Profits Improve at Neeley Biofuels
Submitted by DTN Ethanol Blog
.S. Ethanol Margins Could Take a Hit as More Production Comes OnlineBy Todd Neeley
DTN Staff Reporter
OMAHA (DTN) — Though the hypothetical Neeley Biofuels Inc. ethanol plant in South Dakota has recently crawled out of a seven-month net-profit hole, one expert said the industry as a whole will struggle to stay profitable through much of 2009 as more U.S. plants come online and production continues to outpace demand.
About one week ago Neeley Biofuels’ 50-million-gallon plant recorded a positive profit margin of around 25 cents per gallon as corn prices dropped by more than $1 a bushel in less than a month to around $5.15, before spiking to around $5.45 in this latest update.
Yet the profits rollercoaster continues, and as of July 30, Neeley Biofuels recorded a net profit of about 6 cents per gallon.
Though the latest numbers are less than stellar, the change represents a 44-cent improvement since July 1 when Neeley Biofuels paid nearly $7 a bushel for corn.
Eitan Bernstein, an analyst with capital markets company Friedman, Billings, Ramsey & Company, Inc., based in Arlington, Va., wrote in a July 18 research report that overall ethanol profitability is expected struggle for the foreseeable future.
“Our updated supply/demand data suggest that the U.S. ethanol market is now in oversupply and will likely remain in that condition until demand catches up with available supplies in late 2009,” Bernstein wrote. “This suggests ethanol production margins will face increasing downward pressure, and the producers’ earnings will be negligible. Additionally, cash flow concerns will continue.”
FBR tracks publicly traded ethanol companies VeraSun Energy Corp., Aventine Renewable Energy and Pacific Ethanol.
One good indication of struggling profit margins, Bernstein said, is Brookings, S.D.-based VeraSun’s decision to delay the startup of two of its plants in Hartley, Iowa, and Welcome, Minn.
In recent weeks the U.S. industry pushed production capacity up to around 9.8 billion gallons, with that capacity to reach upwards of about 13 billion gallons sometime in early 2009.
“Ethanol is an attractive, low-cost gasoline additive for petroleum refiners and blenders,” Bernstein wrote in his report, “but with most of the major metropolitan centers already blending ethanol and the Midwest approaching saturation, future consumption growth will have to come from smaller, coastal markets, which will take time.”
Donna Funk, a certified public accountant with Kennedy & Coe in Salina, Kan., which provides profitability and other consultation services for about 10 ethanol plants, said the clients she works with have had a profitable month despite all the concerns.
“July was going to be tighter,” she said. “But they have been consistently in positive margins.”
Funk said part of the reason many producers are staying in positive territory is because many of them locked in both lower corn prices and good ethanol prices long before the recently tight economics.
The reason why Neeley Biofuels continues to ride a rollercoaster, she said, is because the hypothetical plant bases its profit numbers on volatile swings in the cash markets for corn, ethanol, natural gas and dried distillers grains.
Other producers that have been in the business for two to four years, Funk said, still might have cash on hand from the ethanol profit heyday seen about 18 months ago.
Neeley Biofuels benefited from a drop in the average DTN corn price paid by South Dakota ethanol plants from $6.74 on July 1 to about $5.45 on July 30.
In addition, the plant’s profitability improved as a result of a significant decrease in what it paid for natural gas on July 30 compared to July 1. On July 30, Neeley Biofuels paid about $9.08 per million British thermal units for natural gas, a drop of about $4.26 since July 1.
On the ethanol-sales side, the plant did see a drop in the average rack price paid in South Dakota from about $2.72 on July 1 to around $2.63 on July 30.
From July to October 2007 the plant was in negative territory, but profits rebounded to as high as 18 cents in January; since the middle of January, however, the plant had been reporting a net loss.
The hypothetical plant was established in DTN’s ProphetX Ethanol Edition as a way to track ethanol industry profitability and see how the changing market is affecting the plant’s net-profit margin per gallon of ethanol sold — the difference between total costs and revenues.
To compute net margins — what’s left in profits after all costs are deducted — DTN used industry-average figures from Iowa State University economist David Swenson. These included annual labor and management costs of about $2.9 million, transportation costs of $10 million, debt-servicing costs of $7.8 million and depreciation costs of $8 million and maintenance costs of $800,000.
Though Neeley Biofuels is paying nearly $16 million in debt-service and depreciation costs on its plant — or about 32 cents per gallon of ethanol produced — many real plants are not in debt and are more profitable. If Neeley Biofuels was not in debt, it would have been operating at a net profit of about 38 cents per gallon on July 30.
Those plants that are seeing profits hover slightly above break-even, Funk said, most likely are looking at ways to develop additional revenue streams within their plants.
This could include installing dry fractionation systems to separate out the parts of the corn kernel to create additional products, or even to use dried distillers grains as an energy source to run ethanol plants.
