Ethanol plants buy sugar at discount
The U.S. Department of Agriculture said Friday it sold sugar to domestic ethanol makers at an almost 90% discount.
The sale was the third this year under a government program outlined in the 2008 farm bill that aims to boost prices for the sweetener.
The program requires the agency to buy sugar and sell it to domestic biofuel producers if it believes sugar processors might default on their government operating loans. When processors default, they forfeit sweetener that was put up as collateral. The most recent sale took nearly three-quarters of the sugar in the USDA's possession off its books after processors defaulted on loans at the end of September.
For refiners, the sale provides a cheap feedstock at a time when ethanol prices are low. Futures rebounded only recently from three-year lows hit earlier this month, as a record U.S. corn harvest flooded producers with supplies. Ethanol futures traded Friday at $2.035 a gallon, well below the summer's high of $2.744 a gallon.
But most ethanol plants run on corn, and switching to sugar isn't always easy. Sugar is more volatile than corn and highly flammable. The sweetener can be abrasive to a plant's equipment, and its processing could violate local permits for air emissions.
"We've had a chemical engineer working on (adapting some of the equipment for sugar) for the last month, so it's not necessarily a simple process," said Mark Beemer, president of Aventine Renewable Energy Inc., a Pekin, Ill.-based producer that bought 165,250 tons of sugar between the September and November sales, the most of any ethanol maker.
All of the plants that bought sugar in the three sales factored some kind of retrofitting into their bid prices, which was part of the reason the USDA has been selling the sweetener at a discount to the sugar processors' loan rates.
Another reason for the steep discounts in the USDA sales is that the pool of bidders isn't very large. Most U.S. ethanol plants are in or near corn-growing areas of the U.S., like Iowa and Illinois, which are typically far from the sugar-cane and beet growing areas, like Florida and North Dakota, which has reduced participation in the sales, industry experts said.
Aventine, Pacific Ethanol Inc. and CIE bought the combined 216,750 tons that the USDA sold this week. The three also purchased the sweetener in the September sale.
Pacific Ethanol, a Sacramento, Calif.-based producer, bought the most sugar from the USDA in its September tender--about 84,000 tons that primarily had been forfeited by Amalgamated Sugar Co., an Idaho-based sugar-beet processor that defaulted on $17 million in government loans at the end of September.
That sugar is located less than 10 miles from Pacific Ethanol's Idaho plant--the major factor in its decision to purchase the sweetener, said Neil Koehler, the company's president and chief executive. Pacific Ethanol paid between 3.5 cents and 4.5 cents a pound for that sugar and plans to start mixing it into its corn feedstock next month, after it finishes installing a tank that will feed the sweetener into the plant.