Gasoline Plunge Wipes Out Profits for U.S. Ethanol Makers

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STOCKTON PORT

An ethanol plant runs at the Port of Stockton in Stockton, California, Friday, March 7, 2014. A deep water port located 75 miles from San Francisco, over 1 billion dollars of cargo passes through the facility every year.

Photographer: Victor J. Blue/Bloomberg

Ethanol producers are cutting output after getting squeezed by the biggest drop in gasoline prices since 2008.

Valero Energy Corp. and Green Plains Renewable Energy Inc., representing about 15 percent of U.S. capacity, have reduced operations as margins narrowed. At a typical mill in Illinois that makes ethanol from corn, profit margins have almost totally disappeared, compared with $1.33 a gallon a year ago, according to AgTrader Talk, a Clive, Iowa-based consulting company.

Gasoline and crude fell more than 50 percent from their peaks in June as the U.S. shale boom helped global oil production outpace demand. While that was good for consumers, saving each American household $750, it dragged down the cost of ethanol 42 percent because the price is linked to gasoline. At the same time, corn, the main raw material used by biofuel producers, fell just 19 percent.

“Gasoline is down a lot and corn has come back up a bit,” Wallace Tyner, an agricultural economist at Purdue University in West Lafayette, Indiana, said by phone Feb. 23. “If you’re an ethanol producer, that doesn’t leave you much.”

Gasoline jumped 9.85 cents, or 6.1 percent, to settle at $1.7187 a gallon Wednesday on the New York Mercantile Exchange.

Ethanol Production

U.S. ethanol output fell 4.6 percent to an annualized rate of 14.5 billion gallons in the week ended Feb. 20 from a record 15.2 billion in December, according to the Energy Information Administration.

Valero said Jan. 29 that it slowed run-rates by 2.6 percent for the first quarter, citing lower gasoline and ethanol prices and “relatively stable” corn costs. Green Plains Chief Executive Officer Todd Becker said Feb. 5 that he’s cut production rates “a bit as well.”

Lakeview Energy LLC, a Chicago-based renewable energy company, lowered operating rates by 15 percent at its Coshocton, Ohio, plant, Chief Operating Officer Eamonn Byrne, said Tuesday by phone.

More cutbacks appear likely. U.S. inventories total 21.6 million barrels, the highest seasonal level since 2012, according to the EIA, the Energy Department’s statistical arm.

Supply will tighten as plants with higher costs slow, according to Archer-Daniels-Midland Co. Chief Executive Officer Juan Luciano, whose company is the biggest U.S. producer.

Making Biofuel

One bushel of corn yields 2.75 gallons of ethanol in a manufacturing process similar to distilling alcohol. Almost all gasoline sold in the U.S. contains the biofuel, with the additive making up as much as 10 percent of overall consumption, government data show.

Unlike crude oil, which is primarily used to make gasoline and other motor fuels, corn is sold in diverse markets. An ethanol company competes with food processors, livestock producers and export customers for corn, Purdue’s Tyner said.

That means corn and oil prices don’t always move in the same direction.

Corn for March is trading at $3.75 3/4 a bushel on the CBOT, 15 percent less than the $4.43 it took to produce last year’s crop, according to data from Iowa State University’s Ag Decision Maker. At current ethanol prices, a producer could eke out a profit if corn were $3.25, Tyner said.

Losing Money

Factoring in costs for overhead, an Iowa distillery is losing 9 cents on every gallon and an Illinois plant is earning 1 cent, AgTrader Talk estimates.

“Ethanol’s got a job to do; one is to stay in line with corn so you don’t lose so much money that you have to shut down,” Mike Blackford, a consultant at INTL FCStone in Des Moines, Iowa, said in a Jan. 20 telephone interview. “On the other hand, you have to stay competitive with gasoline.”

There have been periods this year when it was uneconomical to blend the fuel into gasoline, Tyner said. The fuel’s share of the gasoline market is 3.1 percent lower than a year ago, EIA data show.

In those instances, refiners are able to meet government consumption targets with tradable certificates that they get from blending biofuel, called Renewable Identification Numbers, or RINs.

RINs have gained 36 percent in the past year to 71.9 cents a gallon on the New York Mercantile Exchange.

Renewables Mandate

A 2007 energy law requires refiners to use biofuels, such as ethanol. Oil refiners and renewable energy supporters have been locked in a battle over the law’s merits and the Environmental Protection Agency is currently finalizing targets for last year and this one.

Current market conditions contrast with an 18-month stretch that started in June 2013. Then a typical ethanol plant made on average 63 cents a gallon, data from Iowa State’s Center for Agricultural and Rural Development in Ames show. The industry produced about 13.9 billion gallons, with potential profit of $8.8 billion, based on the Iowa State estimates and EIA data.

Green Plains CEO Becker predicts companies will tire of seeing losses mount in the current market.

“People will realize very quickly that they will burn through cash,” Becker said. “They would lose less money by shutting down. We had a great run for 18 to 20 months.”

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