July 8, 2011 / 6:16 PM / 7 years ago

UPDATE 2-Andersons add cheap US wheat to corn-based ethanol

* Wheat in the mix amid tight corn supplies, high prices

* Analysts see strategy as short-term until corn harvest (Recasts, updates prices, adds graphic, POET comment)

By Carey Gillam

KANSAS CITY, Mo.,July 8 (Reuters) - The Andersons Inc (ANDE.O), a major U.S. ethanol producer, has started mixing a small percentage of wheat along with costlier corn to make the alternative fuel, diversifying its sourcing amid increasingly tight corn supplies.

Andersons, which operates three U.S. ethanol plants with total capacity of 300 million gallons, confirmed it has started using soft red winter wheat along with corn, taking advantage of a rare inversion in prices for the grains.

Neill McKinstray, vice president and general manager of The Andersons ethanol division, confirmed the move, but said he could not discuss the matter.

Analysts said the company, which has plants in Indiana, Michigan and Ohio, was blending up to 10 percent soft red winter wheat into its ethanol formula.

A bushel of wheat typically yields less than 85 percent as much ethanol as corn, and less-valuable secondary products, and many analysts had questioned whether any company would make the necessary investments to switch feedstock. Observers familiar with The Andersons work with wheat said it has caused some problems in the production cycle.

The Andersons is among the top 10 U.S. grain-handling companies. Many in the industry were surprised by its use of wheat to make ethanol, but some said the strategy was a savvy at a time when supplies of corn feedstock were dwindling.

POET, the world’s largest ethanol maker with production of more than 1.6 billion gallons a year at 27 plants in seven U.S. states, said it had no plans to use wheat.

“Interesting development,” POET spokesman Nathan Shock said. “However, we’re not considering the use of wheat at this time.”


Graphic: Corn costs rise over wheat:



“With wheat cheaper than corn, they will likely continue to fit it into their mix to the extent their equipment will allow,” said Rich Feltes, an analyst at R.J. O‘Brien in Chicago.

“Ohio soft red wheat harvest is peaking, and the stuff is available and people are looking for homes for the good harvest.”

Livestock feeders also began using more wheat last month as corn prices ran up to a record nearly $8 a bushel. Corn prices have since retreated from those lofty levels, but wheat has slumped even faster.

On Friday, spot soft red winter wheat futures on the Chicago Board of Trade closed at $6.50-1/2 a bushel, while nearby CBOT corn futures closed at $6.72-1/4.


    The strategy is likely to be short-lived, until new-crop corn harvest starts rolling in October, said many analysts.

    “As soon as we correct that back to a normal spread, then that will go away,” said Newedge analyst Dan Cekander, who pointed out that nearby July wheat futures are about 20 cents cheaper than nearby corn.

    “Historically that’s very cheap,” he said. “It’s wheat trying to find its way to use.”

    There are about 200 U.S. ethanol plants, with production capacity of a little more than 13 billion gallons.

    The ethanol industry uses about 40 percent of the U.S. corn crop to make the alternative motor fuel, a factor which drives persistent criticism from food and livestock industry players who say ethanol consumption drives higher corn prices and shortages. Indeed, corn prices have soared this spring on strong demand from food, feed and fuel sectors, while wheat prices have lagged, at least for old-crop supplies.

    Chuck Woodside, general manager of farmer-owned KAAPA Ethanol in Nebraska and chairman of the Renewable Fuels Association, said he saw the move as mainly experimental.

    “Corn is going to be tight. If you have the capacity to be able to say over the next year you were going to be able to use a blend... you might be able to justify that,” said Woodside.

    POET and other producers have said adding wheat to the ethanol feedstock would require expensive retooling of biorefineries and that the window of opportunity to use wheat would be too narrow to make the switch worthwhile.

    The profitability of ethanol production becomes more critical for industry players as U.S. lawmakers are set to repeal incentives that have been aiding industry growth.

    U.S. senators are working to end a $6 billion per year ethanol tax credit and a 54-cent per gallon tariff on ethanol imports.

    Additional reporting by Mike Hirtzer in Chicago and Timothy Gardner in Washington; Editing by David Gregorio

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