NEW YORK, Feb 3 (Reuters) - U.S. agribusiness Archer Daniels Midland Co on Tuesday said ethanol producers will have to cut output amid high stocks and stagnating demand, as the industry’s woes deepen with the oil rout and squeezed margins.
Inventories have swelled to two-year highs as demand struggles to keep pace with high output. U.S. ethanol makers ramped up production as ethanol futures rose through early December, bucking pressure from falling global oil prices and as corn input costs declined.
But front-month ethanol futures have tumbled nearly 40 percent from those December highs to about $1.45 a gallon.
Those conditions will spur “some rationalization of capacity,” Juan Luciano, ADM’s president and chief executive officer, said on a call with investors to discuss last quarter’s earnings.
ADM was still booking ethanol profits, but pressured margins are leaving higher-cost producers with “some problems,” Luciano said.
A significant chunk of biofuels manufacturers are facing margins at or below costs, according to industry estimates.
“Production will be falling in the coming months, because about 20-30 percent of the industry is at break-even or losing money,” said Farha Aslam, an analyst with Stephens Inc in New York, noting she expects domestic demand to remain around 13.5 billion to 14 billion gallons.
Until the industry works through those stocks, margins will remain “challenged,” said Luciano.
U.S. supplies have risen to the highest since December 2012, U.S. Energy Information Administration data showed last week.
ADM forecast total U.S. exports in 2015 to remain stable from the prior year at about 800 million gallons, a dampening of the company’s outlook last quarter of exports to increase as much as 25 percent.
That arrives against a backdrop of uncertainty over biofuels policy, as the industry awaits finalized mandates from the U.S. government on how much biofuel needs to be blended into gasoline.
U.S. producers generated record volumes of ethanol last year, exceeding targets mandated by the U.S. government, but have swiftly approached the so-called “blend wall,” the maximum amount of biofuel that can be blended into gasoline.
ADM’s bleaker outlook arrives after crude oil prices have slumped more than 40 percent over the last year.
“With oil so cheap, why would you blend more than you have to?” said Steve Nicholson, a grains and oilseed analyst with Rabobank AgriFinance in St. Louis, Missouri.
The situation is similar to one two years ago, when squeezed margins prompted a wave of shutdowns.
“Smaller, less efficient plants shut down from six to nine months,” Nicholson said. “There’s no reason that won’t happen again.” (Reporting by Chris Prentice; editing by Gunna Dickson)