The ethanol industry should prepare for a shake-out year in 2009, says Jim Murphy, senior consultant with Context Network, an agribusiness management consulting firm, who spoke at the 2009 Top Producer Seminar.
The drop in oil prices and rise in corn prices have crippled ethanol plants, with most operating at break-even for the past six months, Murphy says. Meanwhile, the global financial crisis further tightened the availability of working capital.
"Ethanol facilities are quickly burning through their working capital,” Murphy says. Some analysts have projected more than 40 plants will close by year-end. The Renewable Fuels Association (RFA) calculates around 1.8 billion gallons of production capacity is currently idled, due to economic troubles.
"In some ways 2009 is similar to the mid-1990s when we saw a contraction in the ethanol industry,” Murphy says. "Although we don't see as severe a contraction, we also don't see a lot of growth. The ethanol industry will move sideways.”
"Ethanol companies will not sell off assets piecemeal, such as pumps and tanks, like the 1990s, he says. The capacity will remain intact because someone out there is going to buy those assets for pennies on the dollar and mothball them until the proper time.”
Long-term, Murphy projects oil prices will rise again and ethanol economics will improve. In addition, the Obama administration is quite supportive of biofuels, which may help keep the industry alive, he says.
"There will be political challenges, and I expect the blenders credit and import tariff will be gradually reduced,” Murphy says. "But overall, Obama continues to back biofuels.”