UPDATE 2-Ethanol sector braces for bad patch as Valero idles plant

Tue Jun 19, 2012 7:08pm EDT

By Michael Hirtzer and Carey Gillam

CHICAGO/KANSAS CITY, June 19 (Reuters) - The U.S. ethanol industry is hunkering down for another spell of deep losses, with a second producer temporarily shutting a Nebraska plant on Tuesday as diminishing corn supplies and lackluster gasoline demand crush profit margins.

Valero Energy Corp is idling its 110 million gallons (500 million liters) a year plant in Albion, Nebraska, but expects it to resume operations before the autumn corn harvest, when prices should start to ease and supplies become more plentiful, spokesman Bill Day said.

"We started this morning with an organized shutdown because of poor margins in the ethanol industry," Day said. None of Valero's other 10 ethanol facilities were likely to idle, he added. "Corn prices have gone up and ethanol margins have gone down. Corn basis levels are high."

The shutdown, which comes after Nedak Ethanol LLC said last week it would temporarily shutter its 44-million-gallon-per-year ethanol plant in Atkinson, Nebraska, signals the latest twist in the volatile ups and downs of the decade-old industry, which must now survive without the aid of subsidies.

While soaring oil prices and tamer corn prices boosted profits late last year, conditions have reversed in recent months. Corn prices are surging as dry weather threatens next year's corn harvest, while cash basis prices surge as immediate stockpiles shrink toward a 16-year low; oil has tumbled as the European crisis threatens to sap demand globally.

"The environment pretty much through the first part of the year has not been that favorable for ethanol," said Jim Stark, a spokesman for Green Plains Renewable Energy, the fourth largest U.S. ethanol producer with 740 million gallons a year.

Green Plains has slowed one plant in Iowa and one in Minnesota by about 30 percent because of the margin situation.

BLEND WALL

The woes are worsened by what amounts to a de-facto limit on ethanol production at 10 percent of U.S. gasoline supply.

Although regulators have approved blending as much as 15 percent ethanol into the gasoline supply, retailers have refused to sell a higher blend because they fear lawsuits if car engines fail. Automakers have yet to confirm their warranties cover it.

With gasoline demand down 5 percent this year, ethanol makers are having to cut back - putting them in an increasingly difficult bind, since separate U.S. regulations require them to keep producing more and more renewable fuel every year.

Total capacity is 14.7 billion gallons while total production is about 14 billion gallons, compared to the 15 billion gallons as dictated by the Renewable Fuel Standard, according to Renewable Fuels Association spokesman Matt Hartwig.

"Ethanol has been commoditized, as they say, and with that comes the challenges posed by gyrations in the market," he says. "That's why many plants have invested in more efficient technologies and new product streams, like corn oil."

More than half of U.S. ethanol plants have invested in technology to extract corn oil from the residual grains and solubles left over from the fuel refinery process, said Geoff Cooper, vice president of research and analysis at the RFA. The corn oil is then largely sold to biodiesel producers, adding roughly 5 cents to the margin at the ethanol plant.

Still, the market dynamics "pure pain" for industry players, said Linn Group analyst Jerrod Kitt. He said the best case scenario has producers eating losses of 10-15 cents a gallon, though losses could be closer to 30-35 cents a gallon.

The idling ethanol plants so far are too limited to provide much relief to corn prices.

Chicago Board of Trade corn futures for July delivery climbed to the highest level in about a month on Tuesday, rising 1.6 percent to $6.09 per bushel, as hot and dry weather stressed the developing crop.

Basis bids, or the amount above or below benchmark CBOT futures prices that dealers bid to buy corn from farmers, are trading at or near record levels due to the tight grain stocks.

In 2008, energy and grain prices came crashing down from record levels as the global economy fell into recession. That led to the eventual bankruptcy of ethanol purveyor VeraSun Energy Corporation. Valero won seven of the VerSun's ethanol facilities at auction -- including the plant in Albion, Nebraska.

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