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Ethanol plants may be in 'deep jeopardy'

Agriculture.com Staff 10/08/2008 @ 12:50pm

Riding closely on the coattails of the macroeconomic meltdown underway in the U.S., the ethanol industry, some say, could be in "deep jeopardy."

Pratt, Kansas-based Gateway Ethanol, LLC, filed for Chapter 11 bankruptcy protection earlier this week, citing investor debt and insufficient operation funds for the closing of the plant that's been in operation for around a year.

Reports indicate Gateway, in filing for reorganization protection in the U.S. Bankruptcy Court of the District of Kansas on Sunday, noted that its assets and debts range between $50 million and $100 million. Creditors include Cargill, whose credit investment in the plant totaled around $7.38 million, according to reports.

This week's action by Gateway may indicate a trend is underfoot, driven by larger macroeconomic woes. Just how each company and ethanol plant is affected by today's economic downturn depends on a few key factors, according to Midwest Grain Processors board chairman and Belmond, Iowa, farmer Dave Nelson.

"We're going to see a lot more [plants close], especially plants built in the wrong place. Probably the next batch that is going to have trouble is the newly started plants where they're going to be undercapitalized," Nelson says. "Ninety-nine percent of the ethanol plants started in the last 10 years have been undercapitalized.

"I think today, one fourth of the industry is in deep jeopardy. Some have just plain run out of cash," he adds.

Beyond today's general economic malaise, more specific market factors like the prices for crude oil and cash corn are chipping in to the troubling ethanol outlook. Traders now say that CBOT corn futures are directly tied to crude oil prices that are trending sharply lower.

"Right now, there's no margin in the business. Crude oil affects things a lot. Ethanol moves right along with gasoline, and now corn's been tracking energy a lot the last couple of years," Nelson says. "What burned up so much cash in the ethanol industry was the sharp decline in corn prices in July, when corn went down about $2.50 in two weeks."

Add to that an already "nonexistent" credit market for ethanol plants, and it could be a lethal combination for some plants. "There were only about five banks lending to the ethanol industry in a big way, and their portfolios are all full on ethanol risk, so now they're trying to shed that risk," Nelson adds.

Riding closely on the coattails of the macroeconomic meltdown underway in the U.S., the ethanol industry, some say, could be in "deep jeopardy."

While industry members and market-watchers say more plants could fall victim as the nation's economic troubles continue, though how many plants or gallons of ethanol lost remains unclear. What is clear, however, is the order in which ethanol industry stakeholders will feel the fiscal sting, says Iowa State University Extension value-added agriculture specialist Don Hofstrand.

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