State feels tremors of ethanol shakeout

By Seth Slabaugh
Muncie Star Press - October 15, 2007

MUNCIE -- Indiana could pay a price for joining the ethanol gold rush at a bad time.

Ethanol production capacity has expanded so rapidly in the United States that there are likely to be some plant shutdowns, cheap resales, consolidations and bankruptcies, an expert says.

"It's not a pleasant scenario," said Christopher Hurt, an agricultural economist at Purdue University. "We are calling these growing pains. 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."

Five of Indiana's six total ethanol refineries opened this year -- including POET Biorefining in Portland and Central Indiana Ethanol in Marion -- and half a dozen more are scheduled to open in 2008 -- including POET Biorefining in Alexandria, Indiana Bio-Energy in Bluffton and Cardinal Ethanol east of Winchester.

One year ago this week, Indiana Lt. Gov. Becky Skillman attended a ground-breaking ceremony for the Hartford Bio-Energy ethanol refinery in Hartford City. Nothing much happened after that.

"They started last year and then pulled out in November or December and have not been back since that point in time," said Hartford City Mayor Dennis Whitesell. "The last time I talked to them, within the last month, they remained confident of moving forward. It seems to me to be financing at this point."

Hurt isn't surprised that Hartford Bio-Engery and other proposed ethanol plants, including Muncie Ethanol, which was supposed to have broken ground months ago, might be dragging their heels.

"Lenders are saying no way," Hurt said. "It's not an understatement to say there was just a massive over-investment in ethanol that just got ahead of its marketability."

At one point during the ethanol gold rush, at least one and sometimes two ethanol plants were proposed in every county in East Central Indiana, including two that remain planned in Henry County.

VeraSun Energy Corp., one of the nation's largest ethanol producers, recently announced that it was suspending construction of its ethanol refinery in the community of Reynolds, north of Lafayette, because of market conditions. Ethanol prices dropped nearly 50 cents a gallon from August to October.

"Those prices currently are suggesting margins would be extremely narrow or even losses for ethanol plants at this point," Hurt said.

Overproduction has resulted in the lack of infrastructure to transport, store and blend ethanol with gasoline.

"Supply is racing out much farther than the capacity to handle it," he said. For example, rail is the primary mode of transportation for ethanol, followed by trucks and barges.

Orders for new rail tank cars, 75 percent of which are estimated to be for ethanol use, have been increasing since late 2005, according to a recent U.S. Department of Agriculture ethanol transportation backgrounder.

Rail tank car manufacturers increased production lines, but the backlog grew from about 10,000 railcars in the third quarter of 2005 to a peak of 36,334 railcars in the fourth quarter of 2006. By the end of the first quarter of 2007, the manufacturing backlog had decreased to only 36,166 railcars.

Bankruptcies coming?

"If you and I were investors in Cardinal Ethanol, we would not be feeling real positive about it," Hurt said. "We're not losing any money on it now, but the outlook, the future for ethanol profitability is very cloudy right now." State of Indiana officials responsibly backed off financial assistance to ethanol refineries when concerns about rapid growth became known, Hurt said.

What about the Indiana ethanol refineries that came on line this year and those that will come on line next year?"At what point will those plants simply shut down for a period of time?" Hurt said. "That's the kind of thing I think you'll see -- a seasonal shutdown."

Rather than bankruptcy? "No, that's going to come, too," Hurt said. "These plants will shut down when they can't even cover the cost of running the plant. They still have debt to service, overheads costs, depreciation, real estate taxes to pay. But when you can't pay the electricity, the corn costs and the labor, that's when you shut down."

He added: "Plants could sell cheap. This is the way the market works. Discouraged investors who lose too much money will put it up for sale. If it looks like a bad investment, how much money are investors willing to keep throwing at it? You will go through a period of consolidation."

Two of the five ethanol plants that opened in Indiana this year already have been resold.

Turnaround coming?

Deb Abbott, spokeswoman for the Indiana State Department of Agriculture, is more optimistic than Hurt.

"Biofuels, including ethanol, continue to represent tremendous opportunity for our farmers, our rural communities and our environment," she said. "As any industry continues to grow, companies must constantly adjust strategies to stay in tune with the market. This is a normal part of business, and biofuels are no exception. What you're seeing is this adjustment and not an end of the ethanol industry."

She added: "We are excited about the investment and the jobs that biofuels projects have brought to communities throughout the state. While additional projects may come at a slower pace, we expect Indiana to continue to benefit from additional projects in the future."

Jeff Painter, general manager of Cardinal Ethanol, doesn't sound as concerned as Hurt, either.

"There's going to be a turnaround somewhere along the line," he said. "I think there will be a turnaround in nine months, a year or 18 months. It's going to happen. The ethanol industry still has a lot of opportunities."

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