Corn-to-Ethanol Industry is No Longer a Sure Bet
The following article appeared in November 16, 2008 issue of The Indianapolis Star.
Indiana’s ethanol industry is no longer a sure bet
Indiana producers say the industry is no longer a sure bet
By John Russell
Bankruptcy. Red ink. Painful shakeout.
Those terms, normally associated with old-line manufacturing, now are popping up to describe what was seen just three years ago as a sure bet for Indiana: high-tech ethanol plants.
Ethanol producers across the Midwest are being squeezed by falling prices, tight credit, overbuilding and the volatile market for corn. As a result, many have seen their profits shrink and their stock prices fall. Several have slid into bankruptcy and have scrapped deals and projects.
The latest setback came Friday, when Aventine Renewable Energy Holdings, struggling to conserve cash, said it would slow construction of a plant in Mount Vernon, Ind., near the Ohio River, and delay the opening for about nine months. The plant, designed to produce 220 million gallons of ethanol a year, had been scheduled to open early next year.
“The margins in the ethanol business today are not very good. They are near break-even,” said company spokesman Les Nelson. “We need to make sure we have liquidity in our business.”
The company also said it would suspend construction at a plant in Aurora, Neb., for about six months.
The abrupt reversal raises the question of whether the ethanol industry, once seen as a major force in Indiana’s agriculture economy, is just going through a temporary market slump or embarking on a severe downturn.
It also puts a new wrinkle in the national discussion over alternative energy, which took center stage this summer when the price of gasoline soared to more than $4 a gallon.
Now with gas prices less than $2 a gallon, demand for ethanol has fallen. That’s even though ethanol pumps have sprouted up across Indiana, from zero three years ago to 116 now.
Some observers expect a consolidation to sweep the sector, with smaller and weaker players dropping out.
“There’s a little bit of a shakeout going on, but that’s to be expected,” said Mark Walters, director of biofuels programs for the Indiana Corn Marketing Council, which represents farmers across the state. “What it means is the industry is maturing. The euphoria is over.”
A tough road
It’s a far cry from 2005, when a gold-rush mentality gripped the industry, prompted by a federal mandate to mix ethanol into the gasoline supply to provide cleaner-burning fuel. The government offered subsidies and tax breaks to ethanol producers.
Indiana wanted to jump into the game. At the time, the state had just one ethanol plant, built in the 1980s, and wanted to compete with Iowa, Illinois and other Midwestern states that were far ahead.
The state offered $16 million in tax incentives to try to kick-start the ethanol industry here. Companies and investors scrambled to raise money to build multimillion-dollar ethanol plants across the Midwest. More than 40 plants were envisioned for Indiana alone.
Today, 11 plants are operating in the state, along with several biodiesel plants to make soybean-based fuel. More than 20 others never made it off the drawing board.
Some experts say the industry is suffering from a frenzy of overbuilding, a sudden downturn in the markets and a weak economy that is clobbering many sectors.
“I think there certainly was excessive optimism,” said Chris Hurt, an agricultural economist at Purdue University. “There was a lot of talk and a lot of interest. But the vast majority of those projects did not go ahead.”
Nationally, fewer than 10 percent of ethanol plants have shut down, according to the Renewable Fuels Association, a trade group. But several companies have suspended construction of new plants.
Now that a downturn is gripping the country, global demand for oil is falling and the price of gasoline likely will stay below $3 a gallon, said Wally Tyner, an energy economist at Purdue University. That likely will tamp down demand for ethanol.
“I think it’s going to be really difficult to make money in ethanol in the next year,” he said.
Several ethanol companies have taken big hits. VeraSun Energy, Sioux Falls, S.D., which owns an ethanol plant in Linden, Ind., lost tens of millions of dollars, in part by betting wrong on the price of corn, a major raw ingredient for ethanol. Last month, VeraSun filed for Chapter 11 bankruptcy protection.
The company has tripped before. Last year, VeraSun suspended plans to build a plant in Reynolds — a small farm town north of Lafayette also known as BioTown USA — because of a steep drop in ethanol prices.
That means the one town in America that was supposed to be a model for renewable energy is still waiting for an ethanol plant. And now that the industry is slowing, it could be awhile before more plants spring up.
Just ask ethanol companies and the investors that sank billions of dollars into them.
In Ohio, an ethanol maker filed for bankruptcy protection last month, blaming a miscalculation in water use. In Kansas, another company slid into bankruptcy in March and canceled plans to buy three Nebraska plants after failing to line up financing. In Illinois, a company declared bankruptcy after construction costs skyrocketed from $40 million to $130 million.
“The industry is going through a very challenging time,” said Ken Klemme, acting director of Indiana’s Department of Agriculture. “Companies that have the best management, the best operations and the best technology are just modestly profitable. Companies with problems are not going to be profitable during this phase.”
Weathering the storm
Indiana farmers count heavily on ethanol producers as customers for their grain. The Hoosier state’s ethanol plants consume more than 300 million bushels of corn a year, or about one-third of Indiana’s crop.
Some wonder if the industry has overbuilt. Nationally, ethanol output has nearly tripled, from 3.4 billion gallons a year in 2004 to 9.5 billion gallons this year. Some expect capacity to grow to 13 billion gallons by next year.
Some economists say the outlook for ethanol makers depends heavily on the price of corn. The price of corn has been volatile this year, rising to about $8 a bushel after the Midwestern floods that damaged thousands of acres of fields. But recently it started to fall again.
Several ethanol producers in Indiana say they are weathering the storm. Poet, a South Dakota ethanol producer that runs about two dozen plants, including three in Indiana, said its facilities are running at capacity and are expected to make money this year. Cardinal Ethanol, an Indiana company financed by a group of private investors, opened its first plant two weeks ago in Randolph and said it expects to make money this year.
“Obviously, we don’t have the debt all paid down, but when you’re looking at the day-to-day numbers, it does indicate we have (profit) margins after expenses,” General Manager Jeff Painter said.
Indiana still trumpets its role in the industry. The state’s Web site boasts that “Indiana’s biofuels industry has grown to national prominence in just one year,” with new ethanol and biodiesel plants, providing more than 600 jobs here.
“In total, these new facilities will put at least $29.5 million into local farmer pockets and invest more than $1.47 billion in capital expenses,” it continued.
Since offering tax incentives in 2005, Indiana has certified $7.5 million worth of those credits, which carried performance requirements for job creation and capital investment. In mid-2006, the state scrapped tax incentives for ethanol makers, deciding the market had enough momentum on its own.
“We made the determination that incentives weren’t really driving the growth,” said Chad Sweeney, vice president and general counsel of the Indiana Economic Development Corp.
Today, most gasoline sold in the country contains about 10 percent ethanol. Hundreds of stations across the Midwest offer blends of 85 percent ethanol for flex-fuel cars.
But whether ethanol regains its promise remains open for question. President-elect Barack Obama, who comes from the corn-growing state of Illinois, is a strong supporter of ethanol.
As a senator, he supported subsidies for ethanol and other forms of alternative energy and championed earmarks for research projects on ethanol. He wants to nearly double the federal guaranteed market from the current standard of 36 billion gallons a year by 2022, to 60 billion gallons by that year.
Yet energy policy is always a hot topic of debate. And as the ethanol industry is discovering, markets are unpredictable and sometimes unforgiving, with lots of uncertainty thrown in.
“Lately, the news has mostly been negative,” said Tyner of Purdue. “I think it will take some time before everything comes back into balance.”