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Worst Margins in a Decade Set to Keep Fueling U.S. Ethanol Deals


Apr 24, 2019, by Isis Almeida
(Bloomberg)

A wave of consolidation washing through the U.S. ethanol industry has yet to run its course amid some of the worst returns in a decade, according to grain handler and ethanol-plant operator The Andersons Inc.

Margins have taken a beating as President Donald Trump’s trade war halts sales to China, exacerbating a glut of the corn-based biofuel. That’s squeezed earnings at agribusiness giant Archer-Daniels-Midland Co. and prompted Pacific Ethanol Inc. to explore the sale of its Nebraska plants. Green Plans Inc. is also looking to sell more plants as it sharpens its focus on protein.

“There are publicly a lot of plants for sale and you can look at them and understand why the economics are so difficult,” James Pirolli, who heads Andersons’ ethanol business, said by telephone. “You are going to continue to see some consolidation, but that’s just natural given this margin environment.”

Ethanol prices are near the lowest in a decade and margins were just above break-even at 15 cents a gallon on Tuesday amid high stockpiles, according to AgResource. That’s down from 25 cents a gallon last year and the lowest for this time of year since 2009, said Ben Buckner, an analyst at the firm.

Growth Opportunities

Valero Energy Corp., the second-biggest U.S. oil refiner by capacity, last year agreed to buy three ethanol plants from Green Plains for $319 million. The sale accounted for about 20 percent of capacity for the fourth-biggest producer of the fuel. ADM, Poet LLC and Valero are the largest producers in the U.S., with about 1.7 billion gallons of annual capacity each.

Andersons, which recently acquired Lansing Trade Group, declined to comment on whether it was looking to buy any of the plants that are for sale. The firm already runs biofuel facilities in Michigan, Indiana, Ohio and Iowa and is part of a joint venture building a new plant in Kansas that should start up midyear and be fully operational by the end of 2019.

“We always look for opportunities and we are assessing technologies, opportunities to grow and expand,” Pirolli said. “We’ve been very diligent in the decisions that we’ve made historically. We want to continue to expand that model when we have opportunities to do that.”

U.S. ethanol producers expanded production capacity in recent years with an eye toward burgeoning demand, mainly in China.

The outlook for the ethanol industry could start to improve should the U.S. reach a trade agreement with the Asian nation. There have been discussions about boosting sales and lifting China’s anti-dumping and anti-subsidy tariffs on U.S. distillers dried grains, a byproduct of ethanol production that’s used in animal feed.

“We have several markets that we are working on,” Pirolli said. “There’s ethanol going to Brazil, we are working on Mexico, India and several countries in southeast Asia. China is the one that has the infrastructure and the ability to import significant quantities of ethanol quickly.”

“We are all up in the air when these disputes are going to be solved and what the details are going to be,” he said. “Obviously, we are hopeful and optimistic on that front.”

Demand for the biofuel could also get a boost if the U.S. Environmental Protection Agency implements a rule allowing year-round sales of E15, a blend of gasoline that contains 15 percent ethanol.

Agricultural interests are pressing the government to make good on promises to have the rule in place by the upcoming summer driving season. Andersons says there’s still time. “The timing right now would still allow EPA to publish the final rule by the end of May,” Pirolli said.

What Bloomberg Intelligence Says

Lifting the restrictions could lift demand from E15 users by 9 percent from last year, “with more drivers likely to follow suit as the fuel’s availability increases.”– Tobias Nystedt and James Evans, renewables analysts Click here to view the research



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