High costs to squeeze U.S. ethanol makers in 2008

By Karl Plume

CHICAGO, Dec 10 (Reuters) - Tight margins amid high corn and energy costs and weak ethanol prices will squeeze U.S. ethanol producers in 2008, but the industry will continue to expand, albeit at a slower rate than in recent years, industry experts said on Monday.

A rapid expansion of U.S. ethanol output over the past year and the lack of comparable growth in the infrastructure necessary to get that fuel to market has produced a glut of the renewable fuel in the Midwest, where most of it is produced.

That glut may cap ethanol prices in 2008 while input costs for producers remain high due to other market factors.

"The short term outlook is not good for the ethanol plant," Marty Ruikka, president of analytical firm PRX Geographic Inc, said at a National Grain and Feed Association conference in Chicago.

"We need the retail/wholesale distribution chains of motor fuel to get more capacity so that we can use all the ethanol that we have. It's not because of market prices that we have a problem right now. It's because of physical, capital, structural capacity," Ruikka said.

Average weekly U.S. ethanol margins slipped last week to about 52 cents a gallon, from 62 cents the previous week. After fuel, conversion, and overhead costs, many producers were barely breaking even.

U.S. ethanol production capacity has risen to nearly 7.3 billion gallons per year, up about 40 percent from a year ago, according to industry statistics.

Corn is the primary feedstock for U.S. ethanol producers, who also use natural gas to run plants and dry the byproduct distillers grain, which is used as animal feed.

Corn prices jumped to a 10-year high of $4.37-1/4 per bushel in February due to rising demand from ethanol producers and have remained above $3 ever since. Analysts expect strong demand for corn and the battle with soybeans for U.S. acreage to lift corn prices to $4.50 or $5.00 a bushel in 2008.

Meanwhile, natural gas prices, another key input cost for ethanol producers, have held at elevated levels along with other energy prices.

MORE PLANTS, SLOWER OUTPUT

The once booming ethanol sector, which at one point boasted a new plant groundbreaking every four days, may deal with its growing pains by slowing its expansion and paring back output at existing plants, analysts said.

There are 134 ethanol distilleries currently operating in the United States, with 66 more plants under construction and 10 undergoing expansion. Analysts warn that thinning profits will likely shelve or delay many of those future projects.

"We're starting to see some schedule slippage. A year ago, everybody was spending the maximum amount on overtime to get these plants built. Today, we don't see that urgency," Ruikka said.

On Monday, Pacific Ethanol Inc. (PEIX.O) said it suspended building a 50 million gallon per year plant until margins improve. That followed news this fall that VeraSun VSE.N, Glacial Lakes Energy and Chippewa Valley Ethanol Co had delayed projects.

The ethanol sector could also become more consolidated as larger companies can keep down their transportation costs and other costs that could squeeze smaller producers.

Last month, VeraSun announced it would acquire US BioEnergy Corp USBE.O in a deal expected to close in the first quarter of 2008.

More government incentives, transportation improvements and blending of more ethanol into the gasoline supply will help bolster profitability in the longer term, analysts said. (Reporting by Karl Plume; Editing by Marguerita Choy)