Ethanol Peak in Rearview Mirror

It seems that we may be on the back end of the ethanol (and biodiesel) peak. While the President continues to call for increased consumption, the wonders of the invisible hand are working in the real world.  

If dealflow is any guide, we are seeing fewer investment proposals. There was a time when these ideas were flowing thick and fast, and I guess many have been funded and are now among the many ethanol facilities under construction. If there are 6 billion gallons in operation across 100 or so plants — then the additional 80 or so coming online should result in circa 10 billion gallons of ethanol. For context, there are approximately 140 billion gallons of gasoline consumed in the US.

With so much incremental demand for the feedstock, it is little wonder that corn demand and prices have jumped. Whereas average corn prices once were $2.50/bu (CBOT), they are now $4.00/bu. Whereas ethanol was in short supply with the switch from MTBE (the alternative oxegenate that is no longer acceptable), there is now a tsunami of volume seeking a home. Whereas crude oil was heading towards $80/bbl, it is now sitting at $60/bbl. Net: The projected economics are not quite so rosy for the refiner.  

While ethanol is a required blend in many major cities in the US, it is not a welcome additive. It can damage c-store gas pumps, which means we may have hit the volumentric limit unless prices fall to make it an attractive blend. Oh, did I mention that energy content is 30% less per gallon? Yes, mileage suffers.

So if economics are looking so bad, who is building these plants? Many farm coops built the original plants and many are still involved, but the space has seen a significant investment by PE and similar firms. One, in particular, did exceedingly well and timed their exit to perfection last summer, but the guys still in the game may not be so happy. 

If history is any guide, the over-build of the merchant power space 6-8 years ago is a good analogy. There will be too much supply, a number of plants will struggle and may not survive with current equity. So what to do? One option is avoid the space, another is circle the debt, another is play in related spaces (who wants to be a corn farmer?).