Blogging Ethanol & Biodiesel

President Bush to veto farm bill?

Criticizing Congress's "massive, bloated farm bill" that would support millionaire non-farmers, President Bush's comments from the Rose Garden Tuesday indicate that he will veto the package if changes aren't made.

Looking to offset the increased spending that would doom the bill, congressional negotiators on April 25 reduced the volumetric ethanol tax credit for a second time in the talks. Incentives for biodiesel and renewable diesel were removed entirely. Negotiations on the now-$280 billion bill are ongoing, with discussions focused on finding ways to compensate for the proposed $10 billion increase to the farm direct payments program.

A major breakthrough occurred late last week when senior lawmakers agreed on a $1.7 billion package of tax breaks, and ways to finance the overall package. The 51¢/gal tax credit for corn-based ethanol would drop to 45¢, which would save over $1 billion alone. But another $500 million would be netted out by a new $1.01/gal cellulosic tax credit, assuming of course, that any gets made.

Corn costs will head even higher this year

Margin squeeze ahead. U.S. farmers are expected to switch significantly more acres back from corn to soybeans to cut down on costs, the U.S. Department of Agriculture said this week.
            According to the latest Prospective Plantings Report, farmers intend to seed about 86 million acres of corn this year, down 8% from 2007, largely because the stuff takes so much fertilizer to produce.
           Some analysts are already nervous, including BB&T Capital Markets' Heather Jones, who said Monday that if indeed the USDA's call on corn acreage is right, either "demand must be rationed or there needs to be a big supply response from other growing regions of the world."
        Less informed observers are also weighing in.
        Biodiesel producer, take heart! In contrast, the USDA's forecast for U.S. soybean planting this year is way up at 74.8 million acres (versus 63.6 million acres that farmers planted in 2007.) That's because soybean prices have shot up in recent months, making the crop more profitable in relation to corn even though soybeans produce far less per acre.
        Soybean prices, according to ag economists, generally need to be at about 2.5 times higher than the price of corn to equalize the revenue between the commodities.

A Smaller Kind of Harvest

Ethanol producing margins come in part from the sale of byproducts. And the value of those byproducts – from the wet milling and dry milling processes– has been falling in the U.S. (Source: Ethanol & Biodiesel News).
        Wet milling begins first by soaking the grain to separate it into components, namely fiber, gluten and starch. The first two make it into livestock and poultry feeds, and the starch eventually becomes ethanol.
        In dry milling, the entire grain kernel is ground into flour. At the end of the process, there’s a coarse grain and syrup that’s left over, and dried to produce dried distillers grains with solubles, a livestock feed. CO₂ released during fermentation is sold.
        Further exacerbating producer problems is that gasoline inventories are rising while gasoline prices are as well. So at the margin, some ethanol will be left out of the fuel mix. This is not to suggest that gasoline demand has become elastic all of a sudden, but simply that ethanol capacity was built at too rapid a clip to be absorbed.
        Contact our David Givens if you want the latest update of this graph as the driving season approaches. 

Andersons exec acknowledges "dark side" of ethanol

Image courtesy: Blame Society Productions
The Andersons, Inc. last week declared its fourth consecutive quarter of record earnings in a conference call that would have been unremarkable if not for statements made by Gary Smith, the Maumee, Ohio-based company's vice president of finance.
        Asked about the impact of high corn prices on the company's ethanol business, Smith made one of the first high-level acknowledgements of validity in the problem of using agriculture as fuel feedstock.
        "In the end, if you have economics driving it and you look at the impact of a dollar increase in corn and what that does to your variable cost for reducing a gallon of ethanol," Smith said, "then you look at it for what it does to your variable cost for producing a pound of beef or a pound of pork or chicken or eggs.
        "It's pretty easy to conclude that you'll keep putting corn to feed before you'll slow down or shut down ethanol plants…before you'll dramatically shut down feeding, and I think most of us would prefer to eat first," he continued in response to a question about the risk to margins from Wall Street Access analyst Charlie Rentschler.
        "So, I think kind of the dark side of ethanol is the combination of what you're talking about, Charlie," Smith said. "It's just that simple."
        Smith quickly added that, on the other hand, the company's grain division had shown an "amazing ability" to increase crop yields on existing land. "I think that's going to continue to occur," he continued. Also, "new" farmland could also come out of the USDA Farm Service Agency's Conservation Reserve Program.
        "There is a substantial amount of land out there that all of us are paying for that is not in production that I believe could be put in production," Smith said. "I think that's terribly unfortunate, especially given the situation like you're describing, Charlie. So I would hope at some point in time we'll see the productive amounts of those lands come back into production to help mitigate the risk that you laid out."
        Following Smith's remarks, Rentschler protested that new ethanol production would require a 15-16% increase in crop productivity "just to feed the incremental ethanol plants coming on-stream" this year.
        "Certainly, yields aren't going to jump up like that year-over-year. There's no way that's possible," the analyst said.
        "I get your point," Smith responded.

