Staying Stocked

Supply chain constraints are improving, but ethanol producers are still dealing with the higher costs and tighter availability of almost all production inputs, parts and equipment.
By Luke Geiver | September 19, 2022

The U.S. supply chain can be described in two ways. There is the complicated explanation for the state of supply in 2022 that requires a deep dive into shipping container availability, fuel prices, post-pandemic hangover, Ukraine and a handful of other intricate factors. There is also a simpler way of looking at the U.S. supply chain. As CoBank, one of the largest private providers of credit to the U.S. rural economy, recently said in a quarterly report created for the rural industries it serves, “Supply chains are still a mess.”

Ethanol Producer Magazine spoke with entities from across the greater ethanol industry to shed light on these lingering supply chain restrictions to see what’s being done about it and when normalcy might return.

The Benchmarking Expert
Connie Lindstrom, senior biofuels analyst for Christianson Benchmarking LLC, offers insight to the supply chain challenges of 2022—down to the penny. Ethanol producers are rethinking inventory levels to ensure they aren’t short on a critical ingredient or necessary part, she says. That new focus on inventory is increasing operational costs per gallon. Lindstrom sees the increase in her benchmarking work that shows plant supplies, repairs and maintenance costs are all running about a cent higher per gallon for the first half of 2022 compared to the previous year. Multiply a penny by 50 or 100 million—gallons, that is—and you’ll see why plants are concerned about a cent difference, she notes. Chemicals and ingredients (minus denaturant) are also running high, roughly 1.5 cents more than the previous year.

“Fortunately, two things are helping mitigate the impact of this: generally good continued profit margins, and the ongoing process efficiency improvements throughout the industry.”
Clients throughout the industry have come to rely on the insight and benchmarking work that Lindstrom and her team provide. Many use the data to understand whether a particular rising cost is specific to their location or facility, or if it’s simply a reality of the industry, she says. “The former a good management team can fix; the latter, a good management team can reach out to others in the industry to problem solve and find workarounds.”

Lindstrom sees plants looking for ways to gain flexibility in the supply chain, including through the addition of onsite storage, power generation and even transportation partnerships. Some larger plants have been able to leverage things like pooled parts and supply inventories, while smaller organizations have sometimes found partners to help mitigate the higher costs of maintaining larger inventories.

Overall, the situation has made new partnerships important for long-term stability, she says. “This has really been a year for ingenuity to shine. Success in managing cost and supply chain challenges relies upon creative thinkers: listen to everyone from the bottom up within your organization for ideas and suggestions, and don’t forget to leverage relationships, not just vendors, but staff from other facilities and even other businesses in your local area.”

According to Lindstrom, the health of the ethanol industry, despite the current supply chain challenges, is in a good place. “We have so many experienced leaders right now,” she says. “Profitability continues [to be] steadily favorable, and plant boards and management executives have been around long enough to see several downturns and up-cycles. So they know it's a great time to invest in technologies that will help them future-proof their profits (into things that will reduce carbon scores, improve efficiency and diversify product mix).”

Ethanol Plant Manager
Mick Henderson, general manager at Kentucky’s Commonwealth Agri-Energy LLC, says his team has experienced supply chain issues like most other sectors of the economy. There have been plenty of nuisance issues to work around and some have been very impactful.

The worst issue for Commonwealth has been sourcing spare parts, according to Henderson. There have been long delays combined with higher prices for the parts. Most ingredients have also taken longer to get and cost more, he adds. “Freight is more expensive all around,” he says, “but we are entirely reliant on truck inputs with virtually no rail issues, so we have that going for us.”

Like Lindstrom, Henderson believes relationships matter more than ever in times like these regarding the supply chain. “We are not on an island. Talk to other ethanol plants and see what their solutions may have entailed. You can get back tenfold what you give,” he says.

As everyone in the industry is having the same problem, Henderson believes there is an end in sight. The suppliers of parts or ingredients are working to hire and retain more workforce, he points out. “Parts inventories will improve soon. Ingredients also. Being forced to look for alternatives to all of the above has helped us in the short term. We will be better in the long-term, too.”

Equipment Specialist
Michael Cohen, vice president of the equipment acquisition group for Illinois-based Aaron Equipment Co., helps the ethanol industry become more cost-efficient by purchasing their excess equipment or helping them auction off inventory. Cohen and his team have seen and felt the effects of the supply chain upheaval on their business and their ethanol clients.

“For many of our customers, long lead times with OEMs have made it impractical to buy new equipment,” Cohen says. “This has led customers to turn to us to help solve their equipment needs. In some cases, we have also sold equipment back to an OEM.”

