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Ethanol Plants Deal with Tight Margins

by Andy Hughes

Published: Friday, November 2, 2012

The high price of corn is great for many farmers, but not so great for the ethanol industry.

With corn selling for over $7.50 a bushel, one northern Indiana ethanol plant says this price makes ethanol production unprofitable. For six weeks, New Energy Ethanol in South Bend hasn't offered corn bids, and according to New Energy president Russ Abarr, there is no timetable as to when the facility will start buying corn again.

Abarr said the relationship between corn prices and the price of ethanol has made the business of producing ethanol unprofitable.

Geoff Cooper of the Renewable Fuels Assn. gave the following formula as an example for what is needed for ethanol profitability: If corn sells for $7.50 a bushel, ethanol needs to sell for $2.40 per gallon and dried distillers grain with solubles (DDGS) must command $265 per ton for the plant to break even. DDGS are a coproduct of ethanol production, and are used as an animal feed supplement. They contain protein, fat, vitamins and minerals.

Currently, most elevators are buying corn for over $7.50 a bushel, and some are paying over $8. Ethanol is selling for just over $2.40 per gallon, and DDGS are bringing about $260 a ton.

Cary Aubrey, bioenergy specialist for the Indiana State Department of Agriculture, said there is a "glut on the market for ethanol," which has also resulted in the temporary shutdown of the Aventine ethanol facility in Mt. Vernon, Ind.

Aubrey said that the tight margins that have persisted this year are resulting in 2012 being a "breakeven year" for ethanol plants. A mitigating factor was the summer drought. But the ethanol industry is fighting back, he said. Some facilities now sell corn oil, which is used in the production of biodiesel, and carbon dioxide, used for refrigeration.

"Ethanol facilities have become wise to their business model," Aubrey said. "They are looking for every avenue for financial gain."

Due to the drought over the summer and its negative impact on corn yield, the price of corn has stayed high.

"Lots of plants aren't running at full capacity," Abarr said. He went on to say that since December 2011, the cost to produce a gallon of ethanol has exceeded the amount of money that can be made.

Abarr stressed that New Energy is in the commodity-processing business, and at times, margins are very tight. The price of ethanol, he said, follows the price of gasoline. He said that even if corn prices were to drop dramatically, the key to profitability would be the price of ethanol.

New Energy has also been for sale since last summer. Abarr said that the family which owns the independent facility is actively looking for a buyer.

Cooper said that of the 211 ethanol plants nationwide affiliated with the Renewable Fuels Assn., 26 are currently shut down temporarily. This year, he said, has seen a 15 percent reduction in the production of ethanol, compared to 2011. Even plants that are in operation are not running at full capacity.

However, DDGS, according to Cooper, serve as a hedge to high corn prices, because the price of DDGS rises and falls with the price of corn. Many ethanol plants earn up to 25 percent of their revenue from DDGS.

Cooper foresees high corn prices enduring through the marketing year, and he predicts more temporary shut-downs of ethanol plants.

"It would be devastating to the industry," was his response when asked what would happen if the 2013 crop year turns out like it did this year, with drought and stunted yields.

POET Ethanol has a plant in North Manchester, and POET public relations manager Matt Merritt would not comment on specifics relating to this facility. But relating to the industry as a whole, he wrote in an e-mail: "Industrywide, ethanol production is currently down as the ethanol industry has adjusted to the market due to the drought."

Neill McKinstray, president of The Andersons Ethanol Group with plants in Albion, Mich. and Clymers, Ind., would not comment on plant specifics. But he did say that 2012 saw a "challenged corn crop" which has resulted in tight margins for ethanol plants. He stressed, however, that all plants are not created equal. For instance, some may have better access to transportation, and some are designed better than others.

Unlike the livestock industry, which needs continuous corn to feed to animals, the ethanol industry can turn off and on as needed, said Michigan Corn executive director Jim Zook. According to Zook, during hot weather, ethanol plants don't tend to run at full capacity. Now, even though cooler temperatures have arrived, margins are tight and will stay that way, he said. This is why so many plants are still not running at 100 percent.

David Davenport, a corn grower from LaPaz, has sold corn to New Energy as recently as this summer. When New Energy was buying corn, he sold about half of his crop (75,000 to 80,000 bushels annually) to New Energy. His current crop is in storage, but he is concerned that if he has to ship his corn to POET in North Manchester or The Andersons in Clymers, he will face a higher freight cost.

Another of Davenport's concerns is if New Energy continues to not offer corn bids, this would result in a lack of competition among area ethanol plants and grain elevators. This would mean less money in farmers' pocketbooks.

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