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Squeezed ethanol markets could trigger industry shake-up

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The ethanol industry could be set for a shakeup, thanks to squeezed margins, the head of US agribusiness The Andersons said.

Speaking to investors, Pat Bowe, chief executive of The Andersons, said that industry consolidation and asset transfers could be on the cards.

The group's ethanol business is currently running below the cost of production, due to the very low cost of the corn-based biofuel, as global energy prices plummet.

Front-month ethanol futures are currently trading at $1.350 a gallon in New York, less than half their 2014 highs.

Consolidation ahead?

"There might be some consolidation," said Mr Bowe, noting that some producers "aren't as well capitalised".

"Obviously when you have difficult times like we've had in ethanol margins of late, that causes a lot of concern," he said.

"There will likely be assets that will trade, I would say, in the coming year or so.

Low profits

The Andersons' ethanol hit record production volumes in 2015, but low margins meant the segment delivered just 28.5m pre-tax profits, compared to $92.3m in the previous year.

In 2015 "steadily weakening oil and gas prices put pressure on margins," said John Granato, chief financial officer of The Andersons.

And the weakness looks set to continue for the time being.

"Market conditions in ethanol are very challenging in the first three months of 2016, as oil and gasoline prices put downward pressure on margins," said Mr Bowe.

He also warned of "some additional pressure early in the year" thanks to higher local corn prices at some of their facilities in the eastern Corn Belt, after dry weather in that region.

Margins disappear

So far this year, The Anderson's ethanol cost of production has been below breakeven, Mr Bowe said.

But Mr Bowe saw better conditions in the April to June period, as competing plants began to close down for scheduled maintenance, helping to support margins.

"We also expect to see increasing driving miles, with these low gas prices as we head into the summer," he said.

Shares in The Andersons in New York fell 10.8% on Thursday, to $24.01, after the company reported falling sales and profits.

By Agrimoney.com

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