NEW YORK (Reuters) - Floods in the Midwest that have pushed corn prices to record levels have wiped out profits for making U.S. ethanol and threaten to sink production of the fuel below government mandates.
“If it’s simply economically impossible to make ethanol. then (the government) may have to amend or suspend the Renewable Fuel Standard,” analyst Pavel Molchanov at Raymond James and Associates in Houston said by telephone.
The floods ravaging the corn crop across at least eight states, including Iowa and Illinois, at a time of growing global demand have put another roadblock before the U.S. biofuels policy. Hoping to wean the country off foreign oil, the Bush administration has boosted incentives and mandates for alternative fuels made from food crops. Many have blamed those steps for lifting food prices at a time of mounting hunger problems.
Corn prices for the new-crop July 2009 corn hit a record near $8 per bushel on Friday, while old-crop also hit a record above $7.
Molchanov estimated that average U.S. producers now lose 8 cents for every gallon of ethanol distilled, compared with a profit margin of 20 cents a gallon two weeks ago. Besides higher corn prices, margins also have been squeezed by two-year highs for natural gas, which fires most ethanol plants.
As much as 2 billion to 5 billion gallons of ethanol “could go offline in the next few months due to high corn prices,” a Citi Investment Research note said. U.S. ethanol production capacity is about 8.8 billion gallons per year from 154 distilleries.
“If the ethanol is not there, I don’t think the government expects blenders to blend as much,” said Ron Oster, an analyst at BroadPoint Capital in St. Louis.
BRAZIL TO THE RESCUE?
In late last year’s energy bill, Washington mandated the blending of 9 billion gallons of biofuels into gasoline by the end of this year, 11.1 billion by next year and nearly 13 billion in 2010.
The U.S. Environmental Protection Agency, which has the power to tweak the Renewable Fuels Standard, said it had not received any requests for waivers from the flooded Midwest states, but would consider any.
Molchanov said if corn prices don’t fall, outages in the ethanol industry could match dismal production in the biodiesel industry where plants run at about half of their capacity because of high prices for soy bean oil, the main feedstock.
“If it’s happened to biodiesel industry it could happen to ethanol,” he said.
Some of the lost production could be made up by imports from Brazil, the world’s second largest ethanol producer after the United States.
But after meeting its own demand, even Brazil may not have enough to make up enough for U.S. blenders to meet the mandates.
“Anyone who dreams that Brazil has vast pools, ponds or lakes of ethanol waiting around to be called up any time the U.S. calls would be mistaken,” Citi Investment Research’s David Driscoll said in an interview.
He said five small-to-midsize US. ethanol plants, out of 154 distilleries, have already shut on high corn prices, but would not reveal which plants.
Molchanov said plants likely to shut first are older, agricultural co-op distilleries that have already suffered worse than average margins. He said newer plants such as those run by the leading producers have higher margins because they can transport ethanol to market more cheaply and run more efficiently.
And there are also worries about plants shut down the flooding itself. Archer Daniels Midland ADM.N said late on Friday it had shut its Cedar Rapids, Iowa plant amid flooding.
Ethanol producer VeraSun VSE.N did not immediately say if it had cut output or shut plants, while privately owned POET, the top U.S. ethanol producer, said it had no outages.
Citi has downgraded investment ratings for shares of pure ethanol producers VeraSun and BioFuel Energy BIOF.O to "sell" from "buy."
Reporting by Timothy Gardner; Editing by David Gregorio
Our Standards: The Thomson Reuters Trust Principles.