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Ethanol Fizzles

November 5, 2008
By: Sara Schafer, Farm Journal Media Business and Crops Editor

The ethanol industry is feeling the economic squeeze, as are most industries across the country, only a bit tighter.

"Both the financial crisis and the price of crude oil have affected the ethanol industry, big time,” says Wally Tyner, Purdue University ag economist. "The financial crisis means no funds to loan and no new plants. The falling price of crude oil means lower gasoline prices, and therefore lower ethanol prices.”

Ethanol plant margins began declining long before the Wall Street turmoil, and now their credit has pretty much gone away, says Cole Gustafson, biofuels economist at North Dakota State University. "It's a double whammy for future growth.”

A few existing ethanol plants have shut down or filed bankruptcy, including Gateway Ethanol in Pratt, Kan., which stated it owed creditors between $50 and $100 million.

Other proposed plants have put construction on hold. The stock price for VeraSun Energy Corporation, Brookings, S.D., one of the largest ethanol producers, dropped this fall to one-tenth its peak value.

As a result, the larger, stronger and typically private ethanol companies are beginning to take a look at the players that are going bankrupt, says Chris Groobey, a project finance partner with Baker & McKenzie, LLP.

What happened on Wall Street will continue to drive the buying and selling of assets in the ethanol industry, Groobey says.

These times will likely bring about an anticipated competitive "sifting out” of less efficient plants, adds Dan O'Brien, Kansas State University economist. "I wouldn't say ethanol profits are gone forever, but the heyday is temporarily over.”

Healthy, but stymied. Despite lower margins, the overall health of the ethanol industry remains positive, according to AgCountry, a Farm Credit System lender in the Upper Midwest. AgCountry has financed 44 ethanol plants, or one-fourth of the country's industry. As of September 2008, only three plants were under "watch” due to poor financial health.

Most existing ethanol plants didn't get caught up in the recent credit crunch due to the seasonality of their feedstock needs. "Most plants had their credit arrangements in place before the economic turmoil started this fall,” Gustafson explains. "Unless an existing plant was tardy or looking for lower interest rates, there is a small chance they were denied the credit they needed.”

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FEATURED IN: Top Producer - NOVEMBER 2008
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