The Aaron team has had to deal with higher fuel costs, making it more expensive to transport equipment from a customer’s location to an Aaron warehouse, a situation that has made Cohen and his team explore different alternatives.

Cohen says his team can help ethanol clients in multiple ways right now. For a CFO or accounting team, Aaron can help with appraisals as well as inventory, so that there is a clear understanding of what equipment is where, and what the value of that equipment is. “On occasion, we have created internal websites to allow plant managers to see excess equipment within the company and have it transferred to a location that needs equipment,” he explains. “We can also help raise cash by purchasing excess equipment or conducting an auction.”

For a plant manager or operations team, Aaron can help them find the equipment they need to replace or purchase. Most plants have a “boneyard” of old equipment or discarded parts. “We can help clean up the boneyard by purchasing equipment or linking the plant to a reputable scrap company. This frees up space as well as generates cash.”

Agriculture Economists
Through its work helping rural customers access credit, CoBank has its research finger on the pulse of ag and biofuel production. The team recently provided a detailed summary of the supply chain as it exists in Q2 and Q3 of this year.

Warehouse capacity is hard to come by and inventory is expensive. Transportation costs have slipped since Q1. Container shipping has become cheaper, but conditions for agricultural transport are mixed, the CoBank team reports. Rail, truck, barge and vessel costs remain stubbornly high and capacity limited.

“The remainder of 2022 will be far from ordinary, and particularly hard to forecast,” says Dan Kowalski, vice president, knowledge exchange at CoBank. “The Fed’s job will become harder and its influence greater. But the U.S. economy and rural sectors in particular are best positioned to navigate what comes next.”

The CoBank team believes the supply chain and logistics matrix in the U.S. has improved and is getting better. The team credits the change to two developments. First, there have been fewer exports issues from China related to the COVID-19 lockdown there. Second, there has been slightly lower transportation price inflation.

The picture isn’t all clear or positive, however. CoBank notes that grain car availability and prices were at multiyear lows and highs, respectively, in Q2 and hadn’t improved until July of this year. Grain export vessel rates are also reaching multi-year highs and, despite efforts to improve agriculture’s access to vessels returning to Asia from California, the share of vessels leaving port empty was still roughly 70% in Q1, CoBank reports.

“Supply chains,” the team notes, “are still a mess.” Kenneth Zuckerberg, CoBank’s lead analyst for grains, farm supply and biofuels, works closely with several seasoned relationship managers who bank the ethanol industry and benefit from being able to share knowledge and triangulate ideas about the future of the industry.

Zuckerberg considers a supply chain to encompass the network of companies, resources, activities and technology involved in both the production and sale or distribution of a given product. With ethanol, he focuses on the cost and availability of corn, the cost of fertilizer, and among others, grain transportation to an ethanol plant. He also follows natural gas prices and market prices for fuel ethanol and ethanol coproducts.

Following Russia’s invasion into Ukraine that caused an initial spike in corn prices, Zuckerberg and his team noticed a trend among ethanol producers. “What we observed was that the most technology efficient ethanol producers were able to make profits during the past six months despite the volatility of inputs, partly driven by a firming in fuel ethanol prices along with rising gas prices,” he says.

Looking forward to the remainder of 2022 and into ’23, Zuckerberg is keenly focused on energy costs and the outlook for corn production. Both factors will impact the balance of a volatile supply chain and the profitability of ethanol production, he says.

David Oppedahl, senior economist at the Federal Reserve Bank of Chicago for more than two decades, agrees with the sentiment of the CoBank team. Oppedahl believes that there are still supply chain issues in many corners of the economy, even if it wasn’t as stressed as a year ago.

Labor is one of the main factors driving the issues, he says. “When you talk to a railroad company, they are holding back partly or even primarily because of labor issues,” he says. Part of Oppedahl’s research work is directly talking with companies from the Fed Bank of Chicago’s region, many of which deal with clients in the heart of ethanol production territory.

For corn producers, it is an unusual time, he says. Outputs are priced well, but inputs are not. Most of the farmers in his region appear to be set for a profitable year, however. For ethanol producers watching the supply chain and the price of corn, Oppedahl says to expect more of the same with corn prices, despite the  return of Ukraine to the market.

“Hopefully, there will be some release in high corn prices when Ukraine stocks get exported, even though there are some questions about the quality of those stocks. It will take a long time to get those supplies to the market,” he adds, “I doubt it will be back to normal in the near term.”

Author: Luke Geiver
Contact: [email protected]