION STILL SHORT
Ethanol production in April, the latest month for which data are available, was 708,120,000 gallons, down 3% from 730,422,000 gallons in March but up 44% from April 2007, according to the Energy Information Administration of the U.S. Department of Energy.
Demand in April was estimated at 751,600,000 gallons, up 5% from 712,860,000 gallons in March and up 46% from a year ago, according to data from the RFA.
Meanwhile, imports of ethanol have risen despite the 54¢-a-gallon duty. Ethanol imports in April were about 50 million gallons, up 28 million gallons from April 2007 and up 45 million gallons from March 2008, according to the U.S. International Trade Commission. Of the April 2008 total, nearly one-third came from Brazil, which converts more than half of its sugarcane crop into ethanol. Private forecasts put ethanol shipments from Brazil to the U.S. between 800 million and 1 billion gallons in 2008 despite the 54¢ duty, up from less than 200 million gallons last year.
U.S. ethanol production in 2007 was estimated at 6.485 billion gallons, up 34% from 4.855 billion gallons in 2006, according to the EIA.
As of early July, the RFA said 161 ethanol refineries with total production capacity of 9.357 billion gallons a year were operational. Using unofficial calculations, monthly capacity would equal 780 million gallons as of July compared with April production of 708 million, which indicates the ethanol industry was running just over 90% of capacity.
Another 49 plants with capacity of 4.258 billion gallons a year were under construction or expanding, the RFA said.
NEW PLANT STARTUPS SLOW
But the pace of new ethanol plant startups has slowed as profit margins shrank or were negative and talk of bankruptcies increased in recent months.
One press report in June indicated that "at least 16" ethanol companies were filing for bankruptcy and "at least two to three times that number" would file within a year. Holmes said she had heard about bankruptcies but not specific numbers. "What I hear is that plants have backed off from capacity, but facilities with good risk management are hanging in there," Holmes said.
According to reports from DTN, an Omaha, Nebraska, U.S.-based commodity communications company that has an ethanol information service, six bankruptcies in the ethanol industry have been verified in the past year, although some did not actually operate production facilities. Those include E3 BioFuels L.L.C., Mead, Nebraska, in November; Central Illinois Energy, Canton, Illinois, and Convergence Ethanol, Inc., Westlake Village, California, in December; Ethanex Energy Inc., Basehor, Kansas, in March 2008; and Wyoming Ethanol L.L.C., Torrington, Wyoming, and its parent Renova Energy P.L.C., London, U.K., in June 2008. Ethanex Energy and Convergence Ethanol filed Chapter 7 bankruptcies while the others were Chapter 11. Central Illinois Energy was later purchased at an auction.
Additionally, Alternative Energy Sources Inc., Kansas City, Missouri, U.S., ceased operations June 23 "due to an inability to successfully raise funds for its ethanol plant construction or expand its ethanol management consulting business," according to a company statement. The company had planned to build ethanol plants in Boone County, Iowa, and Kankakee, Illinois.
"New startups have definitely slowed," Holmes said. "Several startups have been delayed, but there still are several planning to come on line."
One of the nation’s largest ethanol producers with production capacity over 1.2 billion gallons, VeraSun Energy Corp., Brookings, South Dakota, opened a plant in Hankinson, North Dakota, July 22, its 12th facility in operation. By the end of 2008, VeraSun expects to have annual production capacity of 1.64 billion gallons of ethanol from 16 facilities in eight states, which would make it the largest producer in the United States.
A startup at the Hankinson plant as well as at plants in Welcome, Minnesota and Hartley, Iowa had been delayed since June due to market conditions.
"Ethanol is currently being sold at a deep discount to unleaded gasoline, which has caused us to delay the startup of these facilities until the outlook for ethanol selling prices and overall margins improve," said Don Endres, chief executive officer of VeraSun, in a June 25 release from the company. The Iowa and Minnesota plants still had not opened as of late August. US BioEnergy, which operated an ethanol plant in Bloomington, Illinois, became part of VeraSun effective April 1.
