High Corn Prices Cast Shadow Over Ethanol Plants
AltraBiofuels opened its $170 million ethanol plant in Cloverdale, Ind., in April. (Andrea Hsu/NPR)
A rush to cash in on ethanol has slowed as soaring corn prices squeeze profit margins for producers of the alternative fuel. At a recent high of $7 per bushel, the corn used to make ethanol has tripled in price since many plants were built two years ago, and some facilities have been shut down or put on hold.
Ethanol took off in 2006, in response to two federal policies.
One policy was longstanding: Most gasoline had to include an additive that would oxygenate it, make it burn cleaner and reduce air pollution. The other policy was new: The government decided not to shield the oil companies against lawsuits over the additive that they had been using — methyl tertiary-butyl ether, or MTBE, which was found to contaminate groundwater.
(Andrea Hsu/NPR)
So there had to be a different additive. Ethanol, a type of alcohol that is distilled from corn, fit the bill. And the oil companies could get a 51-cent-per-gallon tax credit for using ethanol.
The rush was on, and producers moved quickly to get ethanol plants online.
But recent ethanol news from the Corn Belt has been a lot less upbeat, as many ethanol-plant projects have stalled.
(Andrea Hsu/NPR)
Changing Economics
"The ethanol industry is going through some ... adjustments or, we might say, growing pains," says Chris Hurt, a professor of agricultural economics in the heart of the Corn Belt at Indiana's Purdue University.
"Obviously, we've seen a massive boom in ethanol," he says. "We've seen a lot of capacity put in place. We've had some infrastructure problems in terms of moving all of that ethanol. And we've seen some very rapid changes in prices."
(Andrea Hsu/NPR)
Corn is now more expensive than it was when many of the ethanol plants were built, Hurt says. Two years ago, when many of the plants were being built, corn was $2 per bushel, making ethanol production so profitable, that in some cases a plant could be paid off in just 6 months, he says.
"We were in largely a surplus corn production situation. Today, we've seen corn go to $6, and then, with the flooding most recently through the Midwest, above $7 a bushel," Hurt says.
Mark Stowers of Poet Ethanol Products, one of the biggest ethanol companies, says the economic picture has changed.
"That may have been the case in 2006, but typically that would not be the forecasted return" this year, he says. Stowers says that while the gold rush may be finished, Poet is not.
"There's already evidence that some people have closed plants, and some people have not started up plants. I don't see that impacting Poet," he says.
Stowers says the company expects to open three plants later this year. But Poet did have to cancel plans for a plant in Minnesota this year for lack of an air quality permit.
That's one of 18 problem plants listed on a "Biofuels Deathwatch" map at Earth2Tech.com. The plants are either late to open, soon to close, or already out of business.
A Plant 'On The Edge'
Some plants are just barely making it.
"We're on the edge right now," says Ken DeCubellis, the CEO of AltraBiofuels. In April, his California-based ethanol company opened a $170 million plant in Cloverdale, Ind. "We are one bad day of ethanol pricing from having to decide to shut the plant down," DeCubellis says.
At AltraBiofuels' Indiana plant, trucks drive in and dump their loads of corn to be distilled into alcohol and then shipped off to be blended into auto fuel.
The plant is powered by natural gas and employs 47 people. Two giant storage tanks hold as much as half a million bushels each of dried corn, ready to be processed. A few years ago, filling them both with corn that cost $2 a bushel would have been easy.
But today, DeCubellis says AltraBiofuels has to watch its costs very carefully.
"We run lean and mean," he says. "With corn at $7 a bushel, you don't have the working capital to fill these things up"
DeCubellis is an engineer/MBA who used to work for Exxon Mobil. Having made the switch to biofuels, he is a gung-ho proponent of ethanol. But he's also realistic about the business and the impact of rising prices for his inputs.
"If we aren't able to cover our variable costs" — for corn, natural gas and other raw materials — "we will not run the plant," he says.
Not Enough Corn
Hurt, the Purdue economist, says two big changes explain what's happened to the ethanol producers.
Once the federal requirement for a clean additive has been met, ethanol is only worth as much as the energy it packs, plus the tax break it conveys. And in fact, ethanol packs less energy than gasoline.
So ethanol can't sell for as much as gasoline, but it has to sell for more than corn. Hurt has plotted corn prices and ethanol prices for the past year. His studies show that profit margins have mostly been slim and sometimes negative.
The second big change, he says, has to do with what used to be seen as the perennial problem facing the Corn Belt: the threat of producing too much corn.
"That concept that corn was unlimited" is no longer valid, Hurt says. "Corn is not unlimited. If we used every bushel of corn that we produce this year, we could only substitute for about 14 to 15 percent of the gasoline."
According to the most recent figures, more than 30 percent of this year's U.S. corn crop is going to ethanol, and it accounts for about 8 percent of all the blended gasoline sold at the pump.
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ROBERT SIEGEL, host:
Now the end of a gold rush - not for nuggets of the precious metal, but for golden kernels of corn that can be brewed and distilled into ethanol.
It took off in 2006 in response to two federal policies. One policy was longstanding. Most gasoline had to include some additive that would oxygenate it, make it burn cleaner and reduce air pollution. The other policy was new. The government decided not to indemnify the oil companies against lawsuits over the additive that they have been using, methyl tertiary-butyl ether, or MTBE.
So there had to be an additive - it couldn't be the old one. And there was ethanol, alcohol distilled from corn. And for using it, the oil companies could get a 51-cent-a-gallon tax credit. The rush was on.
Unidentified Woman #1: Wisconsin's largest ethanol plant is set to go online.
Unidentified Man: On the outskirts of Jefferson, in the middle of a cornfield, a rebirth is taking place.
