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Can ethanol weather storm?

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Neil Johnson
August 21, 2012

— If ethanol producers face an impending storm of low demand, dropping gas prices, high corn prices and what could be the weakest corn crop in years, you wouldn't know it in Milton.

United Ethanol, an ethanol production plant on the city's east side, is running at capacity, company sources reported late last week.

"Things haven't slowed down here at all," said a rail worker for the company.

The worker was switching out a dozen train cars that had just offloaded corn at the facility, which has an annual ethanol production capacity of 42 million gallons.

As he radioed back to other workers at the plant's rail site, a pair of tank trucks filled with ethanol passed, headed out from the plant's drive.

The sour tang of processed corn hung in the air even as stands of corn stood in a nearby field with spiky leaves—a telltale signs of drought stress.

While it's boom time for ethanol in Milton, many ethanol industry analysts are predicting that an economic storm could be descending on the U.S. ethanol market as corn prices approach $8 a bushel.

The U.S. Department of Agriculture announced earlier this month that U.S. corn yields could drop to the lowest per acre since 1995. Drought conditions and high temperatures baked cornfields in Wisconsin and the Midwest in July.

Another group, the Renewable Fuels Association, reported yields for corn could be down 25 percent at harvest.

High corn prices, sinking gasoline demand and falling oil prices have created a margin crunch for ethanol producers, according to industry analysts.

That has prompted producers in the Midwest to cut ethanol production between 10 and 12 percent this summer, according to the U.S. Department of Agriculture.

A total of 26 ethanol plants throughout the country have been idled this year, the Renewable Fuels Association reported. Many others are operating "well below capacity" as producers struggle to remain profitable amid a margin pinch and uncertainty over crop prices.

U.S. exports have dropped from 64.9 million gallons in March to 31.2 million gallons in June. Some ethanol analysts fear corn prices could continue to climb amid a weak corn harvest.

For consumers, a widespread shuttering of ethanol plants could mean a spike in gasoline prices.

Small or medium sized cooperatives such as United Ethanol that produce under 100 million gallons of ethanol a year could stand to be hurt most, said UW–Madison agriculture economist Steve Deller.

"If corn prices shoot through the roof, gasoline prices go down," Deller said. "Then later this year, you can't get corn—for small producers, how do you make it? It's like the perfect storm."

Not the end of the world

Josh Morby, executive director of the Wisconsin Bio Industry Alliance, said there could be challenging times ahead for ethanol producers, but he doesn't believe the sky is falling.

Ethanol companies with a low debt load and stable corn supplies likely will withstand the current economic climate, he said.

Morby downplayed the specter of corn price increases. He also was optimistic that recent rains might have helped corn that was planted later in the year.

In the event of a downturn in the ethanol market, producers will "tighten their belts just like any business does when the cost of inputs go up," Morby said.

Deller agreed that the ethanol pinch might not hurt every producer.

"How it plays out is really going to hinge on how these smaller companies hedge their bets in terms of how they're contracting their supplies," he said. "A lot of whether they're going to be able to ride through this is whether they've got supplies and cash on hand."

"Bigger producers are going to be fine," Deller said. "It's the smaller ones. There, it's going to be hit and miss whether they're going to be able to weather this or not."

Last week, United Ethanol was having corn delivered by train. The company would not give details on the amount of grain it has on hand, and it hasn't released any figures on its second quarter production.

United Ethanol has the capacity to store about 1.7 million bushels of corn.

The company reports it buys grain when market conditions are favorable and stores it, which improves profitability, according to the company website.

Dori Lichty, a company spokeswoman, said United Ethanol continues to operate "smoothly and efficiently" and is producing ethanol at capacity.

She declined to answer specific questions about United Ethanol's recent production volume or why it continues to produce ethanol at capacity when other producers have slowed production.

"United Ethanol is standing strong as tight margins descend upon the ethanol industry, again. The demand for our ethanol byproducts has remained extremely high, as more livestock producers are searching for alternate feed sources, like distiller's grain," Lichty said in a statement. "With steady operations and signs of improving margins going forward, it is our intention to weather the current economic storm."

She would not comment on whether it would affect the company's profitability if it had to throttle back on production.

Local connection

Milton City Administrator Jerry Schuetz said United Ethanol officials are hesitant to discuss production volumes. The city gets no estimates on month-to-month production at the company.

"They keep those numbers pretty close to the vest," Schuetz said.

Cageyness among Wisconsin's ethanol producers is common, in part because United Ethanol and many producers in Wisconsin are run as cooperatives, Deller said. They fear spooking their largest investors—primarily local farmers and local banks.

"They don't want to cry wolf or speculate that they're on shaky ground," Deller said.

It's not uncommon for ethanol plants to close for a week or two at a time during the summer, often reporting only that they're doing plant maintenance.

That can leave analysts to speculate whether some producers are idling because of poor market conditions or supply problems.

Petroleum refiner Valero, which runs an ethanol plant in Jefferson, in July suspended operations at two of its 10 plants, one in Indiana and another in Nebraska.

The closures came because of low profits as margins for ethanol shrunk. It's not clear if the company faces similar problems in Wisconsin. Analysts say the company has scant contact with ethanol insiders.

"They (Valero) really haven't at all been willing to communicate with the rest of the ethanol industry in Wisconsin," Morby said.

United Ethanol has $15 million in taxable property and employs about 35 workers, according to the company.

Floor line workers at a plant such as United Ethanol earn $12 to $13 an hour, although higher-skilled workers make as much as $20 an hour, Deller said. Plant managers and engineers are paid even more.

"These are not bad paying jobs," Deller said.

Food or fuel?

About 50 percent of corn grown in Rock County goes to local ethanol production, said Jim Stute, UW Extension crops and soils agent. Much of the rest of Rock County corn goes to feed livestock.

Some analysts think a weak corn harvest could prompt growers to hold back larger amounts of corn, said Bob Oleson, a Palmyra grower and director of the Wisconsin Corn Growers Association. Growers who aren't supplying corn on contract could use their corn to feed livestock instead of selling it to ethanol producers.

That could slow production of ethanol later this year, he said. It also could reduce the availability of distiller's grain, a byproduct of ethanol production that many ethanol producers sell back to farmers as high-protein livestock feed.

Food prices could rise 5 percent, which is higher than average, next year, the U.S. Department of Agriculture estimated. Much of that increase will be in meat and dairy products because the drought this year resulted in less corn and hay available for feed.

"Who's going to get caught with this is hog producers," Deller said.

Some livestock groups are beating their drums for the federal government to crimp its annual ethanol production mandates in the face of a compromised corn crop.

Corn prices are being driven up in part because of the demand for corn for ethanol production, and that's driving corn prices higher, they argue.

Ethanol lobby groups argue that's untrue. They say the industry has responded to corn prices by reducing production in recent months.

The federal government is mandating 13 billion gallons of ethanol be blended with fuel this year.

The Renewable Fuel Association reports that there is now a backlog of ethanol waiting to be blended, and if the ethanol market gets tight, refiners will be able to draw on banked ethanol to meet the government requirement.



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