Des Moines Register - 22 Dec 08

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 5 Jan 09)

Iowa's ethanol plants

Iowa ethanol plants, their locations and capacity, in millions of gallons:
Absolute Energy, St. Ansgar, 100
Amaizing Energy, Denison, 48
Archer Daniels Midland, Cedar Rapids/Clinton, 400
Big River Resources, West Burlington, 92
Cargill, Eddyville, 35
Corn LP, Goldfield, 55
Global Ethanol, Lakota, 97
Grain Processing Corp., Muscatine, 20
Green Plains Renewable Energy, Shenandoah, 50; Superior, 50
Hawkeye Renewables, Iowa Falls, 104; Fairbank, 120; Menlo, 110; Shell Rock, 110
Lincolnway Energy, Nevada, 50
Little Sioux Corn Processors, Marcus, 92
Penford Products, Cedar Rapids, 45
Platinum Ethanol, Arthur, 100
Poet Biorefining, Ashton, 55; Coon Rapids, 54; Corning, 65; Emmetsburg, 54; Gowrie, 60; Hanlonton, 50; Jewell, 60
Siouxland Energy & Livestock, Sioux Center, 60
VeraSun Energy (filed for bankruptcy), Fort Dodge, 110; Charles City, 110; Hartley, 110
Source: Iowa Renewable Fuels Association

Plunging profits trump ethanol's previous fears

December 22, 2008

Experience is said to be a hard teacher, and the ethanol industry has learned some painful new lessons in the last half-year.

Ethanol producers now know that when corn prices fall, the prices of crude oil and ethanol decline as well. So ethanol producers' gains on the cost side will be checkmated by losses on the revenue side.

The result has been the bankruptcy and closing of three of Iowa's 32 ethanol plants. The industry's old worries of being political targets in environmental- and food-versus-fuel debates has been replaced by a more pressing issue, making a profit and staying in business.

The situation might get worse before it gets better.

"These are frustrating times for the industry, and we may see a few more plants close while the market finds equilibrium," said Monte Shaw, executive director of the Iowa Renewable Fuels Association. He acknowledged that "the industry probably overbuilt itself."

VeraSun's facilities in Albert City and Dyersville, and Pine Lake Corn Processors of Steamboat Rock have all closed in the past few months.

But Shaw adds: "The idea that ethanol is on a death spiral is ridiculous. More ethanol will be produced next year than this year (because of a 1.5-billion- gallon increase in the federal mandate) and we'll need producers to get the job done."

Ethanol's problem: The numbers don't add up

The precipitous fall in the price of feedstock corn from $8 per bushel in July to $3.60 this week should be a boon to ethanol producers. But the price of ethanol has staged a corresponding swoon, dropping from $2.90 per gallon in the summer to $1.60 per gallon at present.

Ethanol has fallen in price in tandem with crude oil's $100 per barrel plunge from its summertime high for the same reason - declining demand due to the worldwide economic contraction and the flight of speculative hedge funds from the agriculture and energy commodity markets.

"We could make money when corn was $8 and ethanol was $2.90 per gallon," Shaw said. "But what happened was that while plants contracted into forward months for their corn supply, the oil companies won't let them do similar sales into future months. So the plants are having to sell lower-priced ethanol while using more expensive corn."

Ethanol profit margins have declined from 31 cents per gallon this summer to just 3 cents per gallon in November, according to research by Don Hofstrand of Iowa State University Extension Services. The $2-per-gallon profit margin ethanol plants enjoyed in their halcyon days of mid-2006, when ethanol was the golden child of renewable biofuels, seems like a long-ago era.

At present, ethanol doesn't have the comfort of seeing demand for its bankrupt assets. A Wichita, Kan., plant that went bankrupt attracted just a single auction bidder - the bank that held its secured debt.

Another bankrupt ethanol plant in Ohio was put on the block and failed to attract a single bid. VeraSun said after its Oct. 31 bankruptcy filing that it had received an unsolicited offer for some of its assets - this after rival producer Poet said it would be interested in acquisitions - but nothing more has been said on the subject in the last month.

Ethanol industry takes its case to Washington

The Renewable Fuels Association, ethanol's largest trade group, has approached lawmakers and President-elect Barack Obama's transition team with several proposals for aid to the ethanol industry, including $1 billion in short-term credit to help plants stay in operation and $50 billion in loan guarantees to finance further expansion of the industry.

The RFA as well as a rival industry group, Growth Energy, want the federal government to ease restrictions on how much ethanol can be added to gasoline for conventional cars and trucks.

The current limit, set by the Environmental Protection Agency, is 10 percent. Shaw, of the Iowa Renewable Fuels Association, said the blend ratio could be raised safely to 15 percent and maybe up to 30 percent using existing car engines.

But federal officials say more study is needed of the impact of ethanol on engines before the 10-percent limit is changed. Given that ethanol producers benefit from a usage mandate (which will rise from 9 billion gallons this year to 10.5 billion gallons in 2009), tax subsidy and tariff on imported ethanol, the industry will face strong resistance from cattle and poultry interests and from environmentalists to getting additional aid.

One of the ethanol industry's most powerful allies in Congress, Sen. Charles Grassley, R-Ia., said the biofuel industry should focus on preserving its existing incentives.

Current corn prices too low for farmers

The ethanol industry thinks it has winners in Obama and Tom Vilsack, his agriculture secretary designate, both with long records supporting ethanol. But even the combined efforts of that soon-to-be-powerful duo won't solve short-term problems that Iowa ethanol plants face.

In the aftermath of its bankruptcy, VeraSun asked for, and received, permission from the Delaware bankruptcy court to void future corn purchase contracts priced above market values.

Ethanol plants now face more questions and scrutiny from farmers about their future before they can buy corn.

Beyond the credibility issue, low corn prices have made purchases difficult because most Iowa farmers need at least $4 per bushel to meet the input costs for the recently harvested crop, and are disinclined to sell corn at the prevailing Iowa cash prices of $3.50.

Bruce Rastetter, chairman of Hawkeye Renewables of Ames, says his four plants "are operating all right. But buying corn is tough."

Shaw says "every ethanol plant has had trouble contracting for corn."

Ethanol's problems might be worse were it not for distiller's grains, the protein by-product of ethanol production that plants sell as cattle feed.

The typical Iowa ethanol plant can count on distiller's grains for up to one-third of its revenues and an even larger chunk of its profits. But distiller's grain, like corn itself, has declined in value from a peak of around $180 per ton in midsummer to about $110 per ton this month.