The dramatic fall in oil prices has ended the party for another energy industry — ethanol.
Some producers of corn-based ethanol made record profits in 2014, but that's over. Industry executives now are talking about breaking even or staying slightly profitable.
Cheaper gas affects ethanol producers because they sell into the same fuel market. Most gasoline is 10 percent ethanol.
"It's good for the consumer, but it is getting hard on the industry," said Brian Kletscher, CEO of farmer-owned Highwater Ethanol in Lamberton, Minn., one of five Minnesota-affiliated producers to report record 2014 profits.
Crude oil prices have dropped 50 percent since June, allowing happy drivers to pump $2-per-gallon gasoline into their tanks. It's brought less cheer to ethanol producers. In January, wholesale ethanol fetched half what it did on some days in 2014.
"Margins are pretty thin right now," said Scott McDermott, chief operating officer of Ascendant Partners Inc., Colorado-based financial advisory firm that tracks the ethanol industry.
Minnesota, the nation's fourth largest ethanol producer, has 21 ethanol plants that refine more than 1 billion gallons a year, about 8 percent of U.S. output. More than 12,000 Minnesotans work in the industry and dependent businesses, according to the state Agriculture Department.
The ethanol industry downturn is not like 2008 or 2012, when hard times and drought shuttered ethanol plants, including several in Minnesota. Nor are things as bad as in the oil industry, where producers have reported losses and slashed investment, including a 27 percent drop in North Dakota oil-drilling rigs in the past year.
McDermott said it is the first time the ethanol industry has faced such a precipitous fall in fuel prices. Yet many ethanol producers are in a good financial position, and some are looking to invest in new technology or related enterprises to reposition or expand their businesses, he added.
Kletscher, who also is chairman of the Minnesota Biofuels Association, said he hasn't heard of any planned layoffs or plant shutdowns in Minnesota. None of the nation's 213 ethanol plants have closed recently, according to the Renewable Fuels Association.
Profitable year for ethanol
Many ethanol plants had strong or even record profits last year. At Highwater Ethanol, which opened in 2009 and is the newest ethanol plant in the state, net income hit $21 million, four times the profits of its best previous year. In 2012, the plant lost $4 million.
Seven Minnesota-affiliated producers tracked by the Star Tribune reported gains in 2014 operating income from 60 percent to more than 400 percent over 2013 results. Advanced BioEnergy, headquartered in Bloomington with ethanol plants in South Dakota, ended two years of losses with a $29 million profit for fiscal year 2014. Companies reporting record profits ranged from Heron Lake BioEnergy, with one ethanol plant 20 miles northeast of Worthington, to Green Plains Inc., the nation's fourth-largest ethanol producer whose 12 plants include those in Fergus Falls and Fairmont.
With the new year, ethanol profitability slipped, according to DTN, which collects and analyzes market prices for the industry. Almost everything needed to make ethanol, like corn and natural gas, along with the resulting biofuel and feed, are commodities with prices set by markets. Ethanol makers see their margins shrink when commodities they purchase rise in price or a commodity they sell fetches less, as is the case now.
Rick Kment, a DTN analyst based in Omaha, said ethanol plants increased output in 2014, oversupplying the market. Ethanol in U.S. storage climbed to nearly 21 million gallons in late January, a 2½-year high, Kment said. That kept a downward pressure on the price.
"I think we are going to see production pullbacks — plants not running at capacity — rather than what we saw five to six years ago with plants shutting down and going through bankruptcy," Kment said in an interview.
More ethanol exports?
At Blue Flint Ethanol, a refinery in Underwood, N.D., that is majority owned by a Minnesota cooperative, production hasn't been cut, but margins are tighter, said Gregory Ridderbusch, a vice president for Great River Energy and president of its ethanol affiliate. He said the company's commodity hedging strategy has helped — as have exports.
"Much of Blue Flint's ethanol goes into Canada," said Ridderbusch, whose company has not yet released 2014 results.
Some of the nation's largest producers, including No. 1 Archer Daniels Midland, see another strong year for ethanol exports, which are on track to set a record in 2014. China's decision in late 2014 to lift a trade ban on dried distillers' grains also opens the door for expanded exports of the ethanol-derived animal feed.
"We have very robust inquiries for export product on a daily basis," said Green Plains CEO Todd Becker, who told analysts last week that 17 percent of the company's first-quarter ethanol production is destined for export.
If gas prices stay low, that could spur increased driving and motor fuel sales, he said. If corn prices stay at current levels — under $4 per bushel — ethanol makers can weather $50-per-barrel crude oil and see positive operating margins this spring and summer, Becker added.
"We just need to see discipline in the industry on production rates, not build too much stocks and not get ourselves in trouble," Becker said.
David Shaffer • 612-673-7090 • @ShafferStrib