Ethanol Producers Face Tough Challenges From Floods and Soaring Corn Prices, but One Risk Management Expert Sees Hope in New USDA Supply and Demand Report
Prompted by massive floods in the Midwest, soaring corn prices, volatile commodities markets and on ongoing “food versus fuel” debate, the ethanol industry is on the cusp of a major restructuring period that will likely involve several plant shutdowns, mergers and acquisitions, according to one industry analyst at United Bio Energy. But a report released Friday by the U.S. Department of Agriculture contains signs of hope for ethanol producers.
Although ethanol prices are trending upward, they have not kept pace with corn prices, causing cash flow issues for many ethanol plants. Tom Wapp, United Bio Energy’s ethanol market analyst and risk management advisor to ethanol producers, says ethanol margins are struggling at or just below break-even in the spot market, and plants that have not yet started operating face the greatest uncertainty.
“Most plants that are currently operating will likely have enough corn coverage to be profitable through the third quarter of this year. Profitability will likely start to drop off sharply as we enter the fourth quarter and operating plants work through their remaining corn coverage,” Wapp said. “Some plants will remain profitable into the fourth quarter if they made good hedging or corn purchasing decisions earlier in the year. But plants that are under construction or just waiting to open their doors will struggle to cover cash flow needs at start-up, causing further start-up delays.”
The USDA’s most recent World Agricultural Supply and Demand Estimates, published on July 11, shows more corn available for the year ahead, partially because less corn is being used for ethanol then the USDA expected. Demand has slowed due to high prices, but it will take time and proper hedge management to take advantage of temporary price dips, Wapp said. He encourages plant managers to carefully analyze fixed and variable expenses to accurately assess break-even requirements and to coordinate grain purchasing with ethanol sales, making sure to cover necessary expenses.
“Struggles facing grain-based ethanol producers could also affect cellulosic ethanol production as well, making it more difficult to attract investment dollars into the industry,” Wapp said. “The presence of volatility and risk are becoming a fact of life for ethanol producers, and the importance of preparation to handle that risk will only continue to increase.”
About United Bio Energy
United Bio Energy provides services to the owners of fuel ethanol plants, including grain origination, general management and plant management, as well as commodity price risk management for grains and energy purchased by the plants and outputs they produce. United Bio Energy also provides clients with a full range of distillers’ grain marketing services. United Bio Energy is a wholly owned subsidiary of AgMotion, Inc., of Minneapolis, Minn. (www.unitedbioenergy.com)
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SOURCE: United Bio Energy