Ethanol producers still treading water
By Fred Love Journal Des Moines Bureau | Posted: Sunday, August 24, 2008
DES MOINES -- A pendulum swings both directions, and Iowa's ethanol producers are hoping their pendulum swings back in the direction of wider profit margins.
The state's ethanol industry grew by leaps and bounds over a span of just a few years, but the pendulum started back in the other direction as unstable corn prices plagued the industry all summer. Some of the Midwest's largest producers have held off starting operations in their newest plants because of unfavorable economic conditions.
But the industry remains a profitable one by most accounts -- even if just barely.
Monte Shaw, executive director of the Iowa Renewable Fuels Association, described his outlook on the future of ethanol as cautiously optimistic. "Just about every plant in Iowa is operating with their noses above water, and they expect to continue to do that," Shaw said.
Weathering high corn prices
Storms and floods that battered the Midwest and drowned farmland this summer drove the price of corn above $7.50 a bushel near the end of June. Shaw said corn prices made for a tight ethanol market, but they didn't preclude plants from turning a profit. Some producers contracted their corn in advance to lock in lower prices.
Even if that weren't the case, high corn prices don't guarantee losses, he said. "A lot of people want to ask me at what price of corn does it not become profitable," he said. "There's no such answer. It really matters what price ethanol is and what price you're paying for corn."
Industry experts call the interplay between the price of corn and the price of ethanol the "crush margin." Even if corn prices skyrocket as they did this summer, producers can make money or take only minimal losses if the price of ethanol rises at the same time, Shaw said.
Chad Hart, an assistant professor of economics at Iowa State University's Center for Agricultural and Rural Development, said changes in the price of ethanol largely kept pace with that of corn throughout the summer. That's kept the ethanol industry from sustaining major losses.
"It's still a competitive industry in that the situation today is not one of strong profits, but it's also not of strong losses," Hart said. "It's at the edge where things are breaking even for a lot of these plants."
The price of gasoline also factors heavily into the fortunes of ethanol producers, he said. The price of oil has been on the rise since about 2000, and that affects the cost of growing, harvesting and transporting corn.
"Gasoline and ethanol don't necessarily track together all that well, but they tend to move, in general, in the same direction," he said.
Hart predicted continued and gradual growth in the industry, and he said he expects ethanol to make up a significant piece of the country's energy strategy for the foreseeable future.
"Ethanol's one biofuel we have going out there with good consumer acceptance," he said. "People understand it and where it comes from."
Ethanol boom
An energy bill passed by Congress in 2005 paved the way for more extensive ethanol use and handed tax breaks to ethanol producers. Around the same time, gasoline refiners stopped using the fuel additive MTBE because it was discovered to contribute to water pollution, leaving a gap that ethanol began to fill.
Demand for ethanol surged, as well as the construction of new plants.
Shaw said the ethanol boom attracted major investment to rural Iowa, but it also attracted a glut of newcomers to the industry, not all of whom had experience in the renewable fuels business.
He said the industry may have grown too quickly for its own good, but the frenetic pace led to some of the most exciting times in the history of renewablefuels.
State Sen. Thurman Gaskill, R-Corwith, a longtime ethanol promoter, said the accelerated growth took many in the industry by surprise. "When the expansion process was starting, we didn't know how fast that would go, how fast it would come online," Gaskill said.
He pointed out that the industry is still relatively young and going through some growing pains, but he said ethanol producers proved this summer that they can survive tough market conditions.
Major producer still growing
South Dakota-based ethanol producer VeraSun Energy Corp. announced this month that its total revenue for the second quarter of 2008 jumped nearly fivefold compared to the same stretch in 2007.
The company, fresh off an April merger with US BioEnergy that added five new facilities, reported an increase of $845.6 million in total revenue compared to the year before, despite dealing with volatile markets and corn prices.
VeraSun also started production at plants in Hartley, Iowa, and Hankinson, N.D., where the company had been holding off production because of unfavorable market conditions.
The company is still delaying production at a completed plant in Welcome, Minn., with plans to bring the plant online during the third quarter of 2008.
VeraSun officials also said they will begin production at a plant under construction in Dyersville, Iowa, by the end of the third quarter. And a plant being built in Janesville, Minn., is slated to begin production by the end of the year.
Hart said VeraSun's recent merger accounts for some of its increased revenue, but he said the company's report also indicates some strength in the ethanol industry.
Fred Love can be reached at (515) 243-0138 or fred.love@lee.net
Portrait of a Midwest ethanol producer
The status of VeraSun's newest ethanol plants
-- Hankinson, N.D., -- Completed and in production
-- Hartley, Iowa, -- Completed and in produciton
-- Welcome, Minn., -- Completed but not producing
-- Dyersville, Iowa, -- Under construction, projected to begin production during third quarter of 2008
-- Janesville, Minn., -- Under construction, projected to begin production by endof 2008.
