Grainnet

By Myke Feinman, BioFuels Journal Editor

Lower ethanol prices, higher construction costs, and higher feedstock costs are causing some ethanol plants to slow down or halt construction of new facilities while other companies in the industry are seizing the opportunity for consolidation.

Here are some of the recent closings, work slowdowns, and announcements from the industry:

•Triple Economic Whammy ... Iowa State University Professor of Economics Neil Harl said Oct. 14 the drop in price of ethanol from $2.50 per gallon two years ago to $1.50 per gallon recently is combined with two other economic factors: the rising cost of corn, and higher construction costs.

Harl said the pain will be felt mainly by investors and that it’s basically a problem of too much supply.

•Equity Campaign Suspended. ... Agassiz Energy announced a delay Oct. 13 in plans to build a $115 million ethanol plant near Erskine, MN because of high costs of corn and lower prices for ethanol.

Agassiz Energy said it has suspended its $55.8 million equity campaign and postponed its application process with the Securities and Exchange Commission.

•Growing Pains. ... Christopher Hurt, an agricultural economics professor at Purdue University, Lafayette, IN, termed the slow downs as “growing pains.”

He said that almost every industry has to go through a period of excess expansion and over-optimism, and then go through a period of negative markets, losses and generally some bankruptcies and some consolidations.

•Temporary Shutdown. ... The rising cost of corn and low ethanol prices are forcing the Alchem Ltd., ethanol plant in Grafton, ND to shut down temporarily, leaving about 30 people out of work, a company official said Oct. 10.

Alchem Spokesman Rick Newman said it’s a temporary shut down.

He added that Alchem needs market conditions to make it more feasible and they anticipate that shortly.

The price of ethanol is putting a pinch on the industry as a whole, he added.

•Higher Construction Costs. ... A new ethanol facility in Wapello County, Ottumwa, IA, could cost an extra $30 million to build.

While it may surprise some investors, project officials said the news is anything but unexpected.

Unity Ethanol LLC officials said the biggest factor in this price hike was the cost of nickel and steel, two main components of stainless steel, which is what a majority of the plant will be built from.

Along with the cost of raw construction material, the price of labor has also increased.

•Looking at Opportunities. ... Archer Daniels Midland Co. (ADM) Chief Financial Officer Doug Schmalz said Oct. 2 the corn and soybean processing company would consider buying ethanol plants now that lower prices for the fuel have been pressuring production margins.

Schmalz said ADM will look at all opportunities including acquisitions.

ADM is also building two more large plants to produce ethanol, but is maintaining an option to switch from production of ethanol to other corn products that might be more profitable in light of the recent ethanol industry economic squeeze.

In a presentation to a New York conference Oct. 2, David Weintraub, director of external communications, said the plants, which are under construction in Columbus, NE, and Cedar Rapids, IA, will allow ADM to increase its ethanol production by half.

•Construction Suspended. ... VeraSun Energy Corporation, Brookings, SD, one of the nation’s largest ethanol producers, announced Oct. 1 that it will suspend construction of its 110 million-gallon-per-year (MMGY) ethanol plant in Reynolds, IN due to current market conditions.

The company expects to resume construction in 2008, depending upon the return of more favorable market conditions.

“We believe it’s important to be mindful of the current market conditions and manage our business accordingly,” said Danny Herron, VeraSun chief financial officer and senior vice president.

•Pace Slowing. ... Sam Clovis, an Iowa economist, said the pace of constructing new ethanol plants has slowed down, making it tough for cities like Sioux City to land new ethanol plants.

He said the industry is close to the point of “saturation.”

•Shakeout to Lead to Consolidation. ... Sano Shimoda of BioScience Securities Inc.of Venice, CA said in late September that the industry's current shakeout will lead to more plants being owned by fewer and larger investors.

He said the higher cost of corn and lower price of the fuel are squeezing profit margins for ethanol plants.

•Considering Consolidations. ... Jeff Broin, POET president and CEO, said Sept. 14 that the Sioux Falls, SD-based ethanol producer is looking at opportunities to purchase existing ethanol plants.

“A couple of opportunities have surfaced to purchase plants,” Broin said. “But we haven’t finalized any deals yet. If the opportunity presents itself to purchase the right plant, we’d be interested.”

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