Is There An Ethanol Squeeze?

"Like most other industries across the country, ethanol is feeling an economic pinch. Only the squeeze has become particularly tight for ethanol," according to The Wichita Eagle in an Oct. 14 article. "It began well before Wall Street’s recent turmoil and has been partly fueled by the industry overproducing, according to economists,” the article stated.

“Put all the pieces together and you have some ugly scenes escalating for ethanol plants and related fields,” the Wichita Eagle article continued. “A handful of U.S. plants have shut down. Gateway Ethanol in Pratt recently filed bankruptcy. ICM, based in Colwich and the nation’s leading designer of ethanol plants, laid off 73 employees earlier this month for a total of 178 since April. VeraSun Energy Corp., the nation’s second-largest ethanol producer, has been reduced to junk-bond status. Other plants under construction have stopped building.”

Jay O’Neil, a senior agricultural economist at Kansas State University, told the Wichita Eagle that “the industry is really at a bit of a crossroads.”

Federal mandates for ethanol production created a hot ticket. The rush to jump on ethanol’s bandwagon saw an explosion of plants between 2005 and 2006. But as production of ethanol exceeded the mandate levels, the price for ethanol tumbled, and so has the industry. “We got too much too quickly,” O’Neil said. “And then the market conditions came together to spoil the profitability, the fun so to speak.”

Plants that got on the wrong side of the corn prices also have been hit hard. When prices soared this summer to nearly $8 a bushel, some plants bought corn to hedge against even higher prices. Instead, corn prices fell and are now under $4 a bushel. Now add in the fact that the cost to build a plant has roughly doubled over the past 18 months. “They overbuilt lickety-split,” David Swenson, an economist at Iowa State University, told the Wichita Eagle. Critics say all that’s keeping ethanol plants afloat are the federal mandates for specific production amounts."

Todd Neeley, DTN’s ethanol reporter, countered that “as corn prices have moderated in the past several months, not only has ethanol profitability improved on a cash basis, but a number of companies have announced that they will build new ethanol plants.

East Coast Ethanol LLC is one of those companies, announcing that it will build four corn-based plants in the Southeast,” Neeley said. “In addition, First United Ethanol announced the start-up of production at a 100-million-gallon corn-based plant in Albany, GA. While there have been many signs of trouble in the industry including an announcement by VeraSun Energy Corp. that it could see third-quarter losses exceed $100 million as a result of a failed hedging strategy, the number of ethanol companies announcing bankruptcy seems to be few. At last count there were just five companies filing for bankruptcy since 2007, accounting for as much as 135 million gallons of production capacity.”

(Sources: The Wichita Eagle; DTN)

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