The state's ethanol industry grew by leaps and bounds over a span of just a few years, but the pendulum started back in the other direction as unstable corn prices plagued the industry all summer. Some of the Midwest's largest producers have held off starting operations in their newest plants because of unfavorable economic conditions.
But the industry remains a profitable one by most accounts -- even if just barely.
Monte Shaw, executive director of the Iowa Renewable Fuels Association, described his outlook on the future of ethanol as cautiously optimistic. "Just about every plant in Iowa is operating with their noses above water, and they expect to continue to do that," Shaw said.
Weathering high corn prices
Storms and floods that battered the Midwest and drowned farmland this summer drove the price of corn above $7.50 a bushel near the end of June. Shaw said corn prices made for a tight ethanol market, but they didn't preclude plants from turning a profit. Some producers contracted their corn in advance to lock in lower prices.
Even if that weren't the case, high corn prices don't guarantee losses, he said. "A lot of people want to ask me at what price of corn does it not become profitable," he said. "There's no such answer. It really matters what price ethanol is and what price you're paying for corn."
Industry experts call the interplay between the price of corn and the price of ethanol the "crush margin." Even if corn prices skyrocket as they did this summer, producers can make money or take only minimal losses if the price of ethanol rises at the same time, Shaw said.
Chad Hart, an assistant professor of economics at Iowa State University's Center for Agricultural and Rural Development, said changes in the price of ethanol largely kept pace with that of corn throughout the summer. That's kept the ethanol industry from sustaining major losses.
"It's still a competitive industry in that the situation today is not one of strong profits, but it's also not of strong losses," Hart said. "It's at the edge where things are breaking even for a lot of these plants."
The price of gasoline also factors heavily into the fortunes of ethanol producers, he said. The price of oil has been on the rise since about 2000, and that affects the cost of growing, harvesting and transporting corn.
"Gasoline and ethanol don't necessarily track together all that well, but they tend to move, in general, in the same direction," he said.
Hart predicted continued and gradual growth in the industry, and he said he expects ethanol to make up a significant piece of the country's energy strategy for the foreseeable future.
"Ethanol's one biofuel we have going out there with good consumer acceptance," he said. "People understand it and where it comes from."
Ethanol boom
An energy bill passed by Congress in 2005 paved the way for more extensive ethanol use and handed tax breaks to ethanol producers. Around the same time, gasoline refiners stopped using the fuel additive MTBE because it was discovered to contribute to water pollution, leaving a gap that ethanol began to fill.
Demand for ethanol surged, as well as the construction of new plants.
Shaw said the ethanol boom attracted major investment to rural Iowa, but it also attracted a glut of newcomers to the industry, not all of whom had experience in the renewable fuels business.
He said the industry may have grown too quickly for its own good, but the frenetic pace led to some of the most exciting times in the history of renewablefuels.
State Sen. Thurman Gaskill, R-Corwith, a longtime ethanol promoter, said the accelerated growth took many in the industry by surprise. "When the expansion process was starting, we didn't know how fast that would go, how fast it would come online," Gaskill said.
He pointed out that the industry is still relatively young and going through some growing pains, but he said ethanol producers proved this summer that they can survive tough market conditions.
Major producer still growing
South Dakota-based ethanol producer VeraSun Energy Corp. announced this month that its total revenue for the second quarter of 2008 jumped nearly fivefold compared to the same stretch in 2007.
The company, fresh off an April merger with US BioEnergy that added five new facilities, reported an increase of $845.6 million in total revenue compared to the year before, despite dealing with volatile markets and corn prices.
VeraSun also started production at plants in Hartley, Iowa, and Hankinson, N.D., where the company had been holding off production because of unfavorable market conditions.
The company is still delaying production at a completed plant in Welcome, Minn., with plans to bring the plant online during the third quarter of 2008.
VeraSun officials also said they will begin production at a plant under construction in Dyersville, Iowa, by the end of the third quarter. And a plant being built in Janesville, Minn., is slated to begin production by the end of the year.
Hart said VeraSun's recent merger accounts for some of its increased revenue, but he said the company's report also indicates some strength in the ethanol industry.
Fred Love can be reached at (515) 243-0138 or fred.love@lee.net
Portrait of a Midwest ethanol producer
The status of VeraSun's newest ethanol plants
-- Hankinson, N.D., -- Completed and in production
-- Hartley, Iowa, -- Completed and in produciton
-- Welcome, Minn., -- Completed but not producing
-- Dyersville, Iowa, -- Under construction, projected to begin production during third quarter of 2008
-- Janesville, Minn., -- Under construction, projected to begin production by endof 2008.
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ER wrote on Aug 24, 2008 4:09 PM: