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Expansions hurt ethanol plants
Published 12:00pm Friday, August 7, 2009The ethanol industry is one that is growing every year. But a broad expansion has caused financial difficulties for some ethanol plants.
The need for ethanol in the gasoline supply is increasing, causing the industry to grow every year, according to Mark Schmidt, vice president of agribusiness capital with AgStar Financial Services. AgStar is based in Mankato and has expertise in the corn, soybean, swine, dairy and bio-energy industries.
In 1980, 175 million gallons were produced in the United States, according to Renewable Fuels Association (RFA), the national trade association for the U.S. ethanol industry. The amount jumped to 900 million gallons in 1990, 1.6 billion gallons in 2000. In 2008, 9 billion gallons of ethanol were produced, according to the RFA.
The number of ethanol plants in the United States has also grown. In January 1999, there were 50 operating ethanol plants with five under construction or expanding, according to the RFA. Ten years later, there are 170 operating ethanol plants with 24 under construction or expanding, according to the RFA.
However, the industry underwent a broad expansion in production since 2006 to meet demand, Schmidt wrote in an e-mail to The Journal. “Like any other growth industry, the balancing of supply and demand may not be controlled by anything but markets,” he explained. The increase in supply to meet the new demand caused an oversupply, which in turn caused a decline in price.
That decline in price was severe enough to cause negative profit margins, Schmidt wrote. Lasting negative profit margins cause financial stress for the ethanol plant, he wrote.
Corn accounts for 75 to 80 percent of the costs of making ethanol in the United States, according to Schmidt.
Despite the negative profit margins, loan defaults don’t occur in the ethanol industry any more than in any other growth industry, Schmidt wrote.
In its 2009 outlook report, the RFA called 2008 a “perfect storm of events” with record corn prices, undervalued ethanol and the economic crisis. Those events will create a stronger ethanol industry in 2009, it predicts in the outlook.
The Otter Tail Ag Enterprises ethanol plant has defaulted on its loans. It owes Otter Tail County a total of $648,000, which was due last week. The company also owes $61.5 million to AgStar Financial Services and repayment is due by Friday. The Fergus Falls ethanol plant opened in the spring of 2008. It has a capacity of producing 57.5 millions of gallons of ethanol per year, according to the RFA.
AgStar Financial Services staff said they couldn’t speak specifically about Otter Tail Ag Enterprises due to client confidentially.
There are various circumstances that could cause a default on a loan. When it occurs, “the lender makes every effort to work with the borrower to cure the default and keep the asset operating with the existing borrower,” Schmidt wrote.
The timeline of recovery for an ethanol plant in financial stress depends on how long the plant has lacked profitability, Schmidt wrote. Recovery begins as soon as the plant begins to make a profit again.
“Management at the plant does not have control of price, therefore they must control costs and that is what they do as a response to low price,” Schmidt explained.
An ethanol plant has a “huge” impact on the local economy, Schmidt wrote.
“The construction process lasts 12-16 months and pours millions of dollars into the local community in the form of wages and purchased services,” Schmidt wrote, adding that construction involves local suppliers and service providers. “Once the plant is built there are 35-45 new jobs plus purchased supplies and services from local merchants, not to mention the corn that is purchased from local farmers. All of this activity creates a huge economic impact on the local community, which is another reason why lenders do everything they can to work with the borrowers in times of financial difficulty.”
The smaller rural communities receive the largest boost to their economy when an ethanol plant opens, according to the RFA. Overall, the ethanol industry added 240,000 jobs in the United States, according to RFA. That brings the number of jobs that can be related to ethanol to nearly half a million.
To Schmidt, the future of ethanol is positive.
“The use of ethanol in motor fuel provides for cleaner air and reduces our dependence on foreign oil, and at the same time, it provides for a market for farm produce and generates economic activity for the local community,” Schmidt wrote.
