The growth of the U.S. ethanol industry will help producers survive despite withdrawal of government support. The Senate voted to stop the $6 billion federal subsidies for the industry. Minus the import tariff and the loss of 45 cent-a-gallon tax credit could hurt profits, ethanol prices may dip 7% and reduce 20% on margins. Still, its success relies more on fickle market factors. According to analysts, the industry is well supported by the Renewable Fuel Standard and sees it to grow to 36 billion gallons yearly by 2022.
Present producers like POET, Valero Energy Corp and Archer Daniels Midland Co are by and large different from the highly leveraged from 5 years back. Many went bankrupt then when prices fell in increased production. Wiser politicians controlling a staggering deficit would target $6 billion in ethanol subsidies. Most analysts expect support cuts but not a full subsidies removal. Economist Cole Gustafson expects some firms to exit the industry but the greater concern is high feedstock prices.
U.S. corn supplies have been very tight in 15 years whose prices rose to almost $8/bushel. This has forced some plants to reduce production and may close this summer before harvest time. For one, the Bionol plant in Pennsylvania extended its maintenance shutdown due to supply shortage and high prices of corn. With high demand and high sugar prices, ethanol’s 54-cent tariff removal may not daunt producers. Analyst Julie Ward said if next year’s sugar crop is huge and prices come down, it might have an impact. The bigger issue is less corn this summer and that some plants have already shut down, she added.
Job Economia’s Julio Maria Borges said sugar producers may only be able to expand cane estate in 4-5 years and invest in new ethanol plants to improve exports. He said local prices will remain supported by strong demand and only a limited increase in supply. In Washington, tanks and blender pumps for ethanol industry funding so that stations can offer gasoline with a higher ethanol percentage is being debated upon. It has divided the House and Senate but may help increase demand. The Senate wanted producer credit repealed and voted against cutting government funding of “flex pumps” which allow customers to create their own ethanol blend. POET CEO Jeff Broin said more funding is needed and by voting to repeal ethanol tax credit and flex pumps funding, the Senate came close to a reform package supported by the ethanol industry. With no new pumps in supply, the recent approval of 15% ethanol to gasoline blend could be futile. Analyst Divya Reddy said the industry has been operating in the last few years with the notion that at the very least the subsidies are going to be scaled back. So, they’ve focused on how to guarantee demand, Reddy added.