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Calm before another ethanol storm?

Agriculture.com Staff 06/17/2009 @ 7:03am

Two years ago at the Fuel Ethanol Workshop in St. Louis, it was standing room only at the workshop on hedging and locking in what were high margins. Tuesday, the breakout session on "understanding true risk management" at the 2009 Workshop in Denver wasn't quite so crowded.

The St. Louis workshop was crowded with potential investors as well as farmers who own ethanol plant stock and memories of $2 a gallon profit margins were fresh. As Will Babler of First Capital Risk Management put this year, "You just as well could have owned an ethanol plant as the Denver Mint because they were really throwing out cash."

Today, an industry with capacity to make 13 billion gallons is putting out only about 10.5 billion gallons after several companies, including one of the largest, VeraSun Energy, went bankrupt.

As several analysts explained, the plants that didn't hedge a margin, faced big losses. Some were long the futures market in corn, but weren't protected by sales contracts or hedges for the ethanol they made. When corn prices crashed in late summer and fall, they faced heavy losses.

Privately, some in the industry were critical of the advice offered by some market analysts and brokers. Hedging a margin is difficult when ethanol futures contracts are thinly traded and when fuel blenders are unwilling to offer contracts for ethanol more than a few months out.

But with some ethanol capacity idled and gasoline prices rising ahead of ethanol prices, margins a better than a few months ago.

"I think we're sort of in the eye of the storm right now," Logan Caldwell of Houston BioFuels Consultants, LLC, told Agriculture Online. Net margins on ethanol these days are positive, maybe 5 cents a gallon, he said, compared to losses of 5 cents a gallon or worse a few months ago.

Some apparent recovery in the economy and the seasonal gas price increases that come every summer, along with idled plant capacity, are giving the surviving ethanol makers some breathing room. But when the summer driving season ends, the possibility of lower fuel prices could squeeze the industry again, especially if more plants ramp up production.

No one expects to see $2 a gallon margins in ethanol again any time soon.

Mike Blackford of FCStone said he believes margins for the ethanol industry are more likely to resemble those of soybean crushers.

"The market is maturing, which leads us back into a typical processing type margin," he said.

Two years ago at the Fuel Ethanol Workshop in St. Louis, it was standing room only at the workshop on hedging and locking in what were high margins. Tuesday, the breakout session on "understanding true risk management" at the 2009 Workshop in Denver wasn't quite so crowded.

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