ANALYSIS - Tough Times For US Ethanol To Force Shake-Out
Author: Timothy Gardner
Washington has offered producers hundreds of millions of dollars in incentives in an attempt to reduce foreign oil imports while supporting the agriculture business.
But that has had the unintended consequence of helping to boost corn prices to a record of more than $5.40 a bushel. New distilleries are gobbling the grain as US ethanol production capacity has nearly doubled in 13 months to more than 8 billion gallons per year.
High corn prices are unlikely to fade as new plants keep opening. Energy analysts at Friedman, Billings, Ramsey & Co, Inc, for instance, recently raised their 2008 to 2010 corn price forecast from $3.75 to $5.00 bushel.
"A lot of smaller companies may not be able to stay competitive in this kind of environment, so I think a trend toward consolidation is likely, especially larger players taking over smaller players," Divya Reddy, a biofuels analyst at the Eurasia Group, said in a telephone interview.
She said low profits for ethanol producers may linger as long as two years. It could take that long for the industry to help refiners buy more ethanol by building new terminals that would ease transportation of the fuel from the Midwest to cities on the coasts.
Charles Fishman, an analyst at Piper Jaffray and Co, said consolidation could help smaller players who do not have access to good rail transport.
LOOKING FOR DEALS DURING HARD TIMES
When average ethanol producer profits hit lows in November, VeraSun Energy Corp announced it would buy US BioEnergy Corp in a deal that would make the combined company the biggest distiller of US ethanol.
Profits rose in January after President Bush signed an energy bill that mandated a five-fold increase in blending of biofuels like ethanol into motor fuel by 2022.
But profits have again dropped on soaring corn and rising prices for natural gas, which powers most distilleries. The average "crush spread" for producing ethanol was only about 37 cents a gallon Friday, and after conversion costs average profits were about 15 to 25 cents per gallon.
"The less-efficient producers are having a difficult time producing ethanol with positive profits," Todd Alexander, a partner at law firm Chadbourne & Parke LLP in New York specializing in finance for energy projects, said in a telephone interview.
He said the pain some distillers are feeling has showed in several cases, including Cargill's decision this week to shelve a $200 million, 100 million-gallon-a-year plant in Kansas that was in the permitting stage. It was the fifth plant in recent months that had halted or delayed construction as corn prices have spiked.
Two small producers, E3 Biofuels, a company whose distilling had been fired by cow manure in Nebraska, and Central Illinois Energy declared bankruptcy late last year.
Alexander said several of his firm's ethanol clients are having debt problems and have asked the firm to work with their lenders to preserve the value of their equity.
If the high corn prices persist, "we'll see accelerated consolidation ... because there are players out there, even ethanol players, who have cash and who are bullish long term on the industry," he said.
SOME PLAYERS ON THE HUNT
"Our company has been looking at multiple opportunities over the last several months," Jeff Broin, the CEO of private ethanol producer POET, which is the currently the largest US ethanol producer, told Reuters on Friday.
He said none have yet met the POET's criteria, but that he would continue to look for potential acquisitions to increase its fleet of distilleries. POET will lose its position as the top ethanol maker once the VeraSun deal is completed.
Alexander said nontraditional players, who believe the industry will be more profitable in the long term as oil prices rise and amid the new energy mandates that require increasing amounts of the fuel, are contemplating acquisitions.
"We are working with existing f