Boom fades as ethanol floods the marketplace

The ethanol party is over, at least for now.

Expensive corn and a glut of ethanol has dimmed the bonanza that swept across the corn belt last summer, raining cash on rural communities.

The industry's sobering morning-after has seen announcements in recent weeks that some of the largest players would delay building new plants, while profits everywhere have shrunk from their 2006 highs.

"It's not looking as rosy as it was a year ago," said corn farmer Jerry Larson, speaking by cell phone on Tuesday from the cab of his tractor.

Last year saw predictions of sky-high profits from turning corn into fuel for an energy-starved nation. Even domestic auto makers were pushing fuel from the Midwest, not the Mideast.

An onslaught of new plants created so much ethanol that it may take years for things to shake out, and some plants may suffer losses or delays waiting for demand to catch up.

The pain may be sharpest for newly public companies that now face expectant investors and an imbalance in ethanol prices. Some of the older players, including many of the state's farmer-owned cooperatives, are better positioned to weather the storm.

"There's a different mentality in investing between Wall Street and Main Street," said Rick Kment, an ethanol analyst with DTN, based in Omaha. The farmers have a long-term stake in the ethanol plants, while "the publicly traded companies have a mentality that says, 'What have you done for me lately?' "

For one thing, many farmer-owned co-ops paid off their plants' construction costs ahead of time.

'A hard time's coming'

"Everyone knows a hard time's coming," said Steve Core, a project developer for Fagen Inc., a Granite Falls, Minn., ethanol plant builder. "They just don't know when."

Some of the larger companies, many of which went public with a bang last summer, are now scaling back as their stock prices have taken a steady beating. VeraSun Energy Corp., of Brookings, S.D., one of the nation's largest ethanol producers, announced plans to delay construction of a 110-million-gallon-a-year plant in Reynolds, Ind. The company will continue with plans to open a similar-size plant in Welcome, Minn., according to a spokesman.

And the third-largest ethanol producer in the country, US BioEnergy, based in Inver Grove Heights, said it is holding off on new projects for now, though it will continue construction of a 100-million-gallon-a-year plant that broke ground this summer in Janesville, said company CEO Gordon Ommen.

"It's a commodity business and it's a young, immature industry and you're going to have this," Ommen said. The bottom line predicts a strong future for corn-based ethanol, he added, noting that all ethanol is currently being blended with oil-based gasoline or diesel fuel.

One plant's numbers

The slumping ethanol market can be seen in the financial results at Granite Falls Energy, which opened a 50-million-gallon ethanol plant in late 2005. Revenues in its most recent quarter fell to $23 million from $29 million a year ago. Profits plummeted from $15 million to $2 million. The company's year so far is mixed, with profits down 28 percent for the first three quarters on a revenue gain of 15 percent, to $74 million.

Still, the company paid off its construction loans in June, four years ahead of schedule.

The squeeze comes from basic economics. Ethanol futures prices have fallen from about $2.50 at the beginning of the year to $1.55 Tuesday. The price of corn, meanwhile, has soared this year, with futures trading above $4 a bushel earlier this year before falling back to below $3.50.

It may take a year for the ethanol industry to turn around, but that depends on weather, demand and the unpredictable nature of the commodities markets.

"I don't think anybody's got a very good crystal ball," said Ralph Groschen, a marketing specialist with the Minnesota Department of Agriculture.

If an ethanol project has steel in the ground today, with permits approved and stock sold, it will continue, he predicted.

The heavily subsidized industry has lobbied for even more government help, including an increased mandate for the use of ethanol in the nation's fuel supply.

"At the very least, Congress should be mandating that any state that's producing ethanol should be mandating 10-percent ethanol in gasoline," as Minnesota has done for 10 years, said independent analyst Alan Roebke, of Chaska.

Ethanol producers may benefit from another Congressional mandate, depending on what happens to the 2007 energy bill. The government already requires an increasing portion of the nation's fuel supply come from renewable fuels, from 4 billion gallons last year to 7.5 billion gallons by 2012. The Senate energy bill calls for a dramatic increase in that level, known as the Renewable Fuels Standard, to 36 billion gallons annually by 2022. A House version of the bill has no such mandate, and a compromise has yet to be worked out.

Such a mandate would far outstrip the industry's current capacity, about 7.8 billion gallons annually, according to the Renewable Fuels Association. New plants coming online will increase that by 6.4 billion gallons.

Keith Kor, general manager of the Corn Plus plant in Winnebago, Minn., remembers a similar scenario in 1995 and 1996 when high corn prices forced some plants to close. Yet the long-term effects have helped farmers.

A farmer today has several markets for corn, whereas before the ethanol industry, "he had to go to the one elevator" in his area, Kor said. "If you look back at why we did these ethanol plants, it was to drive the price of corn back up, and we've achieved that goal," he said.

Matt McKinney • 612-673-7329

Matt McKinney • mckinney@startribune.com