Ethanol plant closures 'will not be the last'

20th Jun 2012, by Agrimoney
The slowdown in US ethanol output, highlighted by official data on Wednesday, has further to run as elevated corn prices and a sluggish ethanol values send producers margins further into the red, Linn Group warned.

Ethanol production in the US, where refineries use corn as their main feedstock, tumbled by 20,000 barrels a day to 900,000 barrels a day last week, the lowest figure in six weeks, official data showed.

The data follow Valero Energy's announcement that it is to idle a 110m-gallon-a-year plant in Nebraska, where Nedak Ethanol last week revealed it was to mothball a site with capacity for 44m gallons a year.

A third plant, in Arizona, is also being temporarily shuttered, Agrimoney.com has heard, with other sites believed to be running below maximum capacity.

"We are hearing more slowdowns or closings of ethanol plants in the western Corn Belt due to poor margins and problems procuring corn," said Paul Georgy at broker Allendale, who on Tuesday reported that "several" sites in Nebraska were either closing or operating only one fortnight in every two.

Ethanol vs corn

Indeed, the plant closures so far, equivalent to about 3% of US capacity, will not be the last, given the extent of losses that many producers are running at, Linn Group analyst Jerrod Kitt said.

"Ethanol is showing no signs of strength. At the same time the, there is a rampaging corn market," Mr Kitt told Agrimoney.com.

"Margins are really bad right now. They have been really bad all year," only in March showing a brief period of profitability.

Indeed, margins had reached a "really bad" $0.35-36 per gallon of ethanol in some areas, with conditions worse in the "wings" of the Corn Belt – states such as Nebraska and Indiana – rather than central corn-growing areas where the grain is cheaper.

Mr Kitt said: "We are likely to see another three or four more plants shut down [temporarily]. By mid-July we could have lost another 3% of [national] production capacity."

Inventories rise

The softness of the ethanol market was also highlighted by a rise of 519,000 barrels, to 21.19m barrels, in US stocks of the biofuel as if June 15, despite the production slowdown.

Some other analysts have taken a more upbeat view of ethanol plant profitability - at least ahead of this week's rise in corn prices - with Morgan Stanley at the start of the week estimating margins at a positive $0.04.

"Ethanol's call on corn should remain firm, in our view," the bank said, noting that US exports up to March were "running well above last year's levels".