Wednesday, April 08, 2009

We may not need as much corn...

Even as I bundle up to watch fields drain off and just begin to dry out prior to the next three-day rain event, my assumption the corn market will get nervous about getting enough corn planted to meet growing demand is on shaky ground, perhaps. Despite enormous efforts to subvert the laws of thermodynamics and economics, the ethanol industry is encountering even stiffer resistance on multiple fronts.
Ethanol producer Aventine Renewable Energy Holdings Inc. filed for Chapter 11 bankruptcy protection on Wednesday, the latest victim in an industry stung by volatile commodity prices and shrinking profit margins.
The Pekin, Ill.-based company warned last month that it may have to file if it could not raise sufficient cash in the near-term.
In its Delaware court filing, Aventine listed assets of $799 million with $491 million in debt. The company listed 30 creditors.
Chief Executive Ron Miller said Aventine is challenged by a difficult market environment, and the filing will allow it to operate without interruption.
"We will use the Chapter 11 process to more rapidly restructure our overhead, pursue potential investors, and definitively resolve our debt issues," Mr. Miller said in a statement. [More]

The question of whose hair will be cut is again answered with this action, but the larger question is regardless of the vow to keep operating, are the ethanol margins even positive? Not to mention ethanol prices hovering above gasoline, discouraging all but the minimal blending.

The industry flagship, ADM, is not exactly shrugging off the storm either.  Its stock took a blow when a respected analyst downgraded their stock rating.

After meeting with Archer Daniels Midland ( ADM - news - people ) management, Driscoll said his belief that "fundamental trends are deteriorating across ADM's major businesses" was confirmed. He maintained his earnings-per-share estimate for the 2009 fiscal year ending June 30 at $3.48, and his estimate for 2010 at $2 per share.
Wall Street analysts polled by Thomson Reuters expect the company to earn $3.54 per share this fiscal year and $2.87 per share next year.
While the company said in February its profit rose in its fiscal second quarter, and sales inched up 1 percent to $16.67 billion, Chief Executive Patricia Woertz said then that "the ethanol business is still a challenge," and that global demand - and prices - for the fuel and other commodities had fallen sharply.
"Slowing agricultural demand and overcapacity are negatively impacting volumes and margins" in the company's oilseeds and agricultural services businesses, Driscoll wrote in a research note to investors, and profits are set to slide in those units. [More]

Still these events were hardly shocking, and merely confirm the industry restructuring is roiling the whole biofuel segment.  But other troubling problems may be cropping up as well.

Ethanol's main by-product, which is sold as livestock feed, has raised potential food safety concerns.

Several studies have linked the byproduct, known as distillers grain, to elevated rates of E. coli in cattle. And now, distillers grain is facing further scrutiny because the Food and Drug Administration has found that it often contains antibiotics left over from making ethanol.

Ethanol production relies on enzymes, yeast and sugar to convert corn into fuel. And just as the wrong bacteria in the body can sicken people, it can also cause a variety of ailments in a batch of ethanol.

Mark von Keitz with the University of Minnesota's Biotechnology Institute said in ethanol production, the main enemy is a bacterial bug that makes lactic acid.

"What these organisms do is they also compete with the yeast for the sugar," said von Keitz. "But instead of making alcohol, they make primarily lactic acid."

If enough of the bacteria are present, von Keitz said fermentation can be ruined.

"It gets acidified to the point that the yeast is no longer able to properly produce ethanol, and then you're stuck with a big batch of corn mash," said von Keitz.

If that happens, there's no ethanol and no profit. To prevent the problem, producers rely on medicine. [More]

Given the enormous pressure to reform our food safety regulation system, antibiotics in distiller's grains is about the last thing this industry needs.  The case against for sub-therapeutic use of antibiotics is not all that firm to begin with, and predicated almost entirely on economic arguments: it finishes livestock - especially cattle - faster with higher feed conversion, ostensibly lowering the price for meat.  Or maybe not.
The European Union has already banned non-therapeutic use of antibiotics in farm animals, but each year lobbying by agribusiness in this country dooms legislation that would do the same. On Tuesday, Rep. Louise M. Slaughter (D-N.Y.) introduced a bill that would restrict the use of antibiotics that are important to human health in farming operations. The medications could be used to treat illness, but not as a growth promoter or as a substitute for cleaner living conditions. The bill might have a better chance of passing now, with a stronger Democratic majority in Congress.

The timing is right in other ways as well. In January, the Department of Agriculture -- responsible for promoting the meat industry as well as consumer health -- reported that, except during the nursery stage for young pigs, the costs of using preventive or growth-promoting antibiotics slightly outweighed the economic benefits for farms. That's not counting the added costs to consumers in prescription prices for more exotic antibiotics or the $4 billion a year this country spends to combat resistant infections. Some farms are successfully using better sanitation and tracking of illnesses among their herds instead of preventive antibiotics. [More]
The problem is sharp-penciled business analysis is at risk of seeming cold and way too similar to what was heard from business tycoons before the current financial fiasco.  However true, I think a message of "Cheaper trumps everything else" won't work as well as it has previously.  And the example of EU livestock indsutry provides a too-convenient comparison for concerned consumers.

Consequently, a new food safety regulatory body located outside the USDA could be a real coup de grace for the ethanol industry unless the world economy lifts oil prices much higher than they are. And that could be where we are headed, much to the dismay of the ag lobby.

The report calls for the immediate consolidation of food safety leadership within the Food and Drug Administration (FDA) and ultimately the creation of a separate Food Safety Administration within HHS.  Currently, no FDA official whose full-time job is food safety has line authority over all food safety functions.  A speedy effort by the Obama administration to consolidate leadership within FDA, followed by Congressional action to create a separate Food Safety Administration, would both ensure immediate progress on food safety and create a platform for long-term success in reducing foodborne illness.  [More]

Given the range of problems facing the ethanol industry, it is hard to imagine that legislative efforts alone can solve all the issues.  But right now, that is the only hammer, so look for massive lobbying on every front.

But unless we can start distilling really, really cheap ethanol to compete on price alone, the future does not look promising.  And the fastest way to lower the cost of production for ethanol is to shear the investors such as we are now doing.

Even then, losing much of the value of the byproducts could be a non-recoverable casualty, and also the final straw in the ethanol EROEI debate.


ThomasMoore said...

If antibiotics are not used in the ration the amount of corn will have to go down.

John Phipps said...


It's been while since I fed cattle, but I agree with your comment. A lot will depend on the definition of ionophores (sp?) (Rumensin) as antibiotics or not.

The ration would not be as "hot" without it, but would that simply lengthen the finishing period using about the same amount of corn more slowly?

Anonymous said...

It's an interesting development to follow. I had heard from some in the swine industry that they were seeing fewer pigs born alive from sows on a ration with DDG's, so that producer had stopped using DDG's. I know of a grain producer who is organic and is also in the know on some research, he says DDG's make a better fertilizer than feed. I wonder when the industry will follow the Braziallian example and burn the DDG's to operate the ethanol plants.