On Credits, Risk and the Future

By Luke Geiver | July 15, 2010
Extension of the Volumetric Excise Ethanol Tax Credit is the most important issue facing the industry today, said John Urbanchuk, technical director for Entrix Inc., one of many speakers at FEW who referenced the biodiesel industry's struggles with the lapse of its tax credit. Urbanchuk, whose recent study shows 112,000 jobs will be lost should VEETC not be extended, also highlighted the main reason for the credit. "The RFS2 says you've got to use ethanol, it doesn't say you have to produce ethanol." The failure to extend the credit would allow foreign producers to provide us with a product we can already produce within our own borders, according to Urbanchuk. Because VEETC acts as a domestic fuel production incentive, he added, foreign investors may look elsewhere to start a production facility without the incentive to produce in the U.S. If words weren't enough, Urbanchuk also provided a number. "Without the extension," he said, "there will be an 86 percent decrease in industry profitability." A VEETC expiration would push the industry into survival mode.

Other speakers in the business/management track presented varying views of the future. "You are either green or growing or you are ripe and rotting," said Britta Bergland, senior analyst for Merjent. Mark Lakers, president of Agribusiness & Food Associates LLC PLLP, summarized the possible paths an ethanol facility can take in 2011-'15 as either consolidation, getting out now, or survival. "Survival is not a plan at all," he said.

Predicting what might happen is often risky, but not preparing for the future is riskier still. Tom Wapp, commodity price risk manager from United Bioenergy, emphasized that each plant must understand it has a unique fingerprint when planning risk management. A plant in Minnesota must deal with different variables than one in a different region, he said, naming five key characteristics each plant should identify to reveal its fingerprint—goals and objectives, corn origination, ethanol marketing, distillers marketing, and natural gas purchasing. "Avoid the temptation to compare yourself with other plants unless you know that their fingerprint is identical to your own," Wapp said. He also noted the importance of setting goals and parameters for the management team, which is then given the green light to operate within those parameters, even within a quickly changing environment. The best place to be is in a neutral position as an opportunistic margin hedger, he added, carrying short corn futures to offset cash purchases as needed. When margins opportunities do appear Wapp said, buy corn futures back and sell ethanol swaps. This may also include buying natural gas and selling distillers in the cash market, futures and/or OTC market. Ultimately Wapp said, a plant needs to "plan the work, and work the plan," to be successful.

John Christianson, principal for Christianson & Associates, agreed with Wapp's depiction of what makes a plant successful, reiterating that companies that have done well have a clear sense of direction and empower the staff to head in that direction. "With all the uncertainty, we have to analyze where we want to go and what we want to do," Christianson said. The place to be, he said, is where a plant can maximize grind margin components. The Minnesota-based company's "Biofuels Benchmarking Report" compares many of these components by region.

Reports like Christianson's and Urbanchuk's and the insights of industry insiders are necessary for the success of the industry and will play a large role in the future, regardless of what happens this fall with VEETC. "I think we can tell the truth about the ethanol industry "and work for data that will help fight the battle," Christianson said.