Taking the Pulse of the Industry

The storyline for the ethanol industry in 2009 and 2010 was increasing health and maturity
By Holly Jessen | June 10, 2011

After the turmoil of 2008, the past two years have brought much improved conditions for the ethanol industry. Through its Biofuels Benchmarking program, Christianson & Associates PLLP has the statistics to back that up, showing it was a period of healing.  “The data suggests that 2009 and 2010 provided a substantial recovery for the ethanol industry,” says John Christianson, principal partner with Christianson & Associates. “Management was focused on strengthening their balance sheets to prepare their companies for future volatility.  Companies want to be in a position to weather the storms that may arise.”

The Willmar, Minn.-based accounting firm recently released its 2010 benchmarking report. In its second year, the report is a summary of information gleaned from those ethanol producers participating in the program that Christianson & Associates has offered since 2003, says Paula Emberland, business analyst for the company. For 2010, a total of 63 ethanol plants participated, an increase of 10 from the previous year. Average production was 68.9 MMgy, with 44 participating plants classified as small and 19 as large.

Jon Buyck, a business consultant for Christianson & Associates, says managers at newer plants—many of whom have backgrounds in the grain and petroleum industries—have become very adept at correlating the purchase of grain and ethanol. “I think their management has matured a lot in the last two to three years,” he says.

Christianson agrees. “We are seeing the industry maturing and a thirst for information as companies are analyzing how their performance compares to their peers,” he says.

By the Numbers
In general, balance sheets strengthened quarter by quarter from 2009 through 2010. In the first quarter of 2009, the average ethanol plant had more liabilities than net worth. By the end of 2010, thanks to consistent profits and debt reduction efforts, the average plant had improved its net worth substantially. In 2010, despite soaring feedstock prices in the second half, ethanol producers increased profitability by about 8 cents per gallon. This was due, in part, to increased ethanol and coproduct netbacks as well as the low price of natural gas and reduced costs for items like chemicals and administration.

From Dec. 31, 2008, to Dec. 31, 2010, total liabilities expressed as a percentage of assets decreased from 52.79 percent to 42.97 percent, and total equity grew from 47.21 percent to 57.03 percent. With better profitability and increased working capital, long-term debt steadily declined. In the first quarter of 2009 ethanol plants had 60 cents per gallon in long-term debt, while by the fourth quarter of 2010 that number had decreased to 40 cents per gallon. Participating ethanol plants saw an improvement of 5 cents per gallon in working capital—the difference between current assets and current liabilities. “This additional liquidity has led to a reduction in interest expense per gallon by 3 cents per gallon from 2009 to 2010 and ultimately helped plants be more profitable in 2010,” the report says.

Due to a number of factors, the grind margin was the most stable since 2007, with margins in 2009 and 2010 nearly equal. The margin for industry leaders dropped 1 cent to 47 cents per gallon grind margin in 2010 and the average increased 1 cent to 38 cents a gallon. The laggards, plants with below average results, went up 2 cents to 28 cents per gallon. Looking at grind margin on a quarterly basis showed that in 2010 it only varied 3 cents while in 2009 the variance was 5 cents. “The grind margin improved throughout the industry in the second half of 2010 … and has continued trending upward into 2011 according to data recently collected,” the report says.  

While not the biggest cost for an ethanol plant, stable and historically low energy prices have had a positive effect on grind margin and profitability. Notably, energy expense to ethanol revenue settled at about 7.7 percent in the fourth quarter of 2010—the lowest it has ever been since the benchmarking program started in 2003. In 2008, energy expense to ethanol revenue was at about 15 percent for most of the year. On the other hand, energy usage per gallon of ethanol produced stayed about the same in 2010. “The industry appears to have hit a plateau for energy consumption gains, until a technology improvement enters the marketplace en masse,” the report says. “Currently, the biggest difference between the leaders and average is the leaders typically produce primarily WDGS.”

Another, more significant factor in profitably and healthier balance sheets, was decreased volatility, Buyck says. Unlike in 2009, commodity prices—sugar, corn, ethanol and gasoline—were generally all correlated to each other in 2010. That allowed producers to employ successful risk management strategies. 

Specifically, corn and ethanol prices were nearly perfectly correlated, says Brad Saeger, also a Christianson & Associates business analyst, characterizing the past two years as a period of healing for the ethanol industry. That allowed ethanol plants to buy commodities on the spot market. “Essentially in the past, ethanol and corn didn’t always react exactly the same, which caused for greater fluctuations in profitability,” he says. “In 2010 the commodity prices acted very similarly, reducing the risk to the industry and stabilizing profits.”

There weren’t any cases of ethanol plants being long on corn or short on ethanol, Buyck adds. In other words, plants didn’t own or price any corn that they hadn’t already sold ethanol against. “People were taking a lot less risk in the industry,” he says. “They were correlating their corn to their ethanol and not going out and taking high risk corn futures.”

The combination of reduced volatility plus more equity and less debt may mean new capital investments. Producers are once again considering a variety of potential projects. “Technological improvements are now back on the table,” Saeger says, “whereas two years ago, those were just nonconversation starters because lending did not exist.”

