Better days ahead?
Like almost everybody else, I’ve been enjoying the recently falling gas prices.
I had gotten used to looking at the signs at filling stations and wincing, seeing $3 and $4 gas prices that made me gulp and watching the little numbers on the gas pumps spinning way too fast.
But now? Watching the gas prices fall has become one of my favorite hobbies.
“Look, it’s almost $3!”
“Hey, it’s down to $2.50!!”
“No, it isn’t, it couldn’t be ... it’s $1.99!”
But the other day, I saw a more sobering sign. While gas was being sold for $1.99, E85 was going for, yep, $2.29.
For ethanol supporters, this is not a good thing. Since E85 gets lower gas mileage than regular gasoline, it has needed to sell for less, and while gas prices were so high, that wasn’t a major problem.
But now?
On Monday, an Omaha investment banker stood before lenders and told them a record number of ethanol plants are facing bankruptcy.
“There’s very possibly going to be 40 plants by the end of January that are in Chapter 11,” said Mark Lakers.
According to the Renewable Fuels Association in Washington, there were 182 ethanol distilleries in the United States as of mid-November, and some are already in trouble.
VeraSun Energy of Sioux Falls, S.D., with its 16 ethanol plants, filed for Chapter 11 bankruptcy Oct. 31, saying in court papers that it owed more than 1,700 creditors about $1.5 billion. VeraSun blamed its situation on swings in the prices of corn, which more than doubled from the end of 2005 to the end of 2007, and have since plunged 52 percent.
Lakers told the bankers that ethanol producers have been losing money for the past six months, and he expects the industry to go through a consolidation similar to what he’s seen before with poultry/hogs.
Lakers said the companies that survive will be those that can afford to buy new technology, corn fractionation and fluidized bed reactors, that can lower production costs by 70 cents a gallon. He added that the plants with the most risk are the newest plants with the highest costs. Some 50 million-gallon-a-year plants that cost as much as $250 million to build are now valued at less than $150 million, he said.
However, Lakers doesn’t see a decrease in the production of ethanol.
Lakers declined to say who the consolidators will be in the ethanol industry but said the industry will likely be taken over by investors looking for bargains and by existing ethanol companies that have no debt.
“Oil companies are not familiar with the complex relationship between the ethanol plants, farmers and suppliers,” Lakers said.
None of this should come as a surprise to those who have been following the industry. Last October, I spoke with Chet Perry, president of ITEC Refining and Marketing, which had put its plans to construct an ethanol plant northeast of Princeton on hold.
At that time, Perry told me some of the problems with the ethanol industry had come about with the credit crisis and the problems with the housing market.
“There’s tremendous concern in the industry,” he said. “It’s been a real bloodbath.”
And then, less than two months ago, I spoke with Mark Marquis, general manager and president of the Marquis Energy ethanol plant in Hennepin.
Marquis was speaking to a group of prospective DDGS buyers when a man asked if he would build the ethanol plant again, knowing what he knows now and based on the current situation.
Marquis paused, and then said yes. He said he believed the Hennepin plant would be a survivor, due to its location, logistics, high-yielding corn and the large size of the plant.
Marquis also said he would not be surprised to hear that some smaller plants might stop operations in the next few months, and said there would be “rough sledding” for the next six to 12 months in the industry.
But Marquis was also optimistic.
“There are better days ahead in the ethanol business,” he said.
Farmers and ethanol supporters across the country should devoutly hope that he is right.
Barb Kromphardt is a staff writer at the BCR.
