Ethanol industry faces 'toughest down' since 2009

By Holly Jessen | February 20, 2012

As reports of ethanol plants temporarily idling or slowing production trickle in, Ascendant Partners Inc. told EPM that what the ethanol industry is currently going through is partially a normal seasonal cycle, and partially abnormal.

Gasoline demand, and therefore ethanol demand, is typically down during the first quarter of the year, with an expected increase in demand during the summer driving months, said Scott McDermott, partner. On the other hand, average annual gasoline demand is down more than 10 percent from the peak hit in July 2007 and the Energy Information Administration projects the trend to continue in 2012 and 2013. At the same time, U.S. ethanol production and stocks spiked at the end of 2011. “The increased ethanol production and stocks coupled with the declining gasoline demand has pushed ethanol to the peak blending potential of 10 percent,” he said. “With ample supply of ethanol to meet the RFS requirement and ethanol penetration capped at 10 percent ethanol, price becomes the equalizer.”

Looking at RBOB futures, they are up more than 21 percent since mid-December, he pointed out. However, ethanol prices haven’t seen a benefit due to long supplies. For that time period, ethanol futures prices are only up 6 percent and corn futures prices are up 9.3 percent.

The result, McDermott told EPM, that many ethanol plants margins are currently net income negative and some are cash flow negative. That puts pressure on ethanol plants to either idle or slow production. Plants with with higher cost and lower revenue performances are especially struggling. “A given margin situation is materially dependent on ethanol plant hedging and incremental plant value added activity like corn oil recovery, carbon dioxide contracts and energy savings strategies,” he said.

Recently, several companies have indicated they will either slow production levels or idle ethanol facilities. During its quarterly conference call held Feb. 9, Tate & Lyle said it would likely reduce production levels at its only U.S. ethanol plant, a 110 MMgy facility in Loudon, Tenn. The plan is to switch its focus from ethanol to more profitable areas—something it expects other U.S. companies to do, if they have the ability. However, they added that the Tennessee ethanol plant would need to produce a minimum of 40 to 50 MMgy in order to run efficiently.

Siouxland Energy and Livestock Cooperative has cut back from 60 MMgy to 40 MMgy, according to Tom Miller, commodity manger, who points to the fact that blenders purchased increased amounts of ethanol at the end of 2011, before the Volumetric Ethanol Excise Tax Credit expired. It’s not certain how long before production levels at the Sioux Center, Iowa, plant will go back up again. “It could be a month, or it could be three months,” he said, adding that no layoffs are planned.  

Other examples include: Pointing to depressed margins and market saturation, Illinois River Energy LLC and Pinal Energy LLC reported cutting production rates by 7 percent and 10 percent, respectively.  Midwest Renewable Energy LLC, a 28-MMgy plant in Sutherland, Neb., temporarily idled in mid-February. Although the company said the closure was to optimize its U.S. corn processing operations, Archer Daniels Midland Co. annouced Feb. 6 that is would close its smallest ethanol plant, a 30 MMgy facility in Walhalla, N.D.

McDermott feels there are others out there, quietly doing the same thing without talking about it. While slowing production levels may slow the bleeding, idling an ethanol plant, even temporarily, is a much bigger deal. It’s disruptive to business, on the upstream and the downstream, he said. In the meantime, many producers are doing their best to wait it out. “Everybody is looking at everybody else, waiting for them to flinch,” he said, adding that doesn’t help fix the oversupply issue.

Of course, like any commodity business, ethanol is a cyclical business. Still, the risk exists that declining gas demand and the lowering of the blend wall could keep the ethanol industry in this down cycle longer and/or deeper, he said. There’s a more than adequate supply of ethanol to meet the requirements for the renewable fuel standard. Furthermore, the “silver lining” of increased exports in 2011 may not continue as the U.S. dollar strengthens and Brazil works to increase its own ethanol production levels.

The question is, will this be a repeat of the last big downturn, with bankruptcies and sales of distressed ethanol plants? Market experts are mixed on the answer to that, McDermott said. Ascendant’s view is that this won’t be a repeat of three years ago. “Most plants are financially stronger than previous hard times and their boards and management are much better prepared to weather the storm from an experience standpoint,” he said. “This cycle down turn will likely accelerate some consolidation and restructuring of the industry, but it will not likely be as driven through distress and bankruptcy like it was in 2009 and 2010.”

Editor's note: Information added about reduced production at Siouxland Energy and Livestock Cooperative.