Boom times are back in the ethanol business.
Major producers of the corn-based fuel are reporting record returns for the fourth quarter thanks to dramatically lower corn prices, increasing demand for motor fuel and strong ethanol exports.
It's a complete reversal from 2012, when drought sent corn prices higher than $8 per bushel, leaving many of the nation's 210 ethanol plants unprofitable and forcing some to close and others to be sold.
Green Plains Renewable Energy, the nation's fourth-largest ethanol producer with two plants in Minnesota and 10 elsewhere, recently reported that the last quarter of 2013 was its best ever — and the current quarter may be better. Valero, the nation's third-largest ethanol producer and owner of Minnesota's largest ethanol plant and nine more in other states, also reported record ethanol operating income in the fourth quarter.
"We had a good corn crop, and more ethanol usage and for the strong producers that survived … the windfall profits have followed," said Jason Ward, Minneapolis-based analyst for Northstar Commodity Investment Co., an advisory service.
Biofuel Benchmarking, an analytics service that tracks more than 40 U.S. ethanol plants, reported that producers had average net income of 46 cents per gallon in the fourth quarter — the most profitable since the industry's banner year of 2006 when some plants' profits hit $1 per gallon.
"This reiterates that the industry is going to sustain itself," said Paula Emberland, who manages Biofuel Benchmarking for Christianson & Associates of Willmar, Minn.
It's also a pleasant aftershock to an industry battered by the 2012 drought that sent corn prices soaring and helped ignite a still-unfinished fight with the federal government, the oil industry and other interests over scaling back the U.S. ethanol blending mandate.
The record 2013 corn harvest has sent prices down to near $4 per bushel. "Their biggest input just got cheaper," said Ward of Northstar Commodities.
Motorists also used more gasoline last year for the first time in five years, Ward said. Starting in early 2013, ethanol plant margins have climbed steadily, he added. "It has done nothing but go north," Ward said.
Michael Cox, an analyst with Piper Jaffray & Co. in Minneapolis, said that ethanol's strong showing illustrates how an industry launched with government subsidies now operates on basic supply and demand.
"It is in a very good spot right now, and I think it will stay that way through 2014," Cox said.
China exports rising
Exports of ethanol are expected to stay strong, he and others said. Green Plains, the Omaha-based ethanol maker with production capacity of 1 billion gallons per year, said 11 percent of its first-quarter ethanol will be exported, and 20 percent of its second-quarter volume. Noting the first recent U.S. exports to China in November, CEO Todd Becker said that country's market "could be a potential game-changer for the industry globally."
Green Plains owns Minnesota plants in Fergus Falls and Fairmont. The Fairmont plant was acquired for $53.5 million from a failing producer's bank and was reopened in December. The extra output helped drive up that company's revenues and earnings.
Becker recently told analysts that the first quarter of 2014 should be as good or better than the past quarter.
Archer Daniels Midland Co., the nation's largest ethanol producer whose plants include one in Marshall, Minn., also reported strong ethanol results in the first quarter and expects the biofuel business to remain healthy.
Minnesota has 20 ethanol plants, many of which don't report financial results publicly. Biofuel Benchmarking, which releases only combined results, reported that Minnesota ethanol makers had average net income of 43 cents per gallon in the fourth quarter, compared with a 2 cent-per-gallon loss a year ago. For the year, Minnesota producers' average net income of 25 cents per gallon, compared with a 15-cent loss per gallon in 2012.
Larry Johnson, a Cologne, Minn., ethanol industry consultant, said the margins of the past quarter equate to a more than 20 percent return on investment. "That does make up for the zero return on investment for a couple of previous years," he said.
Not all ethanol makers are seeing a boom. A plant in Buffalo Lake, Minn., remains closed after being sold in a bankruptcy case last year. Biofuel Energy Corp., former owner of the Fairmont plant, is out of the biofuel business after its lender sold off both of its production facilities.
Looking ahead, Johnson said, the industry probably won't lose the entire battle over the ethanol blending mandate in 2014. Exports are up, and he expects corn production to be high this year.
"There's a pretty solid sense of optimism in the industry," Johnson added.