Lower gasoline prices still pinching the ethanol industry

U.S. ethanol plants are producing more fuel, selling it at lower prices and taking a hit on profits.

Producers in Minnesota and other states reported second-quarter operating earnings that are a fraction of levels of a year ago.

The nation's largest ethanol maker, Archer Daniels Midland (ADM), which has a plant in Marshall, Minn., reported a 70 percent, or $102 million, quarterly drop in its bioproducts segment compared with the highly profitable three-month period in 2014.

Among six other Minnesota-affiliated ethanol producers that publicly report earnings, two suffered losses and the rest reported operating earnings declines from 32 percent to 76 percent for the quarter.

"That drop is off the second-best run of earnings we've had in the industry's history," said Scott McDermott, partner and co-founder of Ascendant Partners, a Denver-based financial advisory firm whose services include tracking the performance of biofuel makers.

Producers made record or near-record profits in 2014 as the price of ethanol's main ingredient, corn, dropped significantly while gasoline prices remained high for much of the year. But the big profits disappeared in early 2015 as fuel prices fell with the dramatic drop in crude oil prices.

Corn prices have remained low despite a run-up in July to more than $4 per bushel before falling again. That's good news for the ethanol industry, but hard on farmers, who are projected to produce another large corn crop this year, keeping the price down.

Minnesota has 21 ethanol plants, although one, in Glenville, Minn., is not operating after a June explosion, and another in Luverne, Minn., produces ethanol and isobutanol, a higher value alcohol. Some of the Minnesota-affiliated companies end their second financial quarter two to three months earlier than the larger producers, and market conditions can change rapidly.

Brian Kletscher, CEO of Highwater Ethanol in Lamberton, Minn.,which reported a $400,000 loss in the quarter ending in April, said conditions have improved because ethanol has recently sold at a price — an average of $1.44 per gallon — that can be profitable.

"If we get $1.36 to $1.50 a gallon, we operate in a pretty good cash margin," Kletscher said. "If it drops below that it gets to break even."

Valero Energy Corp., the nation's third-largest ethanol producer and owner of Minnesota's largest biofuel plant, in Welcome, reported a 42 percent drop in ethanol operating income for the quarter ending in June. Like other ethanol companies, Valero's latest results were better than the first quarter's, when the operating margin per gallon fell to 4 cents. The second quarter margin rose to 31 cents, but was half that of a year ago.

The market for ethanol, which usually is a 10 percent blend in gasoline, is tightly tied to what happens at the gas pump. With retail gas prices about 80 cents per gallon lower than a year ago, Americans are buying more gasoline, which means they are also getting more lower-priced ethanol.

Juan Luciano, CEO of ADM, told analysts last week that lower prices at the pump and an increase in driving have boosted demand for gasoline by about 3 percent. He said he expects that pattern to continue beyond the summer driving season.

But crude oil and gasoline prices could drop even further, driving down ethanol's wholesale price. "That is probably the biggest downside risk," said McDermott. The other risk, he added, is oversupply.

The nation's 213 ethanol plants have a capacity of more than 15 billion gallons per year, according to the Renewable Fuels Association. At full capacity, that's more than the U.S. market can absorb unless higher ethanol blends, like E15, or 15 percent ethanol, are more widely sold.

Flush with 2014 profits, many ethanol plants are investing in equipment to improve efficiency and increase output. Ascendant Partners estimates that 300 million to 700 million in additional annual capacity could be coming online in the next few years.

"Our concern is, 'Can we take all that supply?' " McDermott said. "And, really, that supply needs to go to export."

Green Plains Inc., an Omaha-based ethanol giant with 12 plants, including in Fergus Falls, Minn., and Fairmont, Minn., reported that 13.5 percent of its production for the quarter ending in June was sold abroad, up from 2.5 percent in period last year.

"We've continued to see strong export interest for U.S. product," said CEO Todd Becker on his second-quarter conference call with analysts.

He projected that U.S. ethanol exports should hit 800 million and 1 billion gallons this year — not a record, but more than most years.

Ultimately, the ethanol industry wants to grab a bigger share of the U.S. market from oil companies by selling E15, a blend that can be safely pumped into newer cars and trucks, but isn't sold widely. Several major gas station chains this year announced plans to offer E15. In July, the U.S. Agriculture Department began reviewing applications from retailers for $100 million in federal grants to assist in pump conversions.

David Shaffer • 612-673-7090 • @ShafferStrib