Though ‘profit situation is tenuous,’ ethanol maker Lincolnway forges ahead
* Nevada, Ia. - Rick Brehm, president of the Lincolnway Energy plant west of Nevada, isn’t one to sugarcoat the current economic environment for ethanol.
“Our profit situation is tenuous,” said Brehm of Lincolnway, which is owned primarily by farmers and the Heart of Iowa Cooperative, which is adjacent to Lincolnway’s 55 million-gallon plant.
Independent studies of ethanol operations by Iowa State University show that profitability for the industry vanished by December 2008 and isn’t likely to return soon unless ethanol prices improve. Brehm also notes that ethanol is a new industry struggling through growing pains, and it needs to become more efficient
“An oil company can move its product by pipeline from Houston to New York City for 3 cents per gallon,” Brehm said. “We have to pay 19 cents per gallon to ship ethanol to New York City by rail.”Companies are trying to build a 1,700-mile ethanol pipeline from Iowa to the East Coast, one example of the efficiencies needed.
“The oil industry has had a century to build its markets and infrastructure and make itself efficient,” Brehm continued. “The modern ethanol industry really only dates to the early part of this decade. We still have a ways to go.”
That will mean, he said, closings of plants and consolidation of companies. That already is happening with the shuttering of about 30 percent of U.S. ethanol capacity through the bankruptcies of Verasun Energy and several other producers.”The ethanol industry was built up very quickly since 2003, and not everybody had the complete skill sets to operate plants and ethanol businesses efficiently,” Brehm said.
Lincolnway hopes to be a survivor in the coming biofuels shakeout. Its 45 employees still operate two 12-hour shifts. Lincolnway has experimented with new energy sources, such as wood waste and tree limbs, that could supplement the coal that is the plant’s main fuel.
Brehm also is keeping an eye on using biomass, such as switchgrass and corn stover, as the raw material to make ethanol.”The future of this industry is in biomass, but we don’t know how soon it will arrive,” Brehm said.
For now, Lincolnway and other ethanol producers must deal with the nasty reality that demand for their product has weakened and the price has fallen.
Ethanol producers increasingly encounter oil companies that two years ago eagerly grasped for ethanol to blend with their unleaded gasoline to meet environmental mandates but now say they do not need as much ethanol as before.
An unprecedented nationwide drop in driving last year decreased demand for gasoline. With that decline came the corresponding drop in demand for ethanol to be blended into gasoline at a 10 percent rate.So when crude oil prices dropped by $100 per barrel from their summer peak last year of $147 per barrel, ethanol prices slid downward along with crude, and the biofuel lost its competitive edge against gasoline.
A study released last week by Sandia National Laboratories and General Motors Corp. pointed out that to be economical, ethanol needs to be priced at least $2.25 per gallon. Last week, ethanol sold for about $1.60 per gallon at Iowa blending terminals. Gasoline sold for an average of $1.77 and $1.90 in Des Moines last week.
Numbers like that have caused financial companies to turn their backs on ethanol. Des Moines investment manager Don DeWaay told a conference last week that “if gas prices stay where they are, then what use is ethanol?”Like other ethanol producers, Lincolnway has discovered that the waste byproduct of ethanol production, distillers grains, has a market among cattle feeders. While the price of ethanol has dropped by almost 50 percent in the past eight months, distillers grains have dropped in price only about 25 percent to around $120 per ton.
Lincolnway’s particular saving grace is its next-door-neighbor, Heart of Iowa Cooperative, which has a ready supply of corn. So Lincolnway has less need to plunge into the corn futures markets to secure supplies.That has helped it avoid the fate of Verasun, which was pushed into bankruptcy when its strategy of using short-selling and forward contracts to secure its corn supplies went bad last year.
