Ethanol industry making profits despite lower price of fuel

Low prices at the gas pump have put a persistent squeeze on Midwest ethanol producers, but most are staying profitable.

Of eight Minnesota-affiliated ethanol producers tracked by the Star Tribune, all but one made money in the third quarter, although not like the high profits of 2014.

"The Midwest ethanol industry is healthy," said Ron Monson, vice president for agribusiness capital at AgStar Financial Services in Apple Valley. "Plants have been able to make money and operate in the environment we have today."

Low gasoline prices pinch ethanol producers because they sell into the same fuel market. The result is thinner operating margins at ethanol plants, a condition that could persist for 12 to 18 months, according an ethanol industry analysis by the national cooperative bank CoBank.

Valero Energy, the San Antonio-based owner of Minnesota's largest ethanol plant in the city of Welcome, said its companywide ethanol margins fell by more than half — from $1 a gallon in third quarter 2014 to 47 cents in the same period this year.

"There is just so much oil, and oil refiners have been producing a tremendous amount of gasoline and that has weighed on the gas price," said Brian Milne, energy editor for Schneider Electric, whose DTN service tracks farm and fuel commodities.

Ethanol sold for more than $2 per gallon on the commodities market during much of 2014. Lately, the front-month contract has been below $1.50 per gallon. Ethanol is blended into gasoline at a rate of 10 percent or more at the pump.

On average, Minnesota-affiliated ethanol refiners reported a 26 percent drop in revenue in the third quarter, which ends in July for most smaller companies and in September for large, multistate producers. The newspaper tracked publicly reported results for companies that own seven of Minnesota's 21 ethanol plants and two Minnesota companies that own plants in North Dakota and South Dakota.

Midwest AgEnergy, a North Dakota ethanol producer majority-owned by Maple Grove-based Great River Energy, increased sales by 22 percent to $53 million thanks to its new Spiritwood, N.D., plant. But start-up costs triggered a $1.5 million loss for the quarter. Its Dakota Spirit AgEnergy plant went online in June and is now operating at above its 65 million gallon per year capacity, said Chief Operating Officer Jeff Zueger.

"We are projecting it to be, long-term, a very profitable entity," said Zueger, who noted that the plant, like its sibling Blue Flint Ethanol in Underwood, N.D., gets steam for plant processes from an adjacent Great River Energy power plant, cutting operating costs.

Not all signs are negative for the ethanol sector.

Monson said corn is plentiful, with good levels of starch needed to ferment alcohol, and the price has remained below $4 per bushel for months. Corn is the main ingredient in ethanol and its largest single cost.

"Farmers would like a better price, but it is what it is," Monson said.

Americans also are driving more, which has boosted demand for gasoline by 3 percent this year. Monson and others say that fuel demand, thanks partly to low prices, is projected to increase 1 percent or more in 2016.

"With gas being under $2.50 [per gallon] for quite a few months, that seems to have stimulated driving and it's probably an indication that the economy is getting stronger," he added. "We don't see that changing."

Exports also have remained strong for ethanol and its animal-feed co-product called dried distillers grains, helping to offset domestic price pressures. Green Plains, the Omaha-based ethanol producer that owns large plants in Fairmont and Fergus Falls, Minn., said it exported 21 percent of its production in the third quarter.

"[W]e are there every day aggressively trying to … export gallons as we focus continually on getting more product offshore," Todd Becker, Green Plains chief executive, told analysts recently.

Brazil, a major ethanol producer, recently increased its domestic fuel blending to 27 percent ethanol, which has curbed that nation's ability to export its cane sugar-based biofuel, CoBank said in its industry outlook. That's an opportunity for U.S. producers, although CoBank warned that U.S. ethanol exports need to grow by 22 percent to 39 percent over the next two years to keep the nation's 214 ethanol plants operating at 90 percent of their capacity.

Ethanol makers also are hopeful that domestic sales will rise as more gas stations are equipped to dispense 15 percent ethanol blends. The U.S. Department of Agriculture in October announced details of its $100 million matching grant program, saying 1,400 gas stations, including 165 in Minnesota, will get help converting pumps and tanks to dispense E15.

E15 is approved by the federal government for 2001 and newer cars. At some stations, a gallon of E15 sells for 10 cents less than regular E10. Zueger said that discount is possible because the value of extra renewable fuel credits is passed on to consumers.

For the first time, Zueger said, the program will help gas stations replace or add tanks to dispense E15. Those projects take time, but the domestic market impact could be felt later next year.

"It will open the door for folks to offer this product," Zueger added.

David Shaffer • 612-673-7090 • @ShafferStrib