Mont Vista comments on ethanol for Bloomberg
Spending Curbs May Slow Ethanol Boom, US BioEnergy's Ommen Says
By Bruce Blythe
March 1 (Bloomberg) -- The U.S. ethanol industry may fall short of its expansion plans as soaring corn prices cool banks' willingness to finance new plants, the head of the nation's second-biggest producer of the fuel said.
The rally in corn futures to a 10-year high has trimmed
ethanol-production profits and may "temper" investor enthusiasm
to complete existing projects or begin planned ones, said Gordon
Ommen, chief executive officer of US BioEnergy Corp. Ethanol
production is forecast to double to almost 12 billion gallons by
2010, according to the Renewable Fuels Association.
There are "indications of the debt financing and the equity
financing markets backing up a little bit, which could slow
things down on some projects," Ommen, 48, said in a telephone
interview yesterday. Financing is "tightening down. Some of the
banks are getting their portfolios full of ethanol plants."
Shares of US BioEnergy, one of three U.S. ethanol companies
to sell shares to the public last year, are down 7.4 percent from
a $14 IPO price in December. VeraSun Energy Corp., the third-
largest producer by capacity, has tumbled 26 percent since its
In addition to less-receptive capital markets, there also
may not be enough construction crews, engineering expertise and
equipment to go around for all the new projects, Ommen said.
Ommen, a licensed pilot, said he's seen "anecdotal"
evidence of this while flying his Cessna 182 aircraft between
company offices in Inver Groves Heights, Minnesota, and
Brookings, South Dakota.
One recent trip revealed an empty construction site where previously ground was broken for a new plant, Ommen said. He declined to identify the site.
"We've seen people move dirt, and all of a sudden, we'll
fly over the site and there's nobody working," he said "I'm not
sure where all the workers went, but they used to be there."
"Are all those plants going to get built? I think that's
open for debate," Ommen said. "There may be some that are `all
hat and no cattle."'
Financing and construction hurdles may hinder President
George W. Bush's efforts to boost use of so-called renewable
fuels and ease what he's termed the nation's "addiction" to
imported oil. Bush, in his State of the Union address Jan. 23,
called for a fivefold increase in use of renewable fuels over the
next 10 years.
The current federal mandate, known as the Renewable Fuels Standard, requires 7.5 billion gallons of biofuels use by 2012.
Ethanol producers' costs have increased with the surge in
corn prices, which on Feb. 26 reached $4.5025 a bushel in Chicago
futures trading, the highest since June 1996. Most ethanol in the
U.S. is made from corn.
U.S. ethanol prices have reached the highest level in seven weeks as crude oil rallied and refiners and fuel blenders expanded use of the grain-based additive in gasoline. Ethanol averaged $2.2121 a gallon as of yesterday, the highest price since Jan. 11, based on data from distributors in Des Moines, Iowa, and other Midwest locations.
That's got ethanol investors "a little nervous," said
Tyler Krutzfeldt, a managing director at Miami-based Mont Vista
Capital LLC, a renewable energy consultant.
"The contraction of the margins will slow new plants being
financed," Krutzfeldt said. He said he knows of at least six
pre-construction ethanol projects that were recently scuttled
because of cost concerns.
Still, US BioEnergy is moving ahead with its expansion plans
on expectations ethanol will be playing an increasing role in the
nation's motor-fuel supply, Ommen said.
The company plans to spend about $880.5 million on as many as five new plants, which will quadruple its ethanol production capacity to 1 billion gallons by 2009, according to a government filing in December. It may also buy other distilleries, Ommen said.
With the December opening of its third distillery in Albert
City, Iowa, US BioEnergy became the nation's second-largest
producer by capacity at 250 million gallons a year, trailing only
Archer Daniels Midland Co. A fourth distillery in Ord, Nebraska,
is expected to open during the second quarter.
"There's going to be substantial growth in the industry,
and we think that's a good thing," Ommen said. "Over the long-
term, it's a good business to be in."
Shares of US BioEnergy, which is part-owned by CHS Inc., an
agricultural processor and cooperative, and by Ron Fagen, who
runs Fagen Inc., one of the largest ethanol plant construction
and design firms, fell 4 cents to $12.98 in Nasdaq Stock Market
Currently, there are 114 operating U.S. ethanol distilleries have capacity to make 5.63 billion gallons a year, according to the Renewable Fuels Association.