June 17, 2011 / 11:12 PM / 8 years ago

Analysis: Ethanol grown up, will withstand subsidy loss

KANSAS CITY, Missouri (Reuters) - The U.S. ethanol industry is growing up. Moves in Washington to start weaning producers off government support are not expected to stunt a sector that had often been perceived as too fragile to withstand the travails of market forces.

A worker pumps gasoline blended with 10% ethanol at the UPI Energy gas station in Chatham, Ontario, April 11, 2008. REUTERS/Mark Blinch

This week’s largely symbolic Senate vote to eliminate $6 billion in federal subsidies refocused attention on an industry that consumes nearly 40 percent of America’s corn crop. Yet, experts and analysts had but one gesture: to shrug.

Sure, the eventual loss of an import tariff and a 45 cent-a-gallon blenders’ tax credit could put more pressure on profits. Ethanol prices could drop about 7 percent and margins could see a 20 percent or greater squeeze, according to a report published in March by the University of Missouri’s Food and Agricultural Policy Research Institute.

But, industry profitability is far more dependent on a volatile mix of market factors, from corn prices to gasoline to the livestock feed additive made as an ethanol byproduct.

“I don’t think losing the subsidies would be a life or death threat to the industry,” said Mark McMinimy, an analyst at Washington Research Group.

Above all, analysts said, the Renewable Fuel Standard, requiring fuel companies to blend a minimum of 12.6 billion gallons of ethanol with gasoline each year, remains in place as a key support and will grow to 36 billion gallons annually by 2022.

While some analysts say additional margin pressures could drive a new round of industry consolidation, most agree there’s almost no risk of a repeat of three years ago.

Today’s breed of ethanol producers, like privately-held POET, Valero Energy Corp and Archer Daniels Midland Co, are a far cry from the highly leveraged ethanol plants of five years ago. Many were driven to bankruptcy trying to increase production as fuel prices fell, corn prices surged, and credit markets collapsed.


It has been clear for months, if not longer, that budget-minded politicians trying to rein in a gaping federal deficit would take aim at $6 billion in ethanol subsidies.

While most analysts do not expect a full removal of subsidies, a compromise solution is likely to emerge that would trim supports. The tax break and the import tariff are due to expire at year’s end, and renewing them is unlikely.

“What we’ve seen in the last couple of days in Washington is not unexpected,” said Cole Gustafson, biofuels economist at North Dakota State University.

“I expect there will be some firms exiting the industry. But the greater concern is high feedstock prices,” he said.

Corn supplies in the United States are the tightest in 15 years and corn prices recently rose to historically high levels, near $8 a bushel.

Surging corn prices and the squeeze on supplies has driven some plants to curtail production and could lead to closures this summer ahead of the new U.S. corn crop harvest.

The small Bionol plant in Clearfield County, Pennsylvania, for example, extended a routine maintenance shutdown, due to a shortage of supplies for high-priced corn in the Midwest, according to local media.


The removal of a 54-cent import tariff on ethanol is equally unlikely to affect producers, due to high sugar prices and stiff domestic demand.

“Brazilian ethanol is pretty pricey right now because of sugar prices,” said R.J. O’Brien ethanol analyst Julie Ward.

“If next year’s sugar crop is huge and prices come down then it might have an impact. The bigger issue is the lack of corn this summer and that some plants have already shut down.”

Julio Maria Borges, director at Job Economia, says it could be four or five years before the world’s biggest sugar producer is able to expand its cane acreage and invest in a new wave of ethanol plants in order to significantly boost exports.

“It’s difficult to imagine any relevant export volumes from Brazil this season (April-March) or in the next one,” he said.

“Local prices will remain supported by strong demand and only a limited increase in supply.”


Another issue brewing in Washington is a debate over funding for tanks and blender pumps that the ethanol industry wants, so stations can sell gasoline with higher ethanol blend rates.

That issue has divided the House and Senate, but is seen as key to increasing demand, according to ethanol players.

On the same day the Senate voted to repeal the producer credit, it voted down a measure that would have cut government funding for infrastructure, such as fuel pumps that allow customers to dial their own blend of ethanol known as “flex pumps”.

“By voting to repeal the ethanol tax credit, while preserving ... funding for flex pumps, the Senate came close to a reform package supported by the ethanol industry,” POET CEO Jeff Broin said, adding that more such funding is needed.

Without a significant supply of the new pumps at retail stations around the country, the government’s recent approval of the higher blend of 15 percent ethanol to gasoline could be meaningless.

“The industry has been operating in the last few years with the notion that at the very least the subsidies are going to be scaled back. So, they’ve focused their efforts on how to guarantee more of a demand,” said Divya Reddy analyst at the Eurasia Group in Washington.

“It (the loss of subsidies) is bad, but not terrible,” she said.

Reporting by Carey Gillam; additional reporting by Timothy Gardner in Washington; Editing by Carole Vaporean

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