Ethanol plants rebound

Farm Forum

The ethanol industry, which was reeling from a drought-induced downturn last year, is making a comeback.

“Last year was such a beatdown in the industry,” said Thomas Hitchcock, Redfield Energy CEO. “This year is a much better picture.”

Hitchcock said the most important financial margin – the cost of buying corn versus the selling price of ethanol – has improved significantly since the beginning of the year. Since Jan. 2, corn prices are down 48 cents a bushel, and wholesale ethanol prices are up 27 cents a gallon, he said.

“It doesn’t take a lot of math ability to see that is a big improvement for us,” Hitchcock said. “Corn is 80 percent of the cost of production, so when the corn price goes down and the price of the ethanol we sell goes up at the same time, we are doing well.”

In addition to producing bio-fuel, ethanol plants produce distiller’s grain (a high-protein livestock feed) and corn oil. The market for those products since the first of the year has also been good,

Hitchcock said.

“We are generating cash and paying down debt,” he said. “Relative to what we budgeted for in our fiscal year (which ends Aug. 31), we are doing better than expected.”

Jim Seurer, CEO at Glacial Lakes Energy, said improved margins are helping improve cash flow.

“We have been making money and paying down debt,” he said. “The market can change quickly, but right now it looks like we will end our fiscal year on Aug. 31 in the black.”

The higher wholesale price of ethanol is due to a nationwide decrease in ethanol production.

Twenty of the nation’s 211 ethanol plants shut down indefinitely, while another 15 were shut down temporarily because of the drought, according to a by The Associated Press.

Ethanol plants in the driest sections of the country were the ones most likely to shut down because of a shortage of corn. Even if the facility could get corn, it was expensive.

Production nationwide dropped from 13.9 billion gallons of ethanol in 2011 to 13.3 billion in 2012, the first decline since 1996, according to

the AP.

Companies that buy ethanol to blend with gasoline have tapped some of their reserves, increasing the demand for ethanol.

Ethanol producers in northeast South Dakota have fared better than in more drought-stricken areas. Access to corn, as well as slightly cheaper corn, have made a difference. While profit margins for ethanol plants plummeted in 2012, area ethanol plants kept producing.

In fact, many plants pushed production to pick up the slack from plants that went off-line. Both Glacial Lakes and Redfield Energy continue to produce as much ethanol as possible.

“We have been pushing the limits and continue to set new production records at both our plants,” said Seurer.

The Glacial Lakes plants in Mina and Watertown are designed to produce a maximum of 100 million gallons of ethanol a year. With refinements to equipment and processes, both plants are now producing between 115 million to 120 million gallons a year, he said.

Redfield Energy has also been pushing production. The plant, designed to produce 50 million gallons a year, is producing about 60 million, Hitchcock said.

Glacial Lakes has been using much of its income to pay down debt, Seurer said.

The cooperative has reduced its debt by $100 million in the past four years, he said. After the 2008 crisis in the ethanol industry, the plant issued a capital call to its members. At one time, the Glacial Lakes was in debt $170 million, Seurer said. Now that number is less than $70 million.

“We have placed a high priority in chewing down that debt,” he said.

Glacial Lakes employs 45 to 50 workers at its Mina plant and the same number at its Watertown plant. Another 20 administrative staff members are involved with both plants.

The plants grind about 1.6 million bushels of corn a week for a total of 84 million bushels a year.

“There is no doubt that ethanol plants have a significant impact on our economy,” Seurer said.

Looking ahead to the next few months, the ethanol picture is more uncertain, ethanol managers say. Some of the plants that went offline, such as a Poet Biorefining plant in Macon, Mo., have come back online, increasing nationwide production.

Brazil, a major producer of ethanol, had a good sugar cane and corn crop, according to USDA reports. That reduces potential export markets for U.S. companies.

“A lot of it is going to depend on the weather,” Hitchcock said. “If we get a good fall crop, that will reduce the price of corn.”

Seurer said the ethanol industry is unpredictable and can change quickly.

“There are two factors we can’t control: Mother Nature and the commodities market,” he said. “We will just patiently wait and see what happens.”

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