Ethanol capacity creep marches on

The U.S. ethanol investment pullback hasn't got any worse, but judging from the dearth of new plant project announcements in recent months, it hasn't gotten any better.
        After outsized capacity growth throughout much of 2006 and 2007, in which 113 ethanol plants came online, many would-be developers now see the market as highly uncertain. How much past equilibrium production capacity might the U.S. be here in the first quarter of 2008?
        An Ethanol & Biodiesel News examination of publicly available data shows that U.S. corn-based ethanol production capacity was a little over seven billion gallons in 2007. By the end of 2008, another six billion in capacity remains on track for completion, which would bring total capacity to about 13 billion gallons.
        But the maximum amount of domestic ethanol that can be sold in 2008 is 12 billion gallons, under the federal Renewable Fuels Standard, assuming a maximum blend of E-10.
        Given that disparity, EBN identified that 835 million gallons/year of capacity from 15 producers was withdrawn or indefinitely postponed since the second half of 2007.
        The suspended plants – most of which were to have been located in Iowa, Illinois, and South Dakota – also had represented attempts to break into the market by states such as New Mexico and Florida.
        But many of those would-be entrants had not foreseen that the very growth of the ethanol market would effect a doubling in the cost of corn, the U.S. industry's sole viable feedstock.
        Lower ethanol market clearing prices, combined with corn costs that remain not only high but highly volatile, regularly pushed plant per-gallon profits into the red by several cents per gallon, according to data tracked weekly by EBN.
        What also could not have made it into business models is that detractors are trying to debunk "clean," "green" biofuels. Despite the success of their lobbying organizations, neither ethanol nor biodiesel fuel is as abundant or sustainable as the carry of popular myth.
        Also coming into play are the continuity of government subsidies, the staying power of the ethanol import tariff, and whether unmodified engines can really use more than a 10% mix of ethanol.
        However, cellulosic ethanols continue to plow ahead, as federal and state governments provide grants to give the unproven process a shake. Projects such as Xethanol’s citrus waste-to-ethanol play in Florida are being supported by local governments where feedstock producers would benefit.
        New announcements from the private sector focused on biomass-fed ethanol. At the Detroit Auto Show last month, General Motors announced a partnership with Cokato, an Illinois biofuels start-up, wants to bring cellulosic ethanol to market by 2010 at a cost of $1/gallon or less.

Jatropha is not biodiesel's magic bean

        Soy and palm oil prices being what they are, the most urgent question on the minds of most attendees at the National Biodiesel Board's annual convention in Orlando is alternative feedstocks.
        How does jatropha curcas measure up? In several conference sessions, the plant, which is now being cultivated for biodiesel purposes in parts of South Asia and Australia seemed to be a favorite target for debunking. A member of the Sustainable Biodiesel Alliance stood up to cast aspersions on jatropha at the pre-conference session on Saturday for being a "threat" to the environment because of the stubborn shrub's weed-like invasiveness.
        And yesterday, Rahul Kale from biodiesel consultancy kemOleo, said jatropha's poor yield simply wasn't worth the bother.
        "It costs roughly 10 times more to harvest jatropha than crude palm oil," Kale said.
        The National Biodiesel Board told Ethanol & Biodiesel News yesterday that it is putting together a proposal draft request for funding to the U.S. Department of Agriculture, seeking help in researching new feedstocks.
        "Soybeans got us to the dance," said NBB's Larry Schafer, "but we're going to need something else, whether it be jatropha, microalgae, or camolina to keep this business growing."
        Schafer said the proposal should be ready to be submitted later this year.

