The Ethanol Industry Going Through a Rough Patch but Reasons Remain for Optimism

The Ethanol Industry Going Through a Rough Patch but Reasons Remain for Optimism
By R. Brown, Web Exclusive Posted Dec. 3, 2008

As gasoline prices drop from their summer highs and margins dwindle due to lower ethanol fuel prices, the ethanol industry finds itself in a true bind, yet optimism remains for the industry’s future prospects.

In a presentation at the National Agricultural conference in Des Moines, Iowa, Mark Lakers, President of the Ag and Food Association, an Omaha, Neb. middle market merger and acquisition investment bank predicted 40 of the 150 ethanol plants in the U.S. will file for bankruptcy by the end of the first quarter 2009. The largest factor, amongst others, affecting the ethanol industry’s demise was the contemporaneous rise in corn and crude oil prices during the summer this year.

The match of ailing ethanol companies is lead by the nation's second largest ethanol producer, VeraSun Energy Corp., which filed for chapter 11 bankrupcy protection October 31, 2008.

Lakers, in his speech warned farmers to be wary of credit lines and contracts with ethanol companies. True enough, VeraSun successfully had the bankruptcy court nullify its corn contracts with farmers December 2, 2008.

Lakers also saw a buyer’s market for ethanol companies with strong balance sheets. This because, bankrupt ethanol plants may be selling for as little as 70 to 80% of their construction cost thus making plant purchase advantageous to plant construction. POET energy, the nation’s top ethanol producer recently announced it was looking into the acquisition of ethanol plants built in well thought-out locations. In a separate and non related news release, VeraSun announced it received non-binding indication of interest for purchase of most of its assets.

Despite the apparent economic woes of ethanol producers, financial analyst still forecast bright long term performance for the ethanol industry. JP Morgan analyst, Terry Bivens, in his 2009 alternative energy outlook expects plant consolidation and an eventual stabilization of gasoline prices to help the industry.

Dwindling margins is not the only trouble facing the ethanol industry. Corn ethanol has largely been blamed for worldwide rise in food prices and increased land use. Though it is becoming clear that proponents of the ethanol fuel outcry based their conclusions on faulty premises and shaky scientific assumptions, the public, for the most part, bought into the ethanol defacing campaign.

To battle the food vs. fuel conundrum, more ethanol producers and venture capitalist are now looking at next generation biofuels such as cellulosic ethanol-made from non-food feedstock such as switchgrass, municipal waste, wood waste, corn stover and more. In the U.S., three main technologies are being deployed in this endeavor, gasification, enzymatic hydrolysis, and acid hydrolysis. The first commercial scale cellulosic ethanol plants are expected between 2009 and 2011, in large part, due to the Department of Energy (DOE) $385 million grants awarded to select ethanol producers in 2007.

Though the ethanol industry is going through a rough patch, many still see a bright future for ethanol in the long term. Some apparent reasons for optimism include, consolidation of ethanol plants under experienced and competent management, the gradual shift to next generation biofuels (fuels produced from non food feedstock), and an administration intent on developing renewable energy sources.