Bumper profits threaten US ethanol support - Financial Times

Article by Gregory Meyer - Feb. 16, 2014

The US ethanol industry is enjoying bumper profits again, placing it in an awkward position as it battles plans by the Obama administration to scale back government support.

Plentiful corn, the main US ethanol feedstock, and foreign demand from sugarcane ethanol-rich Brazil have allowed refiners such as Archer Daniels Midland, Green Plains Renewable Energy and Valero to sharply increase output and biofuel incomes. The US is the world's biggest ethanol producer.

Their robust financial health contrasts with the bleak tone industry groups have adopted in response to the US Environmental Protection Agency's proposal to reduce ethanol blending requirements for the first time.

Growth Energy, an ethanol lobby group, warned last month that the EPA's proposal will have a "significant adverse impact" on the industry, forcing plants to close, thousands to be sacked and billions of dollars in revenues to disappear.

Green Plains, which annually sells more than 1bn gallons of ethanol, trebled net income in the fourth quarter of last year and expects the first half of 2014 to be its strongest on record.

"Ethanol margins have expanded and demand is better than we've ever seen it," Todd Becker, chief executive, told the Financial Times. While the government mandate is in the best interest of industry, "as a company, our perspective is we can compete in any environment", he added.

The biofuels division at Archer Daniels Midland, which makes more than 1.7bn gallons of ethanol per year at six plants, swung to a $134m operating profit in the fourth quarter, from a $94m loss a year earlier. "We are expecting strong margins going into 2014," chief operating officer Juan Luciano told analysts this month.

Valero, also the biggest oil refining company, reported a $269m operating profit at its ethanol division in the quarter, its highest ever.

The strong performance comes despite a stagnant domestic market. The Energy Department forecasts drivers will consume about 135bn gallons of petrol this year, which leaves room for about 13.5bn gallons of ethanol blended at the usual 10 per cent rate. EPA has proposed slashing the corn ethanol mandate for the first time to 13.01bn gallons this year, down from the 14.4bn legal requirement.

Net ethanol exports have filled the gap, rising 24 per cent in 2013 and flowing to countries including Canada, the Philippines, Brazil and the United Arab Emirates.

"It is a broad spectrum of countries, and the list is getting bigger. The US is very competitive," said Soren Schroder, chief executive of Bunge, which produces ethanol in at sugar mills in Brazil and has a stake in a US corn ethanol refinery.

Scott Irwin, an agricultural economist at the University of Illinois, said: "It's difficult for me to construct a scenario where these proposed rules have anywhere near the kind of dire implications for the US domestic industry that lots of arguments have thrown around."

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