Drop in Oil Price Squeezes Ethanol Producers

MINNEAPOLIS (Minneapolis Star Tribune/TNS) —

The dramatic fall in oil prices has ended the party for another energy industry — ethanol.

Some producers of corn-based ethanol made record profits in 2014, but that’s over. Industry executives now are talking about breaking even or staying slightly profitable.

Cheaper gas affects ethanol producers because they sell into the same fuel market. Most gasoline is 10 percent ethanol.

“It’s good for the consumer, but it is getting hard on the industry,” said Brian Kletscher, CEO of farmer-owned Highwater Ethanol, one of five Minnesota-affiliated producers to report record 2014 profits.

Crude-oil prices have dropped 50 percent since June, allowing happy drivers to pump $2-per-gallon gasoline into their tanks. But it’s brought less cheer to ethanol producers. In January, wholesale ethanol fetched half what it did on some days in 2014.

“Margins are pretty thin right now,” said Scott McDermott, Chief Operating Officer of Ascendant Partners Inc., a Colorado-based financial-advisory firm that tracks the ethanol industry.

Minnesota, the nation’s fourth-largest ethanol producer, has 21 ethanol plants that refine more than 1 billion gallons a year, about 8 percent of U.S. output. More than 12,000 Minnesotans work in the industry and dependent businesses, according to the state Agriculture Department.

The ethanol-industry downturn is not like 2008 or 2012, when hard times and drought shuttered ethanol plants, including several in Minnesota. Nor are things as bad as in the oil industry, where producers have reported losses and slashed investment, including a 27 percent drop in North Dakota oil-drilling rigs in the past year.

McDermott said it is the first time the ethanol industry has faced such a precipitous fall in fuel prices. Yet many ethanol producers are in a good financial position, and some are looking to invest in new technology or related enterprises to reposition or expand their businesses, he added.

Kletscher, who also is chairman of the Minnesota Biofuels Association, said he hasn’t heard of any planned layoffs or plant shutdowns in Minnesota. None of the nation’s 213 ethanol plants have closed recently, according to the Renewable Fuels Association.

Many ethanol plants had strong or even record profits last year. At Highwater Ethanol, which opened in 2009 and is the newest ethanol plant in the state, net income hit $21 million, four times the profits of its best previous year. In 2012, the plant lost $4 million.

Seven Minnesota-affiliated producers tracked by the Star Tribune reported gains in 2014 operating income from 60 percent to more than 400 percent over 2013 results. Advanced BioEnergy, with ethanol plants in South Dakota, ended two years of losses with a $29 million profit for fiscal year 2014. Companies reporting record profits ranged from Heron Lake BioEnergy, with one ethanol plant, to Green Plains Inc., the nation’s fourth-largest ethanol producer, which has 12 plants.

With the new year, ethanol profitability slipped, according to DTN, which collects and analyzes market prices for the industry. Almost everything needed to make ethanol, like corn and natural gas, along with the resulting biofuel and feed, are commodities with prices set by markets. Ethanol makers see their margins shrink when commodities they purchase rise in price or a commodity they sell fetches less, as is the case now.

Rick Kment, a DTN analyst based in Omaha, Neb., said ethanol plants increased output in 2014, oversupplying the market. Ethanol in U.S. storage climbed to nearly 21 million gallons in late January, a 2 ½-year high, Kment said. That kept a downward pressure on the price.

“I think we are going to see production pullbacks — plants not running at capacity — rather than what we saw five to six years ago, with plants shutting down and going through bankruptcy,” Kment said in an interview.

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