Independent ethanol producers face a tough future
. -- A smooth road curves toward the hulking ethanol mill that One Earth Energy will open in June. But the path to profitability might be rocky, as the fledgling company could face much larger rivals that have snapped up bankrupt mills at steep discounts.
Valero Energy Corp., the country’s largest oil refiner, broke into the farm-grown business last month, buying seven ethanol mills and a development site from bankrupt VeraSun Energy Corp. at a 70% markdown.
Other mills could soon be up for auction, after Aventine Renewable Energy Holdings Inc. in Pekin, Ill., filed for bankruptcy protection Wednesday and the recent disclosure that Pacific Ethanol Inc. in Sacramento is struggling to repay lenders after its $147-million loss last year.
By acquiring ethanol mills on the cheap, big oil and other players could undercut firms such as One Earth Energy, which spent $166 million to build a plant for distilling corn into fuel.
“The challenge to compete with those new ownerships is they have a lower cost of production because they have less debt,” said Steve Kelly, president of One Earth Energy.
Heavy debt loads and historically high corn prices have been lethal to independent ethanol firms. “The growth in ethanol is mandated, but most U.S. independent ethanol producers have failed or are struggling to survive as stand-alone entities,” wrote Chi Chow, an energy industry analyst for Tristone Capital.
Chow predicts a wave of consolidation among the country’s 170 ethanol mills. Agricultural processors such as Archer Daniels Midland Co. and Cargill Inc. also are expected to expand their ethanol holdings.
Brent King, who has restructured bankrupt biofuel plants, said ADM and Cargill were “waiting for it to get bleak enough so they can buy plants at cents on the dollar.”
A spokesman for ADM, which was outbid for the VeraSun mills, said the company was looking for strategic acquisitions. Cargill declined to comment.
The $552-million Valero deal gives the Texas-based refiner access to 780 million gallons of ethanol a year, so it would no longer have to buy the fuel additive from outside companies.
“This will be a small part of Valero, but big for the ethanol industry,” said Valero spokesman Bill Day, adding that the refiner intended to run the plants at full capacity.
As a result of the deal, ethanol producers counting on purchases by Valero will have to scramble for new customers, further depressing ethanol prices that have sunk to $1.58 a gallon from last summer’s peak of about $2.80 a gallon, said Tom Elam, founder of FarmEcon LLC and an industry critic. Lower prices could drive additional mills into bankruptcy.
“In a market like this, farmer co-ops won’t do well,” Elam said.
At the dawn of the ethanol boom, farmer co-ops embraced an integration strategy similar to what Valero is now pursing. Corn growers banded together to start mills that would create new demand for an age-old crop.
Before launching One Earth Energy, Steve Kelly worked down the road for the Alliance Grain Co. He estimates that the co-op stored about 3 million bushels of corn when he joined it in 1988. The figure reached almost 30 million bushels in 2005, so Alliance needed an outlet for its corn, and One Earth Energy was born.
“It always made sense to me to have the vertical integration, be part of that consumption chain after it leaves the farmer and the storage point,” said Kelly, noting that Alliance will supply One Earth Energy with corn.
Kelly is optimistic about ethanol because it is a fraction of the fuel used by the country, so there could be room for additional production from mills in the years ahead. U.S. motorists will use 138 billion gallons of gasoline this year, but the federal mandate is for 10.5 billion gallons of biofuels.
“What gives us hope,” Kelly said, “is you still have growing populations around the world.”