Ethanol Industry Looks to Drivers and Exports for Path Out of a Slump

MINNEAPOLIS (Minneapolis Star Tribune/TNS) -

Increased driving and gasoline consumption are helping the ethanol industry pull out of a first-quarter slump.

Producers of the corn-based fuel reported steep declines in operating income for the first quarter, marking a sudden end to companies’ record 2014 profits.

“The industry as a whole had a tough go in the first quarter,” said Mark Warren, partner and CFO for Ascendant Partners, a Denver-based financial-advisory firm that tracks ethanol plants’ performance. “We are seeing things turn a little bit as of late.”

Industry officials say that Americans are driving more, and are projected to use more fuel in 2015. Demand for ethanol is expected to increase. Some ethanol plants are making investments to boost output.

“U.S. gasoline consumption continues to improve,” Juan Luciano, CEO of the nation’s largest ethanol producer, Archer Daniels Midland, told analysts on a conference call last Tuesday. “That will translate into stronger domestic demand for ethanol. These, combined with strong exports, will keep our assets running hard, especially as we move through the summer driving season.”

ADM reported a 73 percent decline in its ethanol-related operating profit, to $42 million for the three months ending in March. The biofuel segment reported $156 million in operating profit in the first quarter of 2014.

Ethanol makers largely attributed the quarter’s slump to the drop in the wholesale price of ethanol, which typically is blended at 10 percent at the pump. As crude oil and gasoline prices began to decline in late 2014, ethanol sold for less, squeezing some ethanol producer margins.

“They certainly did get slammed — a year ago they were having record margins,” said Alex Breitinger, a commodities futures broker at Paragon Ag Advisors.

Valero Energy Corp., the nation’s third-largest ethanol producer, reported a 95 percent drop in quarterly ethanol operating profits, to $12 million. A year ago, Valero’s record first quarter generated $243 million in ethanol operating profits.

But executives said ethanol margins have rebounded since March. At Green Plains, the Omaha-based owner of 12 ethanol plants, CEO Todd Becker projected that ethanol will be profitable for the year.

U.S. ethanol exports should range from 800 million to 1 billion gallons, Becker told analysts. The nation’s producers exported 836 million gallons of ethanol in 2014, a 35 percent increase over 2013, but short of the 2011 record, according to the Renewable Fuels Association.

On the domestic market, wholesale ethanol is trading at least 40 cents per gallon less than gasoline, Becker said. That’s important because even with government blending mandates, ethanol’s penetration of the fuel market still relies heavily on price.

Although low gasoline prices hurt the industry’s margins early this year, the long-term effect may be quite the opposite.

U.S. gasoline consumption is on the rise. For the six months ending in March, consumption rose 2.7 percent over the same period last year. The U.S. Energy Information Administration says it expects another 1.6 percent hike this year, mainly because of lower fuel prices and a better economy.

If the consumption and export projections are correct, U.S. ethanol plants could be running at full capacity and still need to draw on stocks in storage, Becker said.

Another pressure on ethanol plants — high corn prices — also has gone away for now. A bushel of corn has been trading at a relatively low $3.60, below the break-even point for many farmers.

“Since the first of the year, I would expect every ethanol producer is much happier,” said Breitinger of Paragon. “Corn is down 40 cents a bushel and ethanol has gone up pretty substantially at the same time. So their margins should be looking better.”