Nothing beats the air in Clovis

Photo: Brian A. Morganti
    ConAgra Foods said high costs have forced it to withdraw an application to build an ethanol plant near Clovis, N.M., the latest in a series of project cancellations in the industry over the past several months.
    Plans for the 110 million gallon plant had been tied up over the past year after the state's Environment Department came under fire over a decision to award the plant its air quality permit.
    Members of lower-income and ethnic minority groups protested the Clovis Plant, as it was known, on the grounds that it was being built too close to their communities.
    But as the debate was unfolding, profit margins for ethanol producers were meanwhile being subjected to 2007's dizzying volatility, as well as capacity creep. ConAgra, one of North America's largest packaged foods companies, decided it didn't necessarily need to be in the ethanol business after all, saying Wednesday it was walking away from the project.
    "ConAgra remains committed to its related offerings in the renewable fuels market," said Stephanie Childs, ConAgra's Director of Corporate Communication in a phone interview, "such as the sourcing of feedstock commodities and marketing dried distillers grains."
    As for re-entering the ethanol space more directly, ConAgra has no plans at the present time, Childs said.

Senate legislation has two-tiered effect on ethanol stocks

        Equity shares of ethanol producers were mixed Monday after rising 9.7% on anticipation of the energy bill's passage in the U.S. Congress Thursday. As investors took profits and digested the impact of the Senate passage of the energy bill, which mandates a doubling of corn-based ethanol to 15 billion gallons by 2022.
        Large, diversified agribusinesses such as The Andersons and Archer Daniels Midland Co. closed at or near annual highs, benefiting from the fact that they are positioned to take advantage of last week's farm bill as well, which preserves existing subsidy programs for grain and cotton farms.
        "Pure" ethanol producers, however, sank Monday, Aventine Renewable Energy shares fell 38¢, or 3.3%, while VeraSun Energy and US BioEnergy, which announced plans to merge last month, declined around 1% each.
        In addition to not being affected by the subsidy aspects of the farm bill, smaller ethanol-only producers, while benefiting from the increased Renewable Fuels Standard, may not be in as strong a position as the majors to take advantage of the farm bill's cellulosic incentives.

The audacity of etOH

Even as VeraSun Energy last week said third-quarter profit fell more than 75% (despite higher revenue), there was an air of inevitability upturn from VeraSun Energy execs as they discussed the value proposition in ethanol's blend economics last week.
        "Whether it’s $0.70, or $1 or 3, the economics are so great, we think [ethanol's] got maximum blending," said CEO Don Endres, "and again, all gallons are being blended; there is no gallons sitting out there."
        "It’s a sustained view that margins will be there," Endres added.
        While it's true that no public producers are reporting any significant unsold inventory, and the Southeast's ~3 billion gallon a year market is just beginning to open, it's may be that famed Icarus's first few minutes of flight time were equally auspicious.
        VeraSun suspended construction on its Reynolds plant last month, but is proceeding with work on its Welcome, Hartley, and Bloomingburg developments. The company is also implementing oil extraction in two existing plants through 2009.
        All this tenacity isn't drawn from the wild optimism of one producer alone; in fact, Goldman Sachs over the weekend found itself marvelling at ethanol producers' growth plans.
        "Incredibly, all three companies we cover - Aventine Renewable Energy, Pacific Ethanol, and VeraSun Energy - are sticking with long-standing aggressive growth plans, even in the face of significant negative free cash flow and weak ethanol crush spreads," Goldman Sachs analyst Arjun Murti said in a research note to clients.
        Murti said he does not expect a higher Renewable Fuels Standard to fundamentally change the "bearish margin outlook for 2008 and would use any rally thereafter to sell shares."

U.N. is urged to disavow 'rogue' ethanol predictions

The gathering alliance of ethanol interest crusaders which last week was content to simply call for more production is now calling on the United Nations to disavow “rogue” and “apocalyptic” statements made recently by one of its representatives.
        The rogue in question is Special Rapporteur on the Right to Food Jean Ziegler, who in Switzerland is a senior professor of sociology at the University of Geneva. In August, Ziegler called the conversion of farmland to biofuel production "a crime against humanity," and recommended in his recent report to the U.N. a five-year ban on biofuel production and expansion. Ziegler argues that converting land to biofuels lowers food production and raises food prices for the poor.
        Pandering to the world's poor is a dangerously anti-ethanol sentiment, and Brazilian Sugar Association President Marcos Jank, held a press conference to accuse Ziegler of simply making an "emotional argument."
        "A moratorium would be bad news for the ethanol industry around the world," Jank told reporters.
        "It could hinder countries in Europe in particular from expanding their own ethanol production," Jank said.
       Now who's being emotional?