Pumping Up Profits With Retail Ventures

By Donna Funk | November 03, 2008
Ethanol plant managers should consider the following: What if my plant could make a few extra million dollars per year? Would I like to take advantage of tax credits and incentive programs that, as a producer, may not be available to my business?

These questions can be answered positively if a plant enters a joint venture with a retail gas station to provide ethanol-blended fuel. With ever-tightening margins it is critical to gain the maximum value for a plant's product. The spread in pricing between what plants currently receive for ethanol versus what consumers pay for gasoline at the pump is not going away. Entry into the retail market is one way to bring some of those dollars back to the plant. Establishing a joint venture with a local fuel retailer who has installed, or is interested in installing, blender pumps could be just the ticket to increasing profits.

For example, if a 40 MMgy plant sells ethanol for $2 per gallon and the consumer pays $4 per gallon at the pump, a $2 per gallon profit isn't shared with the ethanol plant. An investment in that retail location would add dollars to the bottom line of every gallon of fuel sold.

The Internal Revenue Service offers a blender tax credit that is otherwise not available to ethanol production facilities. By partnering with a fuel retailer, a plant can share in the blender credit, depending on how the joint venture is structured. This tax credit can be helpful to both new and operating plants by ultimately reducing federal income tax paid by the facility. Other incentive programs are available at the federal and state levels that can offset some of the cost associated with installing blender pumps.

ICM Inc. recently teamed up with a local fuel retailer to offer regular unleaded fuel as well as E10, E20, E30 and E85 at its pumps. The blender relationship was the brainchild of ICM Chief Executive Officer Dave Vander Griend, who wanted to provide a way for local consumers to use a higher blend of fuel in their car and ultimately increase the overall usage of ethanol.

ICM's partnership with a fuel retailer means it and the station, TJ Convenience, will return the blender tax credit to the consumer. The station purchases ethanol from a plant just over 60 miles away, which also keeps money in the area economy.

The 2009 blender's credit of 46-cents-per-gallon means E10 is 4.6 cents cheaper at the pump than regular unleaded fuel. Thanks to the credit, TJ Convenience can blend the fuel itself, putting more money in its bank while consumers actually realize savings.

Many ethanol plants are considering additional profit strategies. In most cases, it's not a matter of if a blender relationship might benefit the plant but rather when the relationship might occur.

Donna Funk manages the biofuels division of Kennedy and Coe LLC. Reach her at funk@kcoe.com or (800) 303-3241.