The report also delves into a regional analysis of how ethanol plants in the east, west and central U.S. performed in various areas, such as grind margin, ethanol netback, feedstock cost and more. Christianson will share the analysis at the International Fuel Ethanol Workshop & Expo on the afternoon of June 29 during a panel called Qualifying For and Selling Your Fuel into New Markets.

Economies of Scale
Last year’s report from Christianson & Associates revealed that ethanol plants smaller than 60 MMgy were actually slightly more profitable than larger plants. With some exceptions, that proved true in 2010 as well—something that could raise a few eyebrows. “When it comes to production capacity in a manufacturing setting, common theory suggests that more is better,” the report says. “However, in looking at two groups of ethanol plants based on production capacity, we find that more production does not necessarily mean more profitability.”

Small plants had higher revenues and higher overall margins in the past two years when viewing ethanol and coproduct netbacks together. Part of that has to do with DGs supply. Because a smaller plant isn’t flooding the marketing with DGs and driving prices down, it is able to maximize the local market. The smaller plants are more likely to sell WDGS, which resulted in a 2 cent per gallon coproduct sales advantage over large plants. In addition, smaller plants located near a good customer base will have a freight and competition advantage—not having to ship long distances and compete for customers worldwide, the report suggests.

On the other hand, large plants had an advantage over small plants in 2010 in the areas of labor, administrative expenses, depreciation and energy. For example, large plants lagged behind small plants in the area of overall net income with realized hedging in 2009 but pulled ahead of small plants by 2 to 3 cents in 2010. Another area where large plants showed improvement over smaller plants was in feedstock costs, ending up with a slightly lower cost per gallon in 2010. That’s quite significant, considering feedstock acquisition averaged 72.6 percent of total plant costs.

Large plants outperformed small plants in labor costs during both 2009 and 2010, ending up with a 1.5 cent per gallon advantage. Current operating systems allow  monitoring of a plant, large or small, with the same team size, the report explains. Other areas of a plant also require the same amount of employees to do the job whether large or small. In administrative expense, which includes office supplies, memberships, dues and professional fees, but not administrative labor, large plants had a consistent advantage of half a cent per gallon over small plants. “Generally, the administrative expense has declined steadily amongst the industry participants in the last two years reflecting some of the operating efficiencies gained as the industry matures,” the report says. “This is due in part to tight margins and increased efficiencies of staff. In many cases, as staff members have left, other members have matured and taken on additional responsibilities.”

Large plants brought in nearly 4 cents more net income than smaller plants before any other income and expenses per gallon. However, once other income, such as the small producers tax credit, was added into the equation smaller plants actually had a 1 cent per gallon advantage over larger plants in net income with realized hedging per gallon. Large plants also lagged behind small plants in grind revenue in both 2009 and 2010. On the other hand, they had a lower grind expense than smaller plants in 2010. “Thus, it appears that in 2009 and 2010 the large plants are improving and benefitting from the economies of scale as one would expect as they adjust to the industry and continue to work on efficiencies,” the report says.

Benefits in Participation
One plant that signed up for the benchmarking program is Adkins Energy LLC, a 43 MMgy ethanol plant in Lena, Ill. Adkins Energy has subscribed to the service for the past five years, says Ray Baker, chief financial officer for the plant, and has used the information to help identify areas that need improvement and track progress toward that improvement. “The ethanol industry is becoming increasingly competitive and the C&A Benchmarking program provides a valuable tool to help us measure our operational and financial performance against various segments of the industry,” he tells EPM.

It’s something he would recommend other ethanol plants use to their advantage. The most valuable part of the benchmarking program is the staff of Christianson & Associates, who are dedicated to constantly improving the service, he explains. “Their responsiveness to our questions and requests has always been great and helped to add value to our operations,” he says, adding that as the ethanol industry has evolved, so has the online system of the benchmarking program, the data collected and the reporting capabilities.

That value seems to be reflected in the number of ethanol plants using the service. The first year Christianson & Associates offered its Biofuels Benchmarking program only eight ethanol plants subscribed—a number that grew to 63 in 2010. Participating plants enter production and financial data on a secure website every quarter. In return, the data is analyzed and reports are generated that help those plants identify areas for improvement. “It offers real-time analytic information quarterly,” Saeger says. 

The benchmarking program is a tool that allows management and board members to measure the plant’s production and financial situation, as well as identify areas for improvement. “It’s pretty hard to make an improvement if you don’t know where you are sitting currently, and you need to measure those improvements going forward,” Emberland says. It can serve as a catalyst for producers to start asking themselves questions about where they are and researching what others are doing. “I always tell every plant not to look at where you excel, but look at where you are not the top of the list,” Buyck says.

A secondary benefit has to do with the annual report the company has developed the past two years. That report summarizes some of the most interesting information collected during the year-long benchmarking program. In recent years, it seems the ethanol industry has had a large target painted on its back and it’s nice to be able to provide some statistical information to the media to help combat misinformation. “The benchmarking program allows plants to put their information together so we’ve got good statistics to put out there in the public for the industry and we can show a good reflection of what’s happening,” Emberland says.

Author: Holly Jessen
Associate Editor, Ethanol Producer Magazine
(701) 738-4946
hjessen@bbiinternational.com