More Ethanol Plants Going Down

I won’t say I told you so, but I will make a prediction here:

VeraSun Suspends Production at Three Distilleries

Jan. 9 (Bloomberg) — VeraSun Energy Corp., the second- largest U.S. ethanol producer, has idled three distilleries as demand falls and prices fail to cover the cost of production.

Producers have been struggling to make profits amid fluctuations in corn prices. Pacific Ethanol Inc. today said it will suspend output at its plant in Madera, California. On Jan. 7, Aventine Renewable Holdings Inc. said it halted construction of its refinery in Aurora, Nebraska, for up to 180 days.

Vinod Khosla hasn’t been immune:

Last month, AltraBiofuels Inc., which counts venture capitalist Vinod Khosla among its investors, shut production at its plants in Cloverdale, Indiana, and Coshocton, Ohio.

Aventine’s shares have plunged 99 percent since June 2006, when the company held its initial public offering. Biofuel Energy Corp., whose biggest owners are hedge funds run by David Einhorn and Daniel Loeb, has lost 96 percent since its stock began trading in June 2007.

99 percent! Holy cow. I did think this was amusing:

“Back then everyone thought this was such a great thing,” Gomes said. “Most of the publicly traded guys went into substantial debt to build these plants and capitalize on the rush. Right now you just have too much supply.”

Everyone thought that? Au contraire. Here is an essay I wrote in June of 2006 warning about the dangers to investors in the ethanol industry:

Ethanol Investing Counterpoint

That was in response to a gushing article the previous week advising everyone to stash away their life savings in this great new venture. Some of my comments in response – “many claims regarding ethanol are overblown”, “the underlying fundamentals (specifically of Pacific Ethanol) make it a very risky investment”, “ethanol companies are in the same boat (as dot-coms before their crash)”, “It is simply too easy to get into this business”, and “I don’t think the underlying fundamentals warrant the valuations placed on grain ethanol producers.” So I don’t think everyone thought this was such a great thing.

OK, I said I wouldn’t say I told you so. But here is my prediction. We have a mandated demand for ethanol, which means there will continue to be an ethanol industry. The government will not pull the mandate, because of the danger to Midwestern economies. So the producers that will remain standing in the long haul are those that are integrated. The company/coop that both raises corn and produces ethanol will outlast the others. When corn prices skyrocket, they will put non-integrated producers out of business. But the integrated guys will make money on corn in this situation.

It is analogous to the integrated oil companies. Pure refiners stopped making money when oil prices shot up way over $100 a barrel. Some were even pushed into bankruptcy. But the integrated guys, even though they saw refining margins disappear, made up for it on the oil prices.

It will be the same for the ethanol companies. The farmer’s coop that owns an ethanol plant has a better chance of surviving than the Pacific Ethanols of the world.

On a similar note, I just spotted this story:

Albuquerque Police Abandon Use of E-85

The City of Albuquerque is quietly abandoning part of its push for a greener Albuquerque after finding that E-85 powered vehicles are not all they are cracked up to be.

The city found they cost more to run and to keep running.

Enchanted with the idea of going green, the city bought a couple hundred police cars.

The problem is all the green the city is spending to keep those cars running green.

Albuquerque police Chief Ray Schultz said, “We are looking at a couple different things with the E-85. One is the cost. The fuel efficiency, and some problems with fuel pumps.”

It is going to be interesting to see what happens if the mandate by the government is greater than the demand from consumers – which is where I think we are headed. This will in fact keep ethanol prices low even if gasoline prices start to recover.

12 thoughts on “More Ethanol Plants Going Down”

  1. Hi Robert,

    What makes this even worse is the overbuild mostly came from ICM designs built cheaply by Fagen. Those plants are comparitively inexpensive and many farmers co-ops went with this design. About 1 – 2 years into production the cheap equipment procured starts to break down nearly simultaneously.

    ICM also has a handful of design flaws that make things really difficult. The mol sieve dehydration system as well as their highly-touted “Energy Center” requires huge maintenance expenditures.

    About half the US ethanol industry is driving a lemon.

  2. Corn ethanol is looking like a terrible idea. Yet once the farm lobby gets a subsidy, you will never pry it out of their hands…..
    maybe we can get a real energy program out of the Obama Administration…not hopeful, but maybe…..

  3. History shows the “King Canute” legislative mandate has almost always been a bad idea.

    Mandates are an especially bad idea in a time of rapid technological change and when consumers have alternative choices. So ethanol was exactly the wrong place to use mandates.

