by Holly Jessen (Ethanol Producer Magazine) After a period of incredible profitability, leaders in the ethanol industry are better positioned for thinner margins.
In an industry ruled by volatility, it’s important for producers to position themselves to take advantage of favorable market conditions. “You’ve got to get it while the getting is good,” says Scott Chabina, director at Carl Marks Advisors.
The ethanol industry is now on the other side of exactly that type of scenario. In March, University of Illinois economist Scott Irwin pointed out that 2014 was the most profitable on record, in his FarmDocDaily analysis. Looking at a model 100 MMgy Iowa ethanol plant, it lasted 22 months with an average profit of 43 cents per gallon, more than 10 times the average 4-cent-per-gallon profit earned in the previous seven years. …
In an industry ruled by volatility, it’s important for producers to position themselves to take advantage of favorable market conditions. “You’ve got to get it while the getting is good,” says Scott Chabina, director at Carl Marks Advisors.
The ethanol industry is now on the other side of exactly that type of scenario. In March, University of Illinois economist Scott Irwin pointed out that 2014 was the most profitable on record, in his FarmDocDaily analysis. Looking at a model 100 MMgy Iowa ethanol plant, it lasted 22 months with an average profit of 43 cents per gallon, more than 10 times the average 4-cent-per-gallon profit earned in the previous seven years.
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As a result, Guardian Energy, and the ethanol industry as a whole, is set up to better handle the normal volatility that comes with being an agricultural industry. Besides paying down debt or refinancing, Jerke (Mike Jerke, CEO of Guardian Energy Management LLC) added that putting together a rainy day fund was also a move some producers were making, to prepare for leaner times.
Chabina agrees. For those producers able to build up cash, some are thinking about consolidation. … Others are looking at “inside the fence,” toward operational improvement projects or even moving to the true biorefinery model, he adds.
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When asked what Big River Resources did with the profits the company brought in, Ray Defenbaugh, president, CEO and chairman, says the answer is closely tied to the company’s original goals in entering the ethanol industry. “Those goals were to provide good jobs for people in the community and, secondly, to preserve the community—and you have to have good jobs to preserve rural communities—and the third is to provide good returns to our investors,” he tells EPM.
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Looking at the first and second goals, Big River continued to pay good salaries for the people who helped the company reach success and, on top of that, paid out extra bonuses during the time of profitability. Big River also paid local farmers generously for their crops. “Our goal never was for cheap grain, we were put into existence to build up the price of grain, to build up the local farmer,” he says. In reference to the third and final goal, the company paid good dividends to its shareholders. In 2014, return on investment was 126.8 percent and return on equity was 45 percent.
The strategy is working for Big River. “We’ve been in existence over 10 years and we’ve never had a loss year and we’ve never failed to pay a dividend,” Defenbaugh says, adding that the company has no debt and more than adequate cash reserves on hand to weather any unexpected downturns or capital requirements.
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Last but not least, Big River contributes heavily to organizations and causes that support the growth of the ethanol industry, as well as local groups, such as clubs for children and local parks. “When we have a good year like last year, we put even more into those areas,” he says.
On Big River’s list is Prime the Pump, a nonprofit group formed to expand the availability of E15 and higher blends, …
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Alternative Viewpoint
Eric McAfee, chairman and CEO of Aemetis Inc., which operates a 60 MMgy corn-ethanol plant in Keyes, California, and a 50 MMgy distilled biodiesel plant in India, sees things a bit differently. Aemetis’ goal has long been to convert corn ethanol plants to advanced biofuels. In 2013, the EPA approved the company’s pathway to produce D5 advanced biofuel RINs using sorghum in combination with biogas and the plant’s existing combined heat and power system. However, the plans for are on hold due to the high price of sorghum.
Policy certainty is needed in order for the industry to invest in next generation biofuels. The profits brought in during 2014 didn’t significantly change lenders’ willingness to increase their exposure to the ethanol industry, McAfee says, at least not at levels that support $20 million to $40 million projects to upgrade or build plants for advanced biofuels production. “Are biofuel producers making a crazy amount of money, rolling in cash and just can’t wait to throw money at the next advanced biofuels technology, or are biofuels producers mostly saying to the EPA and others seeking advanced biofuels, ‘Oh my gosh, stop beating me up, I’m dying here’,’” he asks. “I hate to tell you, but the industry is closer to the latter.”
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What looks like big numbers in the 2014 profit column, actually aren’t sustained enough to provide access to growth funding, McAfee says.
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“There is no lender in their right mind that would expose itself to additional funding of ethanol businesses when you don’t have the faintest idea whether federal law is going to be enforced,” he says, adding that because lenders and investors can’t depend on the law being enforced, it’s preventing investment, job creation and strengthening dependence on foreign oil.
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McAfee believes a lawsuit for declaratory relief should have been filed against the EPA 18 months ago by biofuels and corn industry associations. “How can you ever run an industry when federal law is not being enforced?” he asks. READ MORE