Stu Ellis

Another ethanol refiner hoisted a white flag this past week. Aventine Renewable Energy at Pekin filed for chapter 11 federal bankruptcy protection, and while it is not the first, nor the biggest, its financial challenges point to continued stress for an industry that had been on top of the world a year ago. Aventine joins VeraSun, the nation’s largest ethanol producer on the bankruptcy list, during a week that a half dozen of VeraSun’s old plants were sold to another ethanol refiner, Valero.

Of course, the larger ethanol companies are not the only ones having difficulty. Many smaller one and two plant operations have also sought bankruptcy protection in the past year following the plummet in crude oil futures in the latter part of 2008. No, they were not all caught speculating on the long side of the crude oil market, but caught in a cost-price squeeze. With ethanol prices linked at the hip to unleaded gasoline, what goes up must come down and ethanol prices fell below cost of production. At least the cost of production that had been booked by the plant’s corn buyers.

The ethanol industry that had been flying high in 2008 with $140 crude oil, and market analysts predicting $200 prices, ethanol refiners were locking in corn prices at higher prices to help push that commodity well past $7.. When the crude oil balloon popped, and prices deflated with the rest of the global economy, ethanol prices had to fall as well and that destroyed any hope of profits, for companies that are solely dependent upon ethanol sales.

The result has been the closure of many ethanol plants, because there is no future in keeping open a plant that is losing money. That is something that cannot be made up on volume, no matter how large. One ethanol industry consultant currently estimates the industry will operate at only 67% of capacity through 2010. That compares to a nearly 100% capacity a year ago, with new plants opening every month.

That presents a significant conflict, with capacity diminishing at the same time the federal requirement for ethanol production to rise. During 2009-2010, the US Renewable Fuels Mandate calls for 12.6 billion gallons of ethanol to be blended into the nation’s fuel supply. If every ethanol plant was operating at maximum capacity, 14.5 billion gallons would be produced. With the industry moving at 67% of top speed, the mandate will not be reached without drawing upon any stocks that might exist or relying upon imported ethanol. The latter would not be politically favorable to the corn and ethanol industry, but would also tack on a tariff that raises the price of ethanol. That is the downside for the motorist.

The downside for agriculture is significant, and will only serve to delay any economic recovery. That is because the courts have allowed VeraSun to walk away from its commitments to purchase corn at previously agreed prices, and successor companies do not have to comply with those commitments either. Thousands of Cornbelt farmers who sold millions of bushels of corn to VeraSun are not being paid, if they have already delivered the corn. In addition, they are required to deliver corn to the new operators of the plants, at whatever price the new operator determines the market to be. Unfortunately, today’s cash corn prices are just half of what they were when the contracts were signed last year.

While there is absolutely no indication of similar events occurring in the case of Aventine, and there are no financial problems being reported by either ADM’s or Tate & Lyle’s ethanol operations, the current ethanol economy has radically changed from 2008, and that has filtered back into the farm economy keeping corn prices and farm profitability under pressure.