VeraSun on Aug. 12 reported record revenues for the second quarter of 2008, which ended June 30. The company increased revenues by 499% over the second quarter of 2007, to $1.01 billion. In the first quarter that ended March 31, the company had revenues of $516.5 million, up 257% from a year earlier, and net income of $7.6 million compared with a loss of $300,000 a year ago.
Archer Daniels Midland (ADM) is a close second to VeraSun with current production capacity of 1.07 billion gallons and another 550 million gallons at plants expanding or under construction at a total of just seven plants in the Midwest.
POET L.L.C., formerly Broin, has the most plants in operation or under construction with 26 and ranks first in production capacity with 1.331 billion gallons currently. But with only 195 million gallons at plants under construction or expanding, POET will drop to third largest in total capacity.
Those three companies account for 35% of current and proposed U.S. ethanol production capacity, which totals 13.614 billion gallons, according to RFA data. No other company has capacity of more than 450 million gallons a year despite such well-known names as Cargill, Tate & Lyle and The Andersons. The majority of ethanol facilities have annual production capacity of only around 50 million gallons, although most news plants, and those under construction, have capacity of 100 million gallons or more. Bunge, meanwhile, has chosen to invest more than $600 million to build three facilities in Brazil to produce ethanol from sugarcane. The Financial Times of London on Aug. 5 reported that ADM also was planning to enter the sugar-based ethanol industry in Brazil.
At only 6% of gasoline use and record high gasoline prices in July, some argue ethanol has had little if any effect on gasoline prices. Iowa State University estimates ethanol has kept retail gasoline prices 17¢ to 40¢ lower than if it were not used. Other estimates have put the impact as high as 61¢ a gallon.
Record high gasoline prices for several weeks this summer had a mixed effect on ethanol. While the high prices were supportive to ethanol prices, the eventual drop in demand for gasoline also meant a decline in ethanol demand. But the drop in crude oil prices, which preceded declines in gasoline and diesel fuel, also contributed to the sharp drop in corn prices, which in turn allowed the ethanol industry to return to slim profitability since mid-July. Holmes noted that the poor profit margins have prompted ethanol plants to add new technology that would increase efficiency.
While ethanol companies have struggled, most petroleum companies the past couple of weeks reported record or near-record profits in the second quarter of 2008.
Energy prices, and gasoline in particular, have become a key political issue in this year’s presidential race. Congress recessed without passing new legislation to address an expansion of domestic oil drilling among other things aimed at bringing prices down.
MCCAIN, OBAMA DIFFER ON ETHANOL
The two candidates for president, Republican John McCain and Democrat Barack Obama, have opposing views on ethanol and alternative energy. Position papers indicate McCain is opposed to subsidies for farmers who make more than $250,000 annually and have net worth exceeding $2 million, but press reports indicate he has voiced objection to the entire farm bill as well as ethanol subsidies (which go to fuel blenders) in recent speeches in the Midwest. He is a big supporter of nuclear energy. Obama’s position papers indicate he supports the $300-billion farm bill as well as subsidies for ethanol.
On the periphery of the ethanol debate is a recent "proposal" from former vice-president Al Gore calling for a shift from carbon-based fuels to alternative fuels, primarily wind and solar energy, in the next 10 years. Even regular Gore supporters appear cool to the idea, in part because of the estimated $1 trillion to $3 trillion price tag.
In the end, the ethanol and renewable fuels issue probably is less clear than it was a couple of years ago, and it’s unlikely to become clearer before fall elections.
"We’re still really optimistic about the future of the ethanol industry," Holmes said. "It’s still a young industry and there are kinks to work out."
Ron Sterk is assistant editor of Milling & Baking News, sister publication of World Grain. He can be reached at firstname.lastname@example.org.
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