KANSAS CITY/WASHINGTON Mark Marquis had planned to double the size of his Illinois ethanol plant in 2011, and was considering expanding a Wisconsin facility his family-run firm bought into last July.
But those plans are now on hold, as Marquis and other ethanol producers brace for the possible end of $6 billion a year in U.S. subsidies for the alternative energy source.
"In certain scenarios, it could be very devastating," said Marquis, whose Marquis Energy operates a 110 million gallon ethanol plant in Hennepin, Illinois. "It is difficult to know what will happen."
The 45-cent a gallon tax credit for fuel blenders and 54-cent a gallon tariff on imports that subsidize the U.S. ethanol industry are due to expire on December 31. With Washington focused on deficit reduction, many in the industry call renewal an uphill battle.
U.S. ethanol plant owners, corn farmers, investors and bankers are scrambling to calculate what removal of subsidies will mean for ethanol production and the price of corn. More than a third of U.S. corn is used to make the biofuel.
Many analysts and industry players say the most immediate impact would be a 10 to 15 percent drop in production in 2011.
Margins would come under pressure, causing some producers to suffer, and discretionary blending of ethanol with gasoline would likely slide. (Graphic: link.reuters.com/bys48q )
Corn prices are also seen impacted. Most analysts polled by Reuters expected U.S. corn futures to drop 10 to 20 cents per bushel if Congress does not extend subsidies. But analysts said corn prices should rebound due to supportive fundamentals and investments by funds.
Still, any ethanol industry setback would likely be much less severe than the collapse two years ago, when the industry got hit by a surge in corn prices and then a global recession. The No 1 producer, VeraSun, fell into bankruptcy. At one point 2 billion gallons of plant capacity were shuttered and even now some 5 percent of capacity remains idle.
The ethanol industry would feel only a modest impact if the incentives lapse, said Bruce Babcock, agricultural economist at Iowa State University, citing high crude oil prices and a U.S. law guaranteeing biofuels a share of the market.
"Production will not fall that far," Babcock said.
Ethanol output would be 5 percent, or 600 million gallons, lower without the subsidies than with them, Babcock estimated in a November report, which also estimated that ethanol prices would be 6 percent lower and corn prices 7 percent lower.
Most analysts believe expiration of the tariff will not trigger large imports, at least in the near term. Brazil, the most likely ethanol supplier, is busy meeting domestic demand.
PROFITABILITY A MOVING TARGET
The profitability of ethanol production is a constantly moving target, as the fluctuating prices of corn, crude oil, corn co-products and natural gas factor in to margins. "There are a lot of moving parts," said Tom Waterman, industry analyst and publisher of The Ethanol Monitor, which tracks industry profitability.
One key calculation is the price of gasoline relative to ethanol prices, which becomes more critical without government support. Ethanol held a premium for most of the summer when gasoline prices were low, but now is at a discount at locations across the United States, said Waterman.
For the New York Harbor market on Thursday, ethanol was 22 cents a gallon under unleaded regular. Ethanol at the Gulf Coast was 4 cents under and in Chicago about 13 cents under.
Refiners should keep blending even absent the tax credit as long as ethanol's price remains equal to or slightly below gasoline, he said. But if ethanol prices climb higher than gasoline, demand will wane, Waterman said.
Another key to profit margins is the price of the feedstock. Corn is the largest expense for U.S. ethanol makers. Grain farmers welcome high corn prices, but livestock feeders and food companies complain ethanol is pushing corn prices too high. They hope if ethanol demand drops, so will corn prices.
The benchmark corn futures contract on the Chicago Board of Trade hit $6.05 in early November, its highest in 26 months and more than 50 percent above a year ago. Corn for March delivery sold for $5.64 a bushel on Friday.
The Renewable Fuels Association, a trade group, said if the tax incentive expires, two out of every five ethanol plants could close, and more than 100,000 workers could lose jobs.
Bankers will become less likely to extend credit to the industry and companies less willing to invest in new technologies, supporters of the incentives say.
"It will be a blow to the industry," said Jeff Broin, CEO of POET, the world's largest ethanol producer with 27 U.S. biorefineries. The other major producers are Archer Daniels Midland Co and Valero Energy Corp, each with more than 1 billion gallons of capacity.
Broin, other ethanol leaders and farm-state lawmakers are pressing for Congress to vote this month to extend the subsidies. The industry says it will accept lower support rates and other reforms if there is a short-term extension of incentives. Their best chance is for ethanol to piggyback on a must-pass tax bill.
"A lapse in the ethanol tax incentive is a gas tax increase of over 5 cents a gallon at the pump," said Sen Chuck Grassley, an Iowa Republican in a Senate speech on Thursday. "I just don't see the logic in arguing for a gas tax increase when we have so many Americans unemployed or under-employed and struggling just to get by."
But one-fifth of U.S. senators are on record in favor of expiration of subsidies in the face of a bloated U.S. deficit.
Currently industry production exceeds a federal mandate for 12.6 billion gallons in 2011.
Jefferies & Co. analyst Laurence Alexander, who follows the industry, also said the immediate impact might be mild.
"Some ethanol producers argue... we won't see a significant swing in demand in 2011 even if the incentives lapse," said Alexander.
POET's Broin said his company will be less likely to keep investing in cellulosic ethanol without government incentives. Ethanol from cellulose, found in crop residue, grasses and woody plants, is supposed to succeed corn as the top feedstock and account for more than half of U.S. biofuels by 2025.
Not all saw doom and gloom. Even though Marquis Energy will likely curtail expansion and proceed with caution, its chief executive said he still saw the opportunity for good profits even without the subsidies.
"If you are a marginal producer, you might end up getting squeezed and having to shut down. But I have two plants in good locations with good production.. and good margins," said Marquis. "I think we'll fare well."
(Reporting by Carey Gillam in Kansas City and Charles Abbott in Washington; additional reporting by Sam Nelson in Chicago; Editing by David Gregorio)