Listen With oversupply and slowing demand, ethanol industry lurches in wake of lost subsidy
Feb 27, 2012
After predicting they would survive the end of a major federal subsidy without problems, it looks like officials at the nation's ethanol producers may have been too optimistic.
Since the subsidy ended Dec. 31, ethanol profit margins have declined sharply, even slipping into negative territory. Experts see no quick turnaround in sight.
Now that the subsidy has disappeared, the ethanol downturn is being felt nationwide, including in Minnesota. The state's $2 billion-plus industry ranks fourth in the nation in capacity and production.
At the Al-Corn Clean Fuel ethanol plant in southeast Minnesota, CEO Randall Doyal sees how the loss of the subsidy has hurt this business. He said his profit margin — the difference between the cost of making the corn-based fuel and what he can sell it for — has disappeared.
"Since the first of the year it's been even-to-slightly negative," Doyal said.
The loss of the 45-cent-per-gallon federal tax break marks a major change in the economics of ethanol. It also created a double whammy beginning with the closing months of last year, when ethanol producers saw a rush of buyers for the last of a subsidized product.
The charge was lead by the gasoline companies that actually received the subsidy for buying ethanol, Doyal said. As the end of the year approached, the companies stocked up, knowing that every gallon would cost 45 cents more after the first of the year.
The heavy demand prompted the nation's ethanol industry to produce as much fuel as possible, Doyal said. That's the other part of the double whammy. Ethanol plants flooded the market with too much ethanol, much more than the nation's fuel capacity could absorb.
"Excess capacity leads to oversupply, which leads to depressed prices," Doyle said.
That's where the ethanol industry finds itself today. U.S. Energy Information Administration numbers show ethanol stocks are up 10 percent over a year ago.
There are two ways to burn though that oversupply. One is through higher consumption. But people drive less during winter, in part because they take fewer vacations. Rising fuel prices and the slow economic recovery also constrain demand for fuel.
With consumption slow, that leaves one other way to bring down the oversupply.
"Generally speaking, if you're losing money, you cut back on production," said William Tierney, chief economist for Chicago-based AgResource Company, a consulting business.
Tierney said there are signs that ethanol companies are cutting production. While no Minnesota plant has announced a cut, officials at Archer Daniels Midland say the company will close one of its ethanol plants in North Dakota.
Officials at Nebraska-based Green Plains, say they will cut production by 30 percent at two ethanol plants.
"If you can reduce total industry production by five to seven percent," Tierney said, "that might, might, be enough to cut production back enough that you can get margins back up again."
So far the industry hasn't cut back that much, but ethanol production has fallen about 4 percent from the December peak. Production, however, is still above the level of a year ago.
Despite the unprofitable market right now, many people in the ethanol business are optimistic the industry will recover quickly.
Higher seasonal demand for fuel in summer and spring also will help, said Doug Punke is CEO of Shakopee-based Renewable Products Marketing Group.
Punke said another plus for the ethanol industry is the overseas market. Brazil, a country that produces its own ethanol, but where demand is high, has been a major customer.
"We're seeing some export demand pick back up, which is necessary for this industry right now to balance out that supply and demand," he said.
Last year U.S. ethanol companies sold about 8 percent of their production abroad. Just how closely sales can match that figure this year will help determine how quickly the green fuel starts generating some bankable green for the companies that make it.