ETHANOL

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Ethanol plant keeping strategy close to home
By DAN PILLER • [e-mail] • July 22, 2008

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Superior, Ia. —The towering edifices of the new Green Plains Renewable Energy ethanol plant and the adjacent Great Lakes Cooperative elevator demonstrate how larger ethanol companies are beginning to look something like major oil companies.

The "vertically integrated" oil companies are involved in the production and refining end of the business. So is Omaha-based Green Plains, which began grinding corn at its 55 million gallon Superior ethanol plant last week.


The company's financial results show that, all the concern about the financial state of the ethanol industry notwithstanding, there's money to be made in grinding corn into fuel.

In April, Green Plains completed its purchase of Great Lakes and its 14.5 million bushel grain storage capacity at elevators in northwest Iowa at Superior, Everly, Greenville, Gruver, Langdon, Milford and Spencer. Last year, Green Plains bought a grain elevator at Essex to support its new ethanol plant nearby in Shenandoah.

The combination of ethanol plants with grain elevators isn't new, of course. That's how Iowa's ethanol industry began. But Green Plains is using the combination on a larger scale to try beat the city slickers and their futures markets.

"What we're trying to do is cut Chicago out of the deal," said Wayne B. Hoovestol, the crew-cut former trucker who is Green Plains' chief executive. Green Plains wants to avoid the futures market on the Chicago Board of Trade and instead rely as much as possible on its own physical storage capacity and spot market buying strength.

So far, that strategy looks promising. According to Securities and Exchange Commission filings, Green Plains' average corn cost in the second quarter recently completed was $4.84 per bushel, well below the $6-$7 range corn traded on the Chicago futures markets. Subtract some profits Green Plains made on derivatives deals and the average price dropped below $4 per bushel.

In the second quarter, Green Plans took in $35.8 million in ethanol revenues and earned an operating profit on ethanol of $6.7 million, an operating margin of 18 percent.

Hoovestol said a key factor is the $5.5 million in revenues Green Plains took in from the sale of dried and wet distillers grains, the residue from ethanol production that is sold to farmers. Distillers grains tend to track the price of corn, and the byproduct enables ethanol plant operators like Hoovestol to remain more comfortable whenever corn prices rise.

That kind of financial performance gave Green Plains the courage to open the Superior plant at a time when plant delays, or outright abandonment of projects, have dominated industry news. Verasun Energy of Brookings, S.D., which has plants in Albert City, Charles City and Fort Dodge and is building a plant at Dyersville, said this month it would delay the opening of a completed ethanol plant at Hartley just west of Spencer - along with two other plants in Minnesota and North Dakota. The company cited the profitability squeeze caused by record high corn prices this spring and summer.

Similarly, Amaizing Energy Holding Co., which operates a 48 million-gallon ethanol plant at Denison, has put its planned plant at Atlantic "on hold" for the time being, according to a spokesman.

Because Verasun is a publicly traded company, its delay announcements caused Wall Street to go negative on ethanol. Analyst Troy Gavitt of FBR Research warned in a report that U.S. ethanol production is in oversupply status.

He said the major metropolitan markets that are under mandates to use ethanol for environmental reasons have fully completed the conversion, and home Midwest market for 10 percent ethanol blend is near saturation. That leaves smaller states and cities along the coasts as the last expansion territory, a more difficult proposition considering that ethanol still must be moved by rail.

Green Plains stock, traded on Nasdaq, has tanked along with the rest of the biofuels industry. Last week, it traded at $7, below the $20 it opened at last year.

But Green Plains is grinding forward, along with other ethanol producers. The state's ethanol capacity will rise from 1.5 billion gallons in 2006 and 2 billion gallons last year to 2.4 billion gallons this year, according to the Iowa Renewable Fuels Association. That's not quite the doubling of capacity every other year that Iowa experienced between 2002 and 2006, but it defies the doomsayers that have assailed the industry this year.

A lot depends on corn market conditions. Ethanol producers got some good news Monday when December corn futures dropped to $6.08 per bushel, making the $8 corn that was supposed to slay the ethanol industry seem further away.

Analyst Rick Kment of the DTN market data firm in Omaha wrote last week that the crush spread that defines ethanol plant profitability has swung 75 cents in favor of producers in the last two weeks.

So, Havestool said he's on the winning side of the market.

"Right now, ethanol is the best and most profitable use of corn," Havestool said from his new office of the Green Plains Superior plant. "We're not in the business of grinding corn to lose money."
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