After two years of sterling profits, the US ethanol industry is staggering into a phase where margins are crumbling as more plants come onstream, and further declines could be on the horizon.
As the sector matures, it is beginning to deal with corn prices that have hit 10-year highs over the past year and ethanol prices that have tumbled from above $4.00 per gallon a year ago to below $2.00 at the Chicago Board of Trade.
"Their margins are crushing them right now," said Gavin Maguire, an analyst for brokerage house Iowa Grain. "Ethanol margins are at their lowest levels now since January of this year, and before that, those January lows were the lowest since 2005," he said.
Corn, the root stock of the US ethanol industry, has doubled in value during the past year while ethanol prices were halved, leaving some latecomers to the sector with less than the anticipated profits. Don Roose, president of US Commodities and an early, active investor in the ethanol industry, conceded that the bottom line looks tenuous.
"If you're basing it on the futures market and no forward coverage, for the most part you're in negative territory all the way out into November of '08," he said. "Basically you're at a break-even for June, July you're up 6 or 7 cents (per gallon profit) and basically you sink into a negative from there on out. The biggest loss would be in December where's there a 21 cent loss per gallon and it kind of hovers around there," Roose said.
Analysts cautioned about being too swift to judge the industry as facing the brink of bankruptcy but they also were not shy about the upstart business facing a volatile and uncertain future. "What you don't know is how cheap they got their corn bought; a good marketer would have booked ahead of time," said Mike Blackford, risk management consultant for FC Stone.
Blackford agreed profit margins have shrunk to nothing or are in the red based on spot markets, and "we've gotten ourselves into a supply-side market with several plants coming on line next month and the market knows that, fears that, so it's wait-and-see by the buyers at this point."
According to the industry group Renewable Fuels Association, there are 119 ethanol plants in the United States, producing 6.2 billion gallons per year and another 86 under construction capable of producing another 6.4 billion gallons. "We still have a third to almost one-half the capacity yet to come on line and still proposed," Blackford said.
This surging expansion is expected by some to lead to an oversupply of ethanol, further depressing ethanol prices while production costs, especially corn, stay at a lofty level.