Ethanol Plants for Sale, Negative Margins Take a Toll – DTN

Photo: ©Debra L Ferguson

Pacific Ethanol is looking to sell some of its ethanol plants as it continues to battle negative margins, company CEO Neil Koehler announced during an earnings call on Thursday.

Koehler said the company is “actively engaged” in discussions to sell assets or form new business partnerships.

Pacific Ethanol is one of two major ethanol companies to report losses on Thursday. Pacific Ethanol and Archer Daniels Midland said in separate earnings calls the U.S. reaching a trade deal with China would be huge for the industry in a persistent, negative-margin environment.

Koehler said the industry continues to suffer from oversupply, a lack of trade with China and from small-refinery exemptions to the Renewable Fuel Standard that have reduced demand since 2016 by about 2.6 billion ethanol-equivalent gallons.

“A resolution to the trade dispute is the one shot in the arm the industry would see,” he said. “It will get resolved at some point.”

Though Pacific Ethanol reported an operating loss of $2.7 million in the second quarter, it was an improvement from the $10.2 million loss in quarter one.

To account for negative margins, Koehler said the company is producing at about 80% of capacity. In all, Pacific Ethanol operates plants in Illinois, Nebraska, Oregon, Idaho and California, with a production capacity of 605 million gallons. In addition, Pacific Ethanol stopped production at its 45-million-gallon plant in Aurora, Nebraska, at the end of 2018 and has cut production costs at all of its nine plants.

Nationally, Koehler said there are a number of plants up for sale but not a lot of transactions announced. Pacific Ethanol filed for bankruptcy protection in 2009. Koehler said times are different now, as the value of company assets exceeds debt.

“It is nothing we are considering at this time,” he said.

Though the ethanol inventories are high, Koehler said there are some encouraging signs. Overall, industry production is down about 3% in the past two weeks and has dropped by about 6% since June.

“We should start seeing inventories come down,” he said. “We appear to be trending in that direction.”

ADM Earnings Call

Archer Daniels Midland reported a $26 million loss in bioproducts in the second quarter as a result of negative ethanol margins. That compares year over year to a $9 million profit for the segment in the same quarter for 2018.

ADM CEO Juan Luciano said his company remains positive that a trade deal with China will get done.

“We expect the ethanol-margin environment to remain challenged until we see a move with China trade,” Luciano said. “We remain comfortable that more-normalized trade will resume with China. It will benefit ADM, but more importantly, American farmers once trade opens with China.”

Luciano said China’s E20 mandate to improve air quality means the country will need to import most of its ethanol. China has an ethanol production capacity of about 1 billion gallons, but needs up to 4 billion gallons.

This means China will need to import between 2 billion and 3 billion gallons from the U.S. and Brazil.

“It is what U.S. margins need to get out of this lull,” Luciano said. “China needs this to comply and the U.S. needs it to help the industry and U.S. farmers. There is no other way (for China) to get the product from the world as Brazil will not be able to supply.”

ADM Chief Financial Officer Ray Young said the ethanol industry is starting to see smaller ethanol refiners shut down.

Plymouth Energy in Merrill, Iowa, announced on July 24 that it was closing its 50-million-gallon plant because of negative margins.

“The ethanol industry continues to operate in negative margins. Absent a deal with China or a serious pullback in production, we do not see a recovery in the near future,” the company said in an announcement on its website. “The board of Plymouth Energy has decided to suspend production until further notice.”

ADM’s Young said he expects to see other plants come offline until margins improve.

“This is normally the peak demand with supplies coming down,” he said. “We’re not seeing it. From our perspective we’re carefully managing production.”

Hypothetical Plant Margins in the Red

DTN’s hypothetical Neeley Biofuels 50-million-gallon plant in South Dakota is showing some easing of market pressures that have been hammering producers in 2019.

Still, margins at the plant continue to be deep in the red.

The plant this week reported a 43.9-cent loss, which is an improvement from the 46.5-cent loss reported in July. This number includes debt service.

Most ethanol plants are not paying debt, however. If the hypothetical plant was not paying debt, the loss would be 13 cents per gallon, compared to a 15-cent loss in our previous update.

The margin improvement was fueled by a drop in the corn price paid by the plant, from $4.13 per bushel based on the Chicago Board of Trade futures price in July to $4 for this latest update.

The plant saw a drop in the ethanol rack price from $1.66 per gallon in July to $1.63 for this update. In addition, the price received for dried distillers grains fell from $138 a ton to $131 for this update.

It has been a long year for the ethanol industry.

Since July 2018, ethanol margins have taken a severe turn south. Neeley Biofuels reported a 22-cent-per-gallon net profit on July 6, 2018. By Sept. 20, net profits sank to 8 cents per gallon. By Oct. 16, 2018, the plant reported a net loss of 34.5 cents. Margins hit what was then a low in December, as the hypothetical plant reported a net loss of 37.9 cents. The plant has since had losses topping 60 cents at times during the past couple of months.

DTN established Neeley Biofuels in DTN’s ProphetX Ethanol Edition as a way to track ethanol industry profitability. Using the real-time commodity price data that flows into the “corn crush” in ProphetX, and some industry-average figures for interest costs, labor and overhead, DTN is able to track current profits. It also tracks how much Neeley Biofuels would make or lose under an infinite number of “what-if” scenarios.

DTN uses industry-average figures from Iowa State University economist David Swenson. Included in the figures are annual labor and management costs, transportation costs, debt-servicing costs, depreciation and maintenance costs. Although Neeley Biofuels is paying debt-service and depreciation costs on its plant, many real plants are not in debt.

Also, it should be noted the calculations include all other costs, such as chemicals and yeasts, electricity, denaturant and water. While DTN uses natural gas spot prices for these updates, many ethanol plants lock in prices on the futures market, so they are not as vulnerable to natural gas market volatility.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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