Ethanol Production Tumbles for First Time since 2006

September 5, 2012 08:32 PM

Last year was a banner year for the high-flying ethanol industry. A record 13.94 billion gallons were produced, with a record-setting 1.2 billion gallons of exports. "We’re coming off a fantastic year," said Geoff Cooper, vice president of research for the Renewable Fuels Association.

How’s 2012 shaping up? Not so good, with estimates calling for 13.3 billion to 13.8 billion gallons of ethanol to be produced this year, meaning a reduction in corn demand. Ethanol plants are now running at 87% capacity compared with 95% the end of 2011.

Cutbacks are being caused by a glut of supplies this spring, in the face of a sharp reduction in gasoline demand, declining crude oil prices, dwindling profits and fewer exports. "The industry overproduced in the fourth quarter of 2011, creating an overhang in the market," Cooper said at the Iowa Farm Bureau Economic Summit. "In January, gasoline demand fell like a rock." The decline in gasoline consumption alone has cost the ethanol industry 2 billion gallons of potential market.

Dwindling demand and high-cost feedstocks due to drought-driven record corn prices are combining to hurt plant profitability. Cooper forecasts poor ethanol plant margins for the next 12 to 18 months.

Some plants have cut back on production while others have temporarily idled, a situation that might not be alleviated anytime soon. Plants are slightly above to slightly below break-even. However, many are producing corn oil, which is adding 5¢ to 7¢ per gallon of revenue. For many plants, that’s the difference between profit and loss, Cooper says.

The drought is hurting ethanol plants in another way besides the high cost of the main feedstock. The major coproduct of ethanol plants is distillers’ dried grains (DDGs) for livestock, and the industry is concerned about whether the extreme drought will produce a corn crop with a high level of aflatoxins that could make their way into DDG feed.

Despite challenges in 2012, the industry will have no trouble meeting the Renewable Fuels Standard mandate, Cooper says. Long-term, he remains optimistic about the industry as ethanol remains an excellent octane booster—one of the few available—and plants have made major strides in improving efficiencies. Moreover, the approval of E15 is creating a market for additional ethanol that breaks through the blend wall.

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