Double Whammy for Ethanol
Double Whammy for Ethanol
Corn Prices Rise as Oil Drops, Putting Squeeze on Margins
By IAN BERRY
Wall Street Journal
January 11, 2009
CHICAGO — Corn producers have gotten a holiday gift in the form of rising prices, but that rally is a lump of coal for one big corn customer, the ethanol industry.
Corn’s rally also comes as crude-oil prices sag, something that has put even more pressure on profit margins in an ethanol industry in which many producers already were in a precarious state, with multiple factory closures, analysts say.
The price of the corn futures contract for March delivery has climbed to as high as $4.26 a bushel Tuesday on the Chicago Board of Trade from $3.0925 on Dec. 5. It closed Friday at $4.1075.
Analysts are befuddled by the rally, saying there is no good fundamental answer. Dry weather limiting South American corn production, concern about enough acres being planted in 2009 and even traders following their so-called technical charts all have been cited, but many analysts say weak demand isn’t going away amid a world-wide recession.
A rally in corn prices — the price of the corn futures contract for March delivery climbed to as high as $4.26 a bushel recently from $3.0925 on Dec. 5 — has befuddled some analysts. Above, harvesting corn in Illinois.
Michael Swanson, senior agricultural economist for Wells Fargo, and other analysts point out that rising prices typically limit demand, and so in that sense the rally has been counterintuitive. “I think this market is going to get disciplined,” Mr. Swanson said.
On the ethanol end, producers extract value out of each bushel of corn by selling the fuel and a byproduct, dried distiller grains. Mr. Swanson says corn prices are too high to allow the 80 cents left over from the sale of each bushel that the “very best” ethanol factories need to cover chemical, labor, handling and depreciation costs, let alone the $1.20 a bushel an average factory needs.
Marty Foreman, analyst for Doane Advisory Services, said that in the summer, ethanol was selling as much as $1.75 a gallon less than gasoline at the pump. Now the situation has reversed. The price of the crude-oil futures contract for February delivery fell 87 cents to settle at $40.83 a barrel Friday on the New York Mercantile Exchange, while February Nymex reformulated gasoline blendstock for oxygen blending futures, or RBOB, rose 2.30 cents to $1.1112 a gallon. February ethanol futures rose 3.2 cents to $1.685 a gallon on the Chicago Board of Trade.
“It’s a tough market to sell extra fuel into,” Mr. Swanson said. “These farmers are thinking ‘this is going in the right direction, let’s rally another 30 cents.’ Well, if they rally another 30 cents, that 30 cents comes right out of the ethanol pocket. And they’re not just going to run this plant just to lose money.”
Analysts say an increase in gasoline demand, which would help cure ethanol’s woes, is possible. But some analysts, including Mr. Foreman, think corn prices will remain firm.
Corn’s recent rally also doesn’t help export demand, which has been anemic. Analysts say the last week of relatively strong exports was in early December.
Corn’s rally isn’t as detrimental to feed demand, even though livestock producers also are hurting. Ron Plain, agricultural economist with the University of Missouri, said that while there is a direct relationship between corn prices and livestock prices, there is a lag between them.
“You can turn an ethanol plant on and off,” Mr. Plain said. “You can’t go out to your pigs, and say, ‘Hey, I’m sorry, corn’s expensive, hang out for the next six months and I’ll be back with some more feed.’ “
Write to Ian Berry at email@example.com
Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol. Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program. Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline. Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.