LITTLE ROCK — U.S. ethanol production is headed for its first decline in 16 years, jeopardizing the nation’s drive to boost alternative fuels, as higher costs and lower demand close plants.
Shrinking distilling margins have resulted in a 14 percent drop in output this year to 827,000 barrels a day, or 12.7 billion gallons annually, according to the U.S. Department of Energy.
At that level, annual production would be 500 million gallons short of the amount refiners are mandated to use under a 2007 law that calls for escalating consumption of the biofuel and would be the first yearly decrease since 1996. Ethanol accounts for about 9.2 percent of total gasoline consumption, according to the Energy Department.
As many as 10 companies, from Valero Energy Corp. to Biofuel Energy Corp., have closed distilleries after the worst drought since the 1950s sent the price of corn to record highs just as gasoline demand slumped. President Barack Obama’s administration has until Nov. 13 to decide whether to agree to calls from governors — including Arkansas Gov. Mike Beebe — and a bipartisan group of lawmakers to suspend the law, which was the centerpiece of George W. Bush’s plan to wean the U.S. off oil.
“It’s an ugly situation that continues to get worse,” said Jason Ward, an analyst at Northstar Commodity Investments LLC, a Minneapolis-based risk management company that specializes in agribusiness and renewable fuel. “The margin simply isn’t enough to run full capacity or in some cases even at all. You can lower the standard, but the market is going to take care of itself.”
Although ethanol, made in the United States by fermenting starches from corn to create an alcohol similar to moonshine, has gained 6.4 percent this year to $2.344 a gallon on the Chicago Board of Trade, that’s not enough to make distilling it profitable. Prices are down 12 percent from a year ago.
On the basis of December contracts for ethanol and corn, producers are losing about 36 cents on each gallon of the biofuel they make, according to data compiled by Bloomberg. They were earning 24 cents a gallon a year ago.
“Right now it is the toughest time ever to run an ethanol plant,” said Bruce Babcock, an energy and farm economist at Iowa State University in Ames. “It’s never been this bad in the last four years.”
More than a dozen producers, including Brookings, South Dakota-based VeraSun Energy Corp., once the largest American distiller, filed for bankruptcy protection over an 18-month period starting in October 2008.
The 2007 law enacted under President Bush, known as the Renewable Fuels Standard, requires refiners to mix 13.2 billion gallons of biofuels, such as ethanol, with gasoline in 2012 and 15 billion by 2015.
In its latest Short-Term Energy Outlook yesterday, the Energy Department estimated that ethanol production will fall to 13 billion gallons next year, 5.6 percent below the 13.8 billion consumption target.
The 2012 corn harvest in the United States will is projected to total 10.706 billion bushels, the lowest in six years, the U.S. Agriculture Department said Oct. 11. About 42 percent is expected to go toward ethanol. Last year farmers grew 12.358 billion bushels, and 40 percent was used to make the biofuel.
The governors of Arkansas, North Carolina, Maryland, Delaware and Georgia and a bipartisan group of legislators in both chambers of Congress asked the federal Environmental Protection Agency, which governs the program, to suspend the biofuel mandate because of its potential impact on food prices because of the smaller corn crop.
EPA Administrator Lisa Jackson has 90 days from the Aug. 13 date when Beebe, a Democrat, filed the waiver request. Beebe’s request said the summer drought had a severe economic impact on Arkansas’ poultry and cattle sectors.
The threshold to suspend the program — evidence that it’s causing economic harm — isn’t likely to be met, and the Obama administration may also be hesitant to cross farm-state lawmakers in the Corn Belt, including Iowa, the nation’s largest ethanol producer, said Divya Reddy, an analyst at Eurasia Group in Washington.
“It’s a constituency that’s in every party’s interest not to antagonize,” Reddy said. “The political side makes it very complicated.”
The drop in output hasn’t been enough to draw down a supply glut of the fuel, said Garret Toay, founder of Toay Commodity Futures Group LLC in Clive, Iowa.
Stockpiles slumped 5.6 percent to 18.1 million barrels in the week that ended Nov. 2, 10 percent higher than a year earlier, according to Energy Department data. Inventories reached a record 22.7 million barrels in March.
The situation is being exacerbated by imports from Brazil, where ethanol is made mostly from sugar cane, said Mike Blackford, a consultant at INTL FCStone Group in Des Moines, Iowa.
Imports in the week ending Nov. 2 averaged 60,000 barrels a day, compared with none a year earlier, government data show.
New Energy Corp. said this week that it stopped production at its 28-year-old plant in South Bend, Indiana, because making the additive has become unprofitable.
Valero, the biggest U.S. refiner by processing capacity and the third-biggest ethanol producer, idled distilleries in Albion, Neb., and Linden, Ind., until it’s profitable for the plants to make the fuel, Bill Day, a company spokesman based in San Antonio, said in late October.
Three of the company’s distilleries are operating at reduced rates until margins improve, Valero said last week on a conference call with analysts and investors. Valero has capacity to produce 1.2 billion gallons of ethanol at 10 plants.
That followed Bunge-Ergon Vicksburg LLC’s announcement to temporarily shutter its Mississippi ethanol mill by Nov. 30. Biofuel Energy, a U.S. producer of the additive partially owned by venture capitalists David Einhorn and Daniel Loeb, said in September that it closed its operation in Fairmont, Minn.
Southwest Georgia Ethanol LLC shut its mill in Camilla, Ga., possibly until next year’s corn harvest if necessary, the company said Oct. 24.
Abengoa SA, a Spanish engineering and renewableenergy company, resumed output at its Madison, Ill., ethanol mill after temporarily idling it in October for maintenance and because of poor margins.
“They’re going to run until they can’t or the banks say otherwise,” Toay said. “Eventually it will cure itself. You slow down ethanol production so much that it rations supply.”
Business, Pages 71 on 11/11/2012