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Ethanol’s 2nd wind

By Staff | Mar 26, 2010

Although the profitability in ethanol is still nowhere close to the heady days of 2006 and 2007, compared to where the industry was a year ago, the industry is getting a new breath of life.

A DTN webinar held in February mapped out that although profit margins are still in wide swings, the numbers are still “in the black” and, according to Todd Neeley, DTN staff reporter, “we’ve heard ethanol companies say that they will be profitable in 2010.”

“When you look at last year,” Neeley said, “margins were in the negative for probably the better part of the first nine months. Then in October ethanol crawled out of a hole and has not been in the negative since.

“Every year there are ups and downs in margins, but there’s no doubt ethanol has a second wind.”

Ethanol ran into hard times in 2008 when corn prices soared to $6 and $8 per bushels. Market volatility led to companies like VeraSun Energy Corp. filing for bankruptcy and eventually dissolving.

But they weren’t the only ones hurting. According to Neeley, at least 11 other companies went out of business and others shutdown plants to hold down costs.

But in 2010 the new signs of life are seen with idled plants brought back into production, debt restructuring and operating costs trimmed.

Neeley said that what makes things appear positive, in the short term at least, is the second largest corn harvest on record and favorable crude oil prices. So far, in 2010, profit margins have ranged from 15 cents per gallon produced, to as high as 23 cents in early February and back down to 8 cents by March.

But compared to a year ago, when profit margins sunk to -65 cents per gallon, eight cents to the positive is a wide swing, Neeley pointed.

The corn market has the biggest influence on ethanol profitability, said Rick Kment, DTN ethanol analyst.

The 12 billion bushel corn harvest in 2008 was eclipsed by a 13.1 billion bushel harvest in 2009. With the USDA predicting more corn acres to be planted in 2010, upward to 90 million acres, the estimated harvest this fall tallies 13.3 billion bushels or more. All this bodes well for ethanol in keeping a regular supply of corn on hand to keep prices stable, Kment explained.

However, he acknowledged, there are questions about the light test weight of 2009 crop that is still in storage, as well as the quality of the 12 percent of corn fields waiting to be combined this spring.

Also affecting the 2010 corn price, Kment said, is that more corn is being used for hog and cattle feed, as well as the idled plants will create increased demand on domestic corn.

Nevertheless, Kment said, “corn is in a long-term bearish mode and expects corn to remain in the $3.50 to $3.90 per bushel range.

Contact Larry Kershner at (515) 573-2141, Ext. 453 or by e-mail at kersh@farm-news.com.

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