Todd Black’s short-term outlook for the U.S. ethanol industry is as bleak as his last name.
“We could see some plants shut down, I think,” says the general manager of Adkins Energy LLC, a 160-million litre farmer-owned facility in Lena, Illinois.
American ethanol prices have fallen 25 percent since January, the result of what some say is overproduction and what others have described as underuse of the alternative fuel.
The price slump threatens the viability of many new farmer-owned plants, but it’s not just the independents feeling the pinch.
Read Also
Canola oil transloading facility opens
DP World just opened its new canola oil transload facility at the Port of Vancouver. It can ship one million tonnes of the commodity per year.
Archer Daniels Midland, the largest producer of ethanol in the United States, has reported that profits from its bioproducts division fell 30 percent in the quarter ending March 31 compared to the same period last year, blaming the drop partly on lower ethanol sales.
The surprise turn of events raises a cautionary flag for a U.S. ethanol sector that has kicked into overdrive and a Canadian industry that is still revving up its engine.
Fuel analysts believe the faltering price reflects a temporary supply-demand imbalance that will be rectified by a looming federal renewable fuels mandate, which will establish a national minimum use requirement for alternative fuels such as ethanol and biodiesel.
However, Black estimated it will be two or three years before prices improve, putting the brakes on a rapidly accelerating sector of the U.S. farm economy.
With one or two large-scale plants setting up shop every month and no new markets for ethanol in the foreseeable future, supply is starting to outpace demand by a wide margin.
Over the next year and a half, 19 new facilities will open, adding another 3.5 billion litres of capacity to the industry, bringing total potential output to 18 billion litres.
“New plants with a lot of debt are going to have a tough time surviving,” Black said.
That is a worrisome assessment for farmers considering building a 150 million litre ethanol plant in Unity, Sask. But even at today’s depressed prices, their business plan shows the project would be profitable.
“I don’t know, maybe agriculture is in such a bad position in Canada that the economics look a bit different up here than they look down there,” said Jason Skinner, general manager of North West Terminal Ltd., a farmer-owned grain terminal that will be co-ordinating the financing and construction of the $75 million project.
“When we built our grain elevator here we were hearing the same thing: the line companies weren’t making money.”
If local farmers had been swayed by that kind of pessimism they wouldn’t now be delivering crops to their own profitable grain terminal, Skinner said.
While he’d rather not build a plant during a time of depressed ethanol prices, Skinner sees mainly encouraging signs when he looks south of the border.
By the end of this year, U.S. ethanol capacity should reach 15 billion litres, more than double the level in 2000. Most of that production is located in corn-growing states such as Iowa and Minnesota and is transported to populous markets in New York and California.
“It seems that developing ethanol plants close to your feedstock in the U.S. Midwest is the economic model that works,” Skinner said.
As a result, he is comfortable building a farmer-owned plant on the Prairies next to an abundant supply of wheat and shipping out the value-added product.
He is also encouraged by political developments in the U.S., where the Senate recently adopted an amendment to its energy bill calling for a 30 billion litre renewable fuels mandate by 2012.
The bill still has to be reconciled with the House version, which calls for a 19 billion litre mandate, and then approved by president George Bush.
Skinner believes the federal mandate will rectify the temporary oversupply problem, spurring new demand in markets such as California, where Saskatchewan has a freight advantage over the Midwestern states.
“We see the U.S. market as maybe our primary market,” he said.
If that’s the case, the Canadian farmers should brace for a fight. American oil companies are reluctant customers of ethanol, viewing it as a growing threat, said Monte Shaw, spokesperson for the U.S. Renewable Fuels Association.
He blames the price slump on the unwillingness of oil companies to use ethanol blends at their pumps despite the fact that with the federal subsidy it is about 23 cents per litre cheaper than gasoline.
“It is their inaction on moving ethanol into new markets that is the root of the problem,” Shaw said.
His claim is corroborated by a recent Consumer Federation of America report that said refiners in New York and California could have lowered the wholesale price of gas between two to three cents per litre in March if they had blended it with cheap ethanol.
It has led to the absurd situation where the U.S., a country concerned about its reliance on oil imports, is exporting a cheap, domestically produced alternative fuel overseas while importing gasoline, Shaw said.
But according to Spencer Kelly, ethanol analyst for the Oil Price Information Service, petroleum companies can’t be entirely blamed for their lackluster response to low ethanol prices.
It takes time and considerable financial resources to install the equipment necessary to blend ethanol with gasoline.
Before they make that kind of commitment, oil companies want a guaranteed and ample supply of cheap ethanol for the foreseeable future. They don’t have to be reminded about an earlier attempt to establish a U.S. ethanol industry that fell flat on its face.
In the early 1980s the U.S. Congress enacted a series of tax benefits for ethanol producers and blenders in response to the Middle East oil crisis. By 1984, 163 plants were operating in the U.S., nearly twice the number there are today.
By the end of 1985 more than half of those facilities had shut down, driven out of business by plummeting crude oil prices.
Shaw countered that those plants were “backyard stills” when compared to today’s efficient operations, their output was measured in thousands instead of millions of litres and the oil economics in the mid-1980s were considerably different than they are today.
“If crude oil goes back to $8 US per barrel for five years in a row, we’re going to have some issues. I’m not exactly losing sleep over that when I go to bed,” he said.
However, lack of new markets for the renewable fuel is a legitimate concern, said Dan Hernandez, chief executive officer of Midwest Grain Processors in Lakota, Iowa, another farmer-owned facility.
Until now, ethanol has been sold almost exclusively as an oxygenate additive to regular fuel, but the industry is close to tapping out that 11 billion litre market, he said.
That is forcing ethanol plants to compete head-to-head with oil companies by buying pump space at independent retailers and selling blends containing either 10 or 85 percent ethanol.
Like many others in the ethanol industry, Hernandez believes the only way out of the marketing quagmire is for Congress to deliver a robust ethanol mandate.
“That will add a little boost to our markets and we’re off to the races again,” he said.
If it doesn’t materialize, there could be a prolonged deceleration in the U.S. ethanol industry and a poor environment for ignition in Canada, Black said.
“Until we get some markets and use up that oversupply, I think we’ve got a problem,” he added.
