Big Firms Staking Claims in Ethanol
Big firms staking claims in ethanol
Oil, agriculture giants buy up troubled small entities on the cheap, pressuring independents
By Joshua Boak
April 9, 2009
Gibson City, IL – A smooth road curves toward the hulking ethanol mill that One Earth Energy LLC will open in June. But the path to profitability might be rocky, as the fledgling company could face much larger rivals that have snapped up bankrupt mills at steep discounts.
Valero Energy Corp., the country’s largest oil refiner, broke into the farm-grown business last month, buying seven ethanol mills and a development site from bankrupt VeraSun Energy Corp. at a 70 percent markdown.
Other mills could soon be up for auction, after Aventine Renewable Energy Inc. in Pekin, Ill., filed for bankruptcy Wednesday and the recent disclosure that Pacific Ethanol Inc. in Sacramento, Calif., is struggling to repay lenders after its $147 million loss last year.
By acquiring ethanol mills on the cheap, big oil and other players could undercut firms such as One Earth Energy, which spent $166 million to build a plant for distilling corn into fuel.
“The challenge to compete with those new ownerships is they have a lower cost of production because they have less debt,” said Steve Kelly, president of One Earth Energy.
Heavy debt loads and historically high corn prices have been lethal to independent ethanol firms. “The growth in ethanol is mandated, but most U.S. independent ethanol producers have failed or are struggling to survive as stand-alone entities,” wrote Chi Chow, an energy industry analyst for Tristone Capital Co.
Chow predicts a wave of consolidation among the country’s 170 ethanol mills. Midwestern agricultural processors such as Archer Daniels Midland Co. and Cargill Inc. also are expected to expand their ethanol holdings.
Brent King, who has restructured bankrupt biofuel plants, said ADM and Cargill are “waiting for it to get bleak enough so they can buy plants at cents on the dollar.”
A spokesman with ADM, which was outbid for the VeraSun mills, said the company is looking for strategic acquisitions. Cargill declined to comment.
The $552 million Valero deal gives the Texas-based refiner access to 780 million gallons of ethanol a year, so it would no longer have to purchase the fuel additive from outside companies. “This will be a small part of Valero, but big for the ethanol industry,” said Valero spokesman Bill Day, adding that the refiner intends to run the plants at full capacity.
As a result of the deal, ethanol producers counting on purchases from Valero will have to scramble for new customers, further depressing ethanol prices that have sunk to $1.58 a gallon from last summer’s peak of about $2.80 a gallon, said Tom Elam, the founder of FarmEcon LLC and an industry critic.
Lower prices could drive additional mills into bankruptcy that larger corporations could then buy. “In a market like this, farmer co-ops won’t do well,” Elam said.
At the dawn of the ethanol boom, farmer co-ops embraced an integration strategy similar to what Valero is now pursuing. Corn growers banded together to start mills that would create new demand for an age-old crop.
Before launching One Earth Energy, Steve Kelly worked down the road for the Alliance Grain Co. Kelly estimates that the co-op stored about 3 million bushels of corn when he joined it in 1988. The figure reached almost 30 million bushels in 2005, so Alliance needed an outlet for its corn and One Earth Energy was born.
“It always made sense to me to have the vertical integration, be part of that consumption chain after it leaves the farmer and the storage point,” said Kelly, noting that Alliance will supply One Earth Energy with corn.
And Kelly is optimistic about ethanol because it is a fraction of the fuel used by the country, so there could be room for additional production from mills in the years ahead. American motorists will use 138 billion gallons of gasoline this year, but the federal mandate is for 10.5 billion gallons of biofuels.
“What gives us hope is you still have growing populations around the world,” Kelly said.
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. On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, 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.