Rush to ethanol could produce glut
In the 2 1/2 years since Gordon Ommen co-founded US BioEnergy Corp., the company has quietly grown into one of the country’s top ethanol producers, with plans to double in size this year and grow its capacity to 1 billion gallons a year by 2009.
But Ommen knows there are challenges ahead for both his company and the rapidly growing ethanol industry. Thanks to that fast expansion and some distribution issues, some analysts predict that the ethanol boom is about to stumble on a supply glut and shrinking profit margins.
“It’s going to be a little bit of a bumpy ride, I think, but in the long run we are bullish on renewable fuels,” said Ommen, chairman, president and chief executive of Inver Grove Heights, Minn.-based US BioEnergy.
It’s a view shared by Geoff Cooper, who runs ethanol programs for the National Corn Growers Assn. He said the industry expected what he called a temporary oversupply for several months, though he hesitated to call it a glut.
Lehman Bros. analysts estimated the surplus at about 1 million gallons a day starting in the second half of 2007. The firm’s report attributed part of that to an ethanol plant building boom, but said transportation bottlenecks were a bigger problem.
Ethanol is produced mainly in the Midwest and has to be moved to coastal markets by train or truck because there are no pipelines in place to carry it, said Michael Waldron, a co-author of the report.
Currently, agribusiness conglomerate Archer Daniels Midland Co., of Decatur, Ill., is easily the country’s largest ethanol producer with annual capacity of 1.1 billion gallons.
US BioEnergy, with 300 million gallons of capacity, is No. 2 among the companies that primarily produce ethanol, behind Brookings, S.D.-based VeraSun Energy Corp., with a capacity of 340 million gallons.
“We expect the relentless supply of new ethanol production capacity will lead to a 70% decline in margins by 2009,” wrote Bank of America analyst Eric K. Brown in a report last month.
Researchers at Iowa State University also raised concerns about falling profit margins as corn prices, driven by ethanol, rose from under $3 a bushel last summer to close to $4 a bushel lately. And as the ethanol supply grows, they predict, ethanol prices will drop.
Last year the U.S. produced nearly 5 billion gallons of ethanol. It will produce around 7 billion gallons this year, according to the Renewable Fuels Assn., the industry’s main trade group.
Federal standards set a goal for Americans to burn 4.7 billion gallons of renewable fuels this year, rising to 7.5 billion by 2012.
Bruce Babcock, director of the Center for Agriculture and Rural Development at Iowa State, said once production reached the 9-billion-to-10-billion-gallon range, the price would have to come down.
Ethanol now makes up about 4.5% of the nation’s gasoline mix. Once that rises to 10% -- the percentage that all cars now sold in the U.S. can use without modifications -- Babcock questions where any new demand will come from.
The Renewable Fuels Assn. is downplaying fears of a glut. Matthew Hartwig, a spokesman for the group, said there was a lot of room for growth.
Hartwig discounted fears of distribution bottlenecks, expressing optimism that the railroads could handle the volume.
A glut could lead to industry consolidation. If that happens, US BioEnergy may be in acquisition mode, Ommen said.
“There’s going to be bumps in the road,” he said. “Those bumps could produce opportunities for well-positioned companies.”