Morby: Hard times facing ethanol industry

By Brian E. Clark

Times are tough for the ethanol industry all over the country, including the nine producers here in the Badger State.

Josh Morby, executive director of the Wisconsin Bio Industry Alliance says very few, if any, of the state’s ethanol plants are now making money.

And late last month, Renew Energy, the state’s largest ethanol producer and the operator of a plant in Jefferson, announced it would file for Chapter 11 bankruptcy.

The Renew board chairman, Paul Olsen, blamed lower revenues, and a bank’s refusal to renew its operating loan. But he said the company will keep making ethanol, and will continue its dry-milling corn operation.

“The future of the ethanol industry is of concern for all of us who are involved in it,” Morby mused.

He said the decline in the price of gasoline has hurt ethanol producers.

“It’s tough for the ethanol industry to compete with its No. 1 customers, which are big oil companies,” Morby said. “Certainly other economic conditions around the country have contributed to the struggles ethanol producers are facing.”

He said his industry has been hurt by “everything from misinformation campaigns by Big Oil” about the benefits of ethanol to the credit crunch to the high price of corn.

“They are all factors that are making (profit) margins tighter,” he said.

Morby predicted that gas prices will rise again, but he said he did not have a “magic number” that it would have to reach for ethanol producers to become profitable.

“It’s different for different plants,” he said. “But back a few months when gasoline was over $4 a gallon, a lot of what big oil companies were doing was purchasing ethanol at a discounted price to gasoline, blending that with gasoline and then pocketing the profits.”

Morby said consumers have a short memory when it comes to the cost of filling their gas tanks.

“When gas is $4 or $5 a gallon, people look for alternatives and become more intrigued about alternatives that reduce our dependencies on foreign oil and are cleaner than gasoline,” he said.

When the price of gas falls, however, they don’t think of those advantages and go back to their old buying habits, he said.

But the cost of gasoline will go up again and ethanol will once again look attractive, he said.

“Then, ethanol production will address that need that consumers have for cheaper motor fuels,” he said.

“From a consumer’s standpoint, the choice is ‘do you want to get your motor fuel from a foreign country where the profits go to big oil companies, or do you want to use a fuel that is produced from a renewable source that has a positive benefit on Wisconsin’s economy?’” he said.

Morby said the cost to produce a gallon of ethanol varies from plant to plant.

“There are a number of factors that go into the price of ethanol,” he said. “It depends on the price of natural gas, the price of corn and the cost of gasoline. Those numbers change daily, so it’s not fair to say it costs ‘X’ dollars per gallon because that number changes all the time.”

David Peters, an assistant professor in Iowa State’s University’s College of Agriculture and Life Sciences, has been looking into the profitability of ethanol plants under current market conditions.

According to Peters’ model, near-term price conditions — corn cost, approximately $4 (per bushel); ethanol price, approximately $1.75 (per gallon) — a typical ethanol plant that has capital debt is losing 17 to 23 cents on every gallon produced.

For a plant producing 100 million gallons each year, that is an annual operating loss of $16 to $23 million. Unless the plant has cash reserves to weather this storm, they could be in trouble, Peters said.

In the past few years, when ethanol prices were high and corn low, many plants made enough money to retire their debt early, he said. These plants with no capital debt are now roughly breaking even or losing a few cents on every gallon, according to Peters.

Peters predicts that the current market may lead to some consolidation among ethanol producers as they try to remain profitable.

“No one has a crystal ball to see the future, but this can give people an idea of where prices have to be,” he said. “For example, if corn is at $4.25, then ethanol would have to be at $2.00 for plants with debt to break even — and $1.85 if they have no debt.”

Morby said the price producers receive for ethanol depends on whether it is sold as part of a long-term contract or on the spot market.

“A lot of it depends on who’s purchasing it, how much they are purchasing and what kinds of contracts are in place,” he said. “There is not an easy answer that if gas costs $2, then ethanol costs $1. I don’t know how gasoline is priced, but that certainly figures into the profitability of ethanol producers.”

Morby noted that ethanol production in Wisconsin is relatively new.

“People need to have some perspective, he said. “The industry didn’t start in Wisconsin until 2002 when ACE Ethanol up in Stanley was the first ethanol plant to come on line … at about 40 million gallons annually.

“Since then, we’ve grown to nine plants with about half a billion gallons when they are operating at full capacity, which all plants aren’t doing,” he said, noting that the ethanol production is a $1 billion industry in Wisconsin.

“It has created thousands of jobs and had an economic impact of hundreds of millions of dollars,” he said. An individual 40-million gallon ethanol plant creates 30 to 40 full-time jobs and provides a one-time boost of $70 million to $100 million to local economies, he added.

Employment at Wisconsin ethanol plants now stands at around 400, he said.

“It’s important to think of the ethanol industry as part of Wisconsin’s economic engine,” he said. “It provides value-added opportunities for the state’s agriculture and (results) in a number of co-products besides ethanol.

“It’s also a dynamic industry where there is a lot of innovation taking place,” he said, noting that plants are becoming more efficient and advancing technologically. And he predicted more ethanol will be produced from sources other than corn.

Over the long-term, Morby said he is hopeful the ethanol industry will remain a “strong part of the Wisconsin economy, provide thousands of jobs and provide hundreds of millions of gallons of cleaner burning, renewable fuel for consumers across the country.”