SIEGEL: More recently, the news from the Corn Belt about ethanol has been a lot less upbeat.
Unidentified Woman #2: This is where construction should be taking place to build the new ethanol plant near Wahoo, but right now there are only a few pieces of equipment and a lot of dirt, and it may look like this for some time.
SIEGEL: What happened? I asked Chris Hurt, who is a professor of agricultural economics in the heart of the Corn Belt, at Purdue University in Indiana.
Professor CHRIS HURT (Purdue University): The ethanol industry is going through some, I think, adjustments, or you might say growing pains. Obviously we've seen a massive boom in ethanol. We have seen a lot of capacity put in place. We've had some infrastructure problems in terms of moving all of that ethanol, and we have seen some very rapid changes in prices. One of those changes is the price of the raw material here in the Midwest; that's corn.
SIEGEL: You mean the corn is much more expensive now for the ethanol plant to buy than it was perhaps when they started building that ethanol plant?
Prof. HURT: That's right. When we go back and look at the eight years, from 1998 through 2005 crops, U.S. farmers received just a little bit over $2 a bushel for their corn. We were in, largely, a surplus corn production situation. Today we've seen corn go to $6 and then with the flooding most recently through the Midwest, above $7 a bushel.
SIEGEL: So if I'm an ethanol plant, I've got to buy corn at that very expensive price.
Prof. HURT: That's exactly right. We have seen what was very profitable ethanol margins two years ago, when many of these plants were being built. And in fact so profitable with $2 corn that an ethanol plant could be paid off, totally paid off in six months.
Mr. MARK STOWERS (Poet Ethanol Products): That might have been the case in 2006, but typically that would not be the forcasted return.
SIEGEL: Not in 2008. That's Mark Stowers of Poet, one of the biggest ethanol companies. He insists that while the gold rush may be finished, Poet is not.
Mr. STOWERS: There's already evidence that some people have closed plants and some people have not started up plants. I don't see that impacting Poet. We have three plants that'll open up in the late third quarter, fourth quarter of this year. And...
SIEGEL: On schedule, that'll open up on schedule?
Mr. STOWERS: We fully expect that. There's no reason to believe otherwise.
SIEGEL: But Poet did have to cancel plans for a plant in Minnesota this year for lack of an air quality permit. That's one of 18 problem plants that you can read about on a map online at the Web site earth2tech.com. The map is called the biofuels death watch. That's because so many ethanol plants are either late to open, soon to close, or already out of business. And there are the plants that are just barely making it.
Mr. KEN DeCUBELLIS (CEO, AltraBiofuels): I tell you, we're on the edge right now. We are one bad day of ethanol pricing away from having to decide to shut the plant down.
SIEGEL: That's Ken DeCubellis, the CEO of AltraBiofuels, a California-based ethanol company. In April, Altra opened a $170 million plant in Cloverdale, Indiana.
Trucks drive in and dump their loads of corn to be distilled into alcohol and then shipped off to be blended into auto fuel. The Cloverdale plant is powered by natural gas and it employs all of 47 people. Two giant storage tanks hold as much as half a million bushels each of dried corn ready to be processed. A few years ago, filling them both with corn that costs $2 a bushel would have been easy. But today, Ken DeCubellis says, Altra has to watch its costs very carefully.
Mr. DeCUBELLIS: We run lean and mean. With corn at $7 a bushel, you don't have the working capital of building things up, right?
SIEGEL: DeCubellis is an engineer MBA who used to work for Exxon Mobil. Having made the switch to biofuels, he is a gung-ho proponent of ethanol. But he is also realistic about the business and the impact of rising prices on his inputs.
Mr. DeCUBELLIS: If we aren't able to cover our variable costs, which are obviously the corn and the nat-gas and the chemicals and enzymes that we consume, we will not run the plant.
SIEGEL: Perhaps and extraordinary statement you've made, that one day of bad ethanol prices and you could be led to shut down here. You've got a very valuable liquid in there, and one day the price could go down, it's that close?
Mr. DeCUBELLIS: It's like I said, Robert, we are barely covering our costs today. We're not servicing our debt at these prices, but we're barely covering our cost.
I'm aware of other plants that have already shut down. VeraSign, who is the largest producer in the industry, has recently announced that they are not starting up three of their huge projects that were slated to come online within the next 30 days, okay? That's a statement right there, that this industry is on the edge.
SIEGEL: Purdue economist Chris Hurt says two big changes explain what's happened to the ethanol producers.
Prof. HURT: Number one: The price of ethanol, we've produced enough, we can oxygenate the gasoline, so it now is just a substitute for gasoline - the BTUs.
SIEGEL: In other words, once the federal requirement for a clean additive has been met, ethanol is only worth as much as the energy it packs, plus the tax break it conveys. And, in fact, ethanol packs less energy than gasoline. So ethanol can sell for as much as gasoline, but it has sell for more than corn. Chris Hurt has plotted corn prices and ethanol prices for the past year, and his graph - you can see it at npr.org - shows what ethanol makers know all too well: profit margins have been mostly slim, and sometimes negative. The second big change, Chris Hurt says, has to do with what used to be seen as the perennial problem facing the Corn Belt: the threat of producing too much corn.
Prof. HURT: That concept that corn was unlimited, we just have a surplus of corn, we just need to get rid of it somehow - corn is not unlimited. If we used every bushel of corn that we produced this year, we could only substitute for about 14 to 15 percent of the gasoline.
SIEGEL: In fact, according to the most recent figures, more than 30 percent of the 2008 US corn crop is going to ethanol, and it accounts for about 8 percent of the blended gasoline sold at the pump. Transcript provided by NPR, Copyright National Public Radio.
