Ethanol Fizzles

November 4, 2008 06:00 PM

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.”

Cheaper corn. Another positive is that the price of corn has dropped, O'Brien says. At press time, both Iowa and Nebraska corn ethanol plants were back to break-even, according to Kansas State studies of ethanol plant profitability.

The financial market collapse also has driven up the exchange value of the U.S. dollar, making corn exports less affordable overseas. That means greater domestic corn supplies are available to ethanol plants and livestock producers.

"Suddenly, ethanol plants are faced with a situation in which both input and output prices are rapidly declining,” Gustafason says. "We are off to a race for which will drop faster, oil prices or corn prices.”

There remains a strong market for ethanol due in part to the Renewable Fuels Standard, which mandates that ethanol be produced, adds Larry Johnson, an ethanol industry consultant who operates LLJ Consulting and Business Development.

But for plants that don't have the capital or are underfinanced, Johnson says they may just have to sit out for a while. "I honestly wouldn't know where to begin to look for investment money right now for a new corn ethanol plant,” he adds.

It also would be difficult to build a new plant in the Corn Belt, Groobey adds. Most new entries into the industry are filling out less traditional geographic areas, primarily in the Southeast, he says.

Groobey is seeing more plants require an off-take contract, under which buyers are obligated to take the ethanol at a specific price, which provides guaranteed profits. "Without that off-take contract, the revenues are so uncertain it is very hard to get debt on projects right now.”

Next-generation funding. Looking forward, the big question is how to get next-generation biofuels and cellulosic ethanol plants off the ground, Gustafson says. Only a handful of lenders across the country have actively provided credit to the biofuels industry, and the portfolios of these lenders are saturated.

It will require new suppliers of credit to foster additional growth of the biofuels industry, Gustafson believes. But they won't be as easy to find as it was back in 2005, when investors knew exactly what they would get with a corn ethanol plant. "Corn ethanol plants already were pretty much cookie-cutter back then, and investors were excited about almost guaranteed returns,” Gustafson says.

With cellulosic ethanol, nothing seems cookie-cutter. There is a wide range of feedstocks and processes used to produce ethanol, Gustafson says. Very few standards are established for new-generation biofuels, and that makes investors nervous about what they are getting into.

Johnson believes investor anxiety will ease as the U.S. makes its way out of the credit crunch but also as technology for cellulosic ethanol continues to improve, rendering cellulosic plants more efficient and feasible.

The long-term price of crude oil will continue to spur investment, he says. "If you assume the price of oil will hover around $100 for some time, then ethanol from cellulose is going to be profitable and we will rapidly move into production,” Johnson says.

To contact Jeanne Bernick, e-mail

Top Producer, November 2008

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