CHICAGO (Reuters) - The biggest threat to U.S. ethanol makers, now struggling with negative profit margins, is not high corn prices but possible changes to the renewable fuel policy by Washington legislators, the top ethanol industry executive said on Wednesday.
“This year is tough. Our biggest challenge though is more about Capitol Hill and threats to policy than the markets and threats to profitability,” Bob Dinneen, chief executive of the Renewable Fuels Association, told Reuters on-line grain forum.
The 2007 U.S. energy policy’s renewable fuels standard (RFS), mandates annual production of 15 billion gallons of ethanol by 2015 for energy independence. By 2022, RFS calls for 36 billion gallons of renewable fuels, including cellulosic biofuels.
U.S. ethanol production in 2011 was 13.9 billion gallons of which more than a billion gallons was exported.
Dinneen said he was pleased by Friday’s approval by the Environmental Protection Agency (EPA) to allow the sale of fuel containing 15 percent ethanol, up from the current 10 percent for vehicles 2001 and newer. But said the oil industry clearly sees ethanol as unwelcomed competition.
“I’m seeing a far more aggressive oil lobby going after the RFS in every forum possible,” said Dinneen, citing a lawsuit against EPA over cellulosic numbers and the introduction of anti-RFS amendments to the Farm Bill.
“That speaks volumes as to the lengths oil is prepared to go to undermine this important policy. I do not believe they will be successful,” Dinneen added.
Ethanol markers have been hurt this spring by tight grain supplies, which has pushed up the cost of corn, an ethanol feedstock. The soft economy has also weakened demand for gasoline, which is blended with ethanol. Profit margins are running anywhere from 25 to 35 cents per gallon in the red, trade sources say.
“This is most definitely a challenging market, and some plants that might not be as well positioned in the market as others may well look at closing for a bit until this bumper crop comes in. It’s really no different than the oil industry that sees production capacity change with the market,” he said.
In the past week two Nebraska plants, Nedak Ethanol in Atkinson and Valero Energy (VLO.N) in Albion, temporarily shut down. Both cited high corn prices and negative margins. In April, Archer Daniels Midland (ADM.N) permanently closed its Walhalla, North Dakota plant for similar reasons.
The announcements raised painful reminders of 2008 when the financial markets crash sent ethanol profits plummeting and many producers filed for bankruptcy including VeraSun Energy.
“In my mind, 2008 was a different year. Operating capital was more difficult to secure, if not impossible. Gasoline prices were relatively higher,” Dinneen said. “But it was an equally challenging year, just different issues.”
“I sure don’t see a rash of permanent closures. There may be more consolidation coming to the industry,” he added.
But Dinneen remains “bullish” on ethanol as demand for the product stays strong, including exports, which Dinneen said should at least match the record 1.1 billion gallons sold in 2011.
Dinneen also expects the sale of E15 to give the industry a boost, with Iowa, Illinois and Kansas to be among the first states to offer the blend.
A shortage of ethanol pumps at rural filling stations and a push back from retailers who fear lawsuits if car engines fail make adoption of E15 an uphill climb, ethanol makers say.
“The E15 market will grow slowly of course, limited by blendstock availability and the constraints EPA has placed on the product,” Dinneen said. “Certainly by September when volatility regulations are removed, E15 should begin to grow more rapidly.”
Reporting by Christine Stebbins; Editing by Bob Burgdorfer