BioFuels Journal

Ethanol Delays: Is There an Industry Slowdown?

by Grainnet Editor Greg Sullivan

Ethanol companies are increasingly delaying startup of new plants, canceling projects, and even closing down completely.

• Gateway Ethanol has stopped production at its 55-MMGY facility in Pratt, KS.

• VeraSun has delayed production startup at three 110-MMGY plants in Harkinson, ND, Welcome, MN, and Hartley, IA.

• POET has cancelled plans for a second plant in Glenville, MN.

• Cargill has shelved plans for its 100-MMGY plant planned for KS.

• Heartland Ethanol has gone out of business after canceling plans for up to seven plants in Illinois.

And the list goes on.

A large part of this trend appears to be due to tightening margins, rising construction costs and soaring corn costs, more exacerbated recently, as the 2008 flood continues to impact corn prices.

The Associated Press reported June 12 that Citi Investment Research analyst David Driscoll said that flooding had caused “irreparable damage to this year’s crop.”

“As a result of the rapid margin deterioration,” Driscoll added, “we believe that many, if not all, of the small-to-midsize [ethanol] producers will be forced to shut down over the next few months.”

Additionally, The Grand Island Independent reported that “soaring corn prices could put a damper on Nebraska's booming ethanol industry and cause some plants to shut down.”

However, “after the flooding concerns ease, a better picture of the crop damage can be determined,” said Todd Sneller, Nebraska Ethanol Board administrator.

Bob Dinneen, Renewable Fuels Association president, added in a June 17 press release that “it is far too early to assess the impact of the flooding.”

Still, “it is clear that this unprecedented event will likely cause already high grain prices to remain elevated, further putting strain on industries that rely on corn and other crops.

“The ethanol industry is no exception.”

Some ethanol producers are in agreement, and are canceling construction or slowing production due to these same corn and market-related reasons.

In a June 16 press release, VeraSun spokesman Mike Lockrem commenting on the company’s startup delays at Hartley, IA and Welcome, MN: "The margins where ethanol is currently selling and higher corn prices do not warrant starting up these two facilities at this time.

"We will monitor the market daily and put these two biorefineries into production when market conditions become more favorable."

When announcing the delay in the Harkinson, SD startup, VeraSun CEO Don Endres added that "Given the current volatility in the market, we believe that delaying all three of these startups is the prudent decision for the long-term benefit of our company and shareholders.

"Ethanol is currently being sold at a deep discount to unleaded gasoline, which has caused us to delay the start-up of these facilities until the outlook for ethanol selling prices and overall margins improves."

Futhermore, the Mankato Free Press reported June 20 that VeraSun has not yet decided whether it will begin production at its new 110-MMGY plant in Janesville, MN when construction is complete in October.

In an interview for that report, Lockrem again mentioned high corn costs and undervalued ethanol as causes for uncertainty.

But larger market forces, such as the general credit crisis, seem to be at work here, too.

Knoxville, TN based Heartland Ethanol recently cancelled plans for up to seven ethanol plants formerly planned for Illinois.

In a Champaign, IL News-Gazette report, Heartland President Walker R. Filbert said it was not ethanol economics that drove the company out of business, but the credit crunch: “the main issue was the inability to finance the project with bank loans.

“That came crashing down when the housing industry had its meltdown late August.

“We’ve been digging out of that for 10 months for all businesses, let alone ethanol plants.”

But while there is a steady stream of ethanol plants and businesses shutting down, some plants continue to come online, and established plants continue to produce.

BioFuel Energy Corp., for example, recently announced startup of at two new 115-MMGY plants in Fairmont, MN and Wood River, NE.

In a Fairmont (MN) Sentinel report, Fairmont, MN Plant Manager Greg Vanevenhoven said that “out aim and our goal is to continue operations as usual.

“We know the business is going to be down a little bit, but we’re going to continue to operate through that.”

Reuters reported June 13 that “POET will not shut production down even though it’s losing money at some of its plants after Midwest flooding triggered record prices for corn.”

CEO Jeff Broin said “We have plants both slightly below and above break-even today.

“Certainly these are not the best of times.”

However, he added that “the rain has not impacted our production capacity,” though “we will need to build some inventories over the next several weeks until this is rectified.”

So what are the middle to long-term affects of volatile conditions—and especially high corn prices—on the ethanol industry?

BioFuel Energy Corp.’s Fairmont, MN Plant Manager Vanevenhoven said in the above Fairmont Sentinel report that “We actually had the bulk of our corn pre-bought a couple months ago, so we’re not paying current prices for it.”

He thinks the plant has enough feedstock to last until corn “goes back down in the area where we need it to be.”

In the University of Illinois Weekly Outlook Report dated June 23, Extension Marketing Specialist Darrel Good said that despite flooding, “favorable weather conditions through September could still result in a respectable crop.”

“There are numerous reports of a slowdown in ethanol production.

“These reports appear to be at odds with indicators of ethanol profitability.”

In a Biofuels Journal Podcast interview with editor Myke Feinman, Iowa Renewable Fuels Association Executive Director Monte Shaw said the following:

“We had a record corn harvest in the bins from last year.

“That’s the corn that we’ll be using this year.

“It’s really not until the very end of this year/next year that, from a supply standpoint, this harvest is what we turn to, and there’s still a lot of time.

“It’s just as likely that we could have a nice solid average crop as some horrendously poor crop.

“Folks tend to contract forward quite a bit of their corn.

“So people aren’t paying that $7.30 for corn.

“If corn prices stay where they’re at today for the next 6-12 months, then you don’t have much chance to forward contract at a good rate.

“The price of corn and impact from the fields is going to be more felt 6-12 months out than it is today, and what we don’t know is what’s going to happen in those next 6-12 months.

“There are still opportunities for profitable ethanol production.”