January 27, 2016

Faced with cheap oil prices, biofuels industry sees no déjà vu

Published in The Business Times

[NEW YORK] Ethanol producers may feel less pain from sinking oil prices than in previous tough times, as a government rule ensures a minimum use of the biofuel and recent consolidation gives them both financial strength and output flexibility.

Oil prices at 2003 lows and the highest ethanol stocks for nearly four years have given some in the trade flashbacks to 2008 and 2012 when weak margins forced many plants to close.

The Environmental Protection Agency (EPA) in late November set Renewable Fuel Standard (RFS) targets that are expected to push 14.5 billion gallons of ethanol into gasoline this year - potentially accounting for over 10 per cent of fuel use.

The controversial RFS targets force fuel companies to blend ethanol even if the corn-based fuel is trading at a higher price than gasoline or other octane-boosters.

That "doesn't assure the ethanol industry will be profitable, but it sets a floor for production and price, regardless of what happens to gasoline prices," said Scott Irwin, an agricultural economist at the University of Illinois.

Indeed, ethanol has been trading at a rare, stubborn premium to gasoline for the longest period since 2009.

The front-month Chicago Board of Trade ethanol futures contract has been above RBOB gasoline prices for nearly five months, the longest since a seven-month run to May 2009, according to Reuters data.

The premium is partly supported by the niche market for biofuels compliance credits known as Renewable Identification Numbers (RINs), which oil refiners and importers are required to have to prove compliance with the government's Renewable Fuel Standard.

Those credits are trading at around 64 cents each - helping to subsidize the cost of using ethanol, according to many traders.

In addition, consolidation in the ethanol industry has put about two-thirds of more than 200 plants into the hands of companies with multiple facilities, according to trade estimates. That compares with 40 per cent before 2008.

Major oil refiners like Flint Hills Resources and Valero Energy Corp, larger ethanol producers like Poet, Green Plains Inc, and commodities merchants like Noble Group scooped up more than 60 plants since 2008, according to data compiled by the Renewable Fuels Association.

Pacific Ethanol Inc, which merged with Aventine Renewable Energy Holdings last year, has said that the consolidation means major producers relying on more than one plant are more easily able to throttle back capacity when needed.

U.S. government data this week showed producers had slowed run-rates by 30,000 barrels per day to 983,0000 barrels per day.

The big ethanol producers also have the financial firepower to cope with a tough environment after a year of record margins in 2014. Publicly-traded producers like Archer Daniels Midland Co and Valero Energy Corp made less profit in 2015, but did not slip to losses.

Still, for those on the margins, the situation may get worse before it gets better as the cold weather drives up the price of natural gas used to run their plants and cuts drivers' miles.

Tyton Biofuels' 55-million-gallon-per-year plant in Raeford, North Carolina, idled a week ago. "Margins are very slim right now, and our costs are high because it's winter," said Rick Brehm, the plant's general manager. He said they hope to reopen after the winter months.

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