FEW: Panelists tackle topic of risk management

By Holly Jessen | June 28, 2011

The topic of risk management was viewed from diverse angles during a June 28 panel presentation on risk management at the 27th annual International Fuel Ethanol Workshop & Expo. “Managing the Margin: Risk Strategies to Ensure Profitability,” included two presentations from financial and risk management services companies as well as two ethanol producers.

Neal Jakel, general manager of Illinois River Energy LLC, a 100 MMgy plant in Rochelle , Ill., shared his company’s view of yield versus gallons. “We don’t just run flat out 100 percent of the time because it’s fun,” he said.

The company has what he calls a relentless focus on yield, yield, yield and uptime. For example, from January to March the company produced fewer gallons and instead focused on wringing every last drop of ethanol out of less corn. Prices were “pretty ugly” at the time, except perhaps for ethanol producers with excess corn storage, he said. Other times of the year IRE pulls back on yield and pushes for as many gallons as it can churn out. “It’s all going to depend on the margin,” he said.

Will Babler, risk manager for First Capitol Risk Management, said no discussion of risk management would be complete without talking about the corn crop. He pointed to the USDA report released June 9, which sharply reduced the projected U.S. feed grains supplies for 2011-’12. The report called for 90.7 million acres of planted corn, down 1.5 million acres from March intentions. Those numbers leave little margin for error, Babler said. “We basically need a picture perfect crop, which is going to be difficult considering what is going on out there.” He added that prices for the new corn crop will be highly dependent on yield. “There’s a lot to be determined on what this new crop looks like.”

David Spickler, commodity risk manager for Blue Flint Ethanol LLC, a 50 MMgy ethanol plant in Underwood, N.D., talked about accounting software developed at the plant to meet its specific needs. The program compiles information on future crush by month, basis history, hedge detail, margin calculator and more. In the past, when the company wanted to assess, formulate or develop plans it took one person a lot of time to look through the financial statements. Today, with its internally developed software, the plant has real-time and historic plant specific data that can be accessed quickly.

In the past, the software might have been considered a luxury. However, with flooding causing problems in North Dakota, this year it’s a necessity. Spickler’s time has been sucked away, literally working to route each load of corn around flooding, leaving little time to devote to risk management. Without the software system, that could have been disastrous for the company, he said.

Sherry Jean Larson, an assurance and advisory services manager for Christianson & Associates, told attendees that it really isn’t about risk management—no company can really manage all its risk, she said. Larson prefers the term risk mitigation, which she considers the most critical factor in determining the success or survival of a business.

There really is no one-size-fits-all risk management plan, she said. It’s important that each plant have a written risk management plan with clear goals and responsibilities. “It really shouldn’t be one person,” she said. “It really should be a team approach.”

That written plan should include what to do about variances from the written plan. For example, what if an opportunity suddenly arises at noon, who has the power to approve a variance from the plan before the markets close at 3 p.m.? It should also be clearly laid out who is responsible to watch the markets on a daily basis. “Forty-eight hours could lose the business if you aren’t watching,” she said.