    If the political class actually cared about something other than their own aggrandisement, they would get rid of mandates. Previous administrations were wise enough to push through some minor alternatives to mandates — such as the US Air Force commitment to buy jet fuel from certain non-traditional sources; or funding for fundamental research.

    If Obama was smart (which remains to be proved), that is the direction he would go. But he would first have to get past the Democrat blocking line of Reid/Pelosi. Keep your expectations very, very low.

  4. “The government will not pull the mandate, because of the danger to Midwestern economies”

    Nah…. Jobs for Americans is so passe. That 500,000 barrels a day could employ thousands of Wahabbi’s. Call your Congressman!

  5. The farmer’s coop that owns an ethanol plant has a better chance of surviving than the Pacific Ethanols of the world.

    Farmer’s co-op? More like ADM and Cargill

  6. The ADMs and Cargills are in a different category, because they are very diversified. But there are quite a few farmer’s coops out there that bought into ethanol plants. As the first comment above indicates, there may be other issues with the design of some of these plants, but being integrated insulates them from price swings.

    Cheers, RR

  7. According to Bloomberg, investment bankers are thinking about hiring supertankers. Due to contango, they can buy oil now, then fill a tanker, lock in a sales price for several months or a year down the road, and sell it later at the agreed upon price.
    It is sure money — the futures markets are expecting a run-up in price.
    But, I think it is probably setting up a wonderful glut. These supertankers are going to be dumping their loads of crude in the future, into an already glutted market. Demand for oil should start falling for seasonal reasons.
    I think we see $10 oil again. Maybe. Imagine a glut of oil, and 30-40 supertankers waiting to unload. That is in the cards already — everytime another supertanker is hired, it will add to the future glut.
    Instead of Peak Oil in 2009-10, we wil see $10 oil, and oil glutting every tanker, on land or sea.

  8. “Imagine a glut of oil, and 30-40 supertankers waiting to unload.”

    The world needs 40 supertankers of oil every day Benny. Imagine Saudi Arabia closing their terminals for “maintenance” for a week…or maybe a month. Or,Israel bombing Iran’s nuclear facilities. Bush wouldn’t give them the bunker busting bombs they need,so maybe they’ll design their own. Nobody can predict where oil prices will be a year from now with confidence. Could be $10. Could just as easily be $200.

  9. Robert, RE your comment to Clee on Farmer-Owned ethanol production. That was the early model for corn ethanol, but the boom spurred by the 1st Congressional mandate in 2005 changed that. RFA has stats at http://www.ethanolrfa.org/industry/statistics/ (scroll down 2/3s of the page). As recently as 2005, farmer owned ethanol capacity was 60%, but had dropped to 11% in 2007, and probably is even lower today.

  10. Maury said: “Nah…. Jobs for Americans is so passe. That 500,000 barrels a day could employ thousands of Wahabbi’s. Call your Congressman”

    How much oil is saved producing that 500,000 barrels of cornahol?

    Robert

  11. For years I’ve used an occasional fill of 5% ethanol in lieu of methyl hydrate for winter driving : pulling water out of the fuel system. I even seem to get better mileage. But over 10% ethanol has always been discouraged at carmags.
    The ethanol ‘bust’ was predicted by someone I’m pretty sure you know well.
    http://ergosphere.blogspot.com/2007_01_01_archive.html
    Exhausting the non-options

  12. Howdy R-Squared,

    This is what happens when government (politicians) allow themselves to be positioned to “helping out” their communities through mandates or even subsidies. We are kidding ourselves if we truly believe that going “green” is the way to ensure better lives ahead. However, most of the people buying this nonsense hook, line, and sinker pretty much have no idea about the science, economics, and payoffs to these programs.

    If you really challenge individuals on these topics, you pretty much find out pretty quickly that they are just repeating some “fact” with little understanding and usually adding a bit more spin to it.

    If these things (EtOH, solar, etc.) really were the way to go and there really were serious opportunities with these technologies, wouldn’t the “Big Oil”, Nuke, or whatever have already gone down those paths? (rhetorical to this group, I just get so red-faced asking this to many of the coffee serving slackers today).

    Sorry for the rant, but a free marketplace is the only way to ensure better quality goods, services, and innovative technology.

    It truly is our job to show the costs as well as the benefits. Most people do not have the basics in chemical thermodynamics, let alone any science to understand topics like energy density. Worse, they are so used to getting the convenience that they have no clue as to what it takes to get anything out of the ground to the pump, regardless if it is mined, drilled, or grown. Don’t even start with the big ball of yellow fire in the sky. That one is way over their heads.

    Great Site!

    Jdubya

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