With Consolidation Comes Strength

Consolidation is making the ethanol industry stronger, writes Mike Bryan. Companies that do not consolidate can still survive or even thrive but they are more vulnerable to changes in the market and commodities price changes.
By Mike Bryan | September 25, 2014

The consolidation of the ethanol industry is happening fast and, as a result, it is a stronger industry than it was even 10 years ago. Consolidation brings financial strength, greater vertical integration and diversification. It was the individual farmers who built this industry one plant at a time. Now even those individual farmers are banding together and buying other ethanol plants and consolidating their base.

A few examples of consolidation are cooperatives like Big River Resources. They began in 1992 in West Burlington, Iowa, with one plant. The cooperative now owns four plants and employs 240 people. Poet had a humble beginning in Wanamingo, Minnesota, in 1983, and it now operates 27 ethanol plants that produce over 1.7 billion gallons annually. Valero, based in Houston, Texas, owns 11 ethanol plants across the United States with capacity to produce over 1.3 billion gallons of ethanol annually.

Consolidation happens in every industry, because in today’s world, it’s difficult to compete as a small stand-alone operation unless the conditions are ideal. With consolidation comes the ability to have ready cash to take advantage of opportunities as they arise. Often consolidation provides the ability for cost- saving vertical integration and product diversification. This allows companies the ability to capitalize changes in market conditions and shift production towards growth markets.

I’m not inferring that unless an ethanol plant is part of a larger cooperative or corporation, it cannot survive or even thrive. What I am saying is that they are more vulnerable to changes in the market, to rises in grain prices or reductions in oil prices or both, simultaneously.

Vertical integration helps not only the multiplant conglomerates but the individual stand-alone plants as well. Corn oil extraction provides the opportunity to add another product line. A number of ethanol plants are now exploring biodiesel production with the extracted corn oil. As the cellulosic technology continues to develop, ethanol plants of all sizes will be able to extract more ethanol per bushel by converting the cellulose contained in the distillers grains. This will provide an even better, higher-protein distillers grains that is worth more per ton.

There is strength in numbers, and owning multiple ethanol plants allows for greater consistency in the production process, as well as the consolidation of maintenance procedures and increase purchasing power to help keep costs down. When you are negotiating for unit trains of grain it’s almost always more cost-effective than negotiating for truckloads of grain.

So, while the individual stand-alone plant still can flourish, we will likely continue to see continued consolidation. I believe, in the long run, this consolidation will be what keeps the industry strong and profitable, with greatly improved economies of scale.

That’s the way I see it.

Author: Mike Bryan
Chairman, BBI International
mbryan@bbiinternational.com