In the ethanol industry's infancy, small, locally owned plants were the way for farmers to capitalize on a booming industry.
Then, all of a sudden, Wall Street found out there was money in ethanol and jumped on board.
Today, the industry is struggling due somewhat to the global economic recession and bad gambles made by certain players. Wall Street is shying away from ethanol as it deals with its own financial turmoil.
- Financial crisis slowed inevitable consolidation phase
- Poet, ADM interested in buying troubled plants
- Only one-third may survive next few years
Speaking at the American Bankers Assn.'s Agricultural Bankers Conference in November, Mark Lakers of Agribusiness & Food Associates said as many as 40 ethanol plants could be bankrupt by early next year of the roughly 175 plants currently under construction or on line.
Logan Caldwell, president of Houston Biofuels Consultants, added that the ethanol industry "is not immune to the laws of supply and demand" as it sifts out players who are not profitable.
The biggest player, VeraSun, is already bankrupt. It owns 16 plants in the Midwest (Map).
Ian Horowitz, energy analyst for Soleil Securities Group Inc., explained that VeraSun had a "foot on the floor and became too big too fast".
VeraSun took an aggressive approach earlier this year and acquired US BioEnergy.
VeraSun continually told Wall Street that it was a "spot market player" in the corn market, but this summer, the reality of its hedging mistakes clearly proved that statement wrong.
"They really strained their balance sheets. That pushed them over the edge. I'm not sure what their situation would have been like today had they not done all the aggressive acquisitions," Horowitz said.
The fate of VeraSun remains unknown, but there is speculation about whether it will be sold in pieces or as a whole.
VeraSun released a statement Nov. 24 saying it "received a nonbinding, unsolicited indication of interest with respect to the purchase of substantially all of its assets".
The company said it plans to pursue the interest and evaluate other proposals in accordance with its obligations under the bankruptcy code.
Also on Nov. 24, Jeff Broin, chief executive officer of leading ethanol producer Poet, said his company was in "serious discussions with a couple of ethanol producers regarding possible acquisitions."
Both VeraSun and Poet cited "confidentiality considerations" in not releasing the names of other parties involved in negotiations.
Broin added that his company has remained "profitable despite the current economic challenges facing the ethanol industry thanks to careful risk management and proprietary technology that makes our process for producing ethanol extremely efficient".
If Poet does acquire VeraSun or other distressed plants, the site selection for its plants must be the right fit.
Archer Daniels Midland Co. (ADM) CEO Patricia Woertz made similar statements in a recent quarterly call, saying ADM is open to acquisitions if the location and economics support the decision.
This implies that, if purchased by a particular party, not all of VeraSun's plants or other troubled plants may come back on line.
The credit crunch also has stifled the acquisition process.
"If it hadn't been for the financial crisis, greater consolidation would have been much more likely in the short term," Caldwell said.
"The lack of credit is making it difficult to come in and buy a plant for those who want to consolidate."
ADM has a diversified balance sheet to support the company when it loses money on corn processing, as it did in the third quarter, whereas many publicly traded ethanol companies do not have that luxury.
Horowitz said a total of 55 private, or non-publicly traded ethanol companies, were on line at the beginning of 2008, with another 23 plants expected to come on line throughout 2008.
Publicly traded companies are typically larger plants that produce more gallons, but they represent a smaller number of actual plants.
Horowitz said he made the mistake of calling for the death of small cooperatives at the turn of 2007-08.
"The older vintage plants have the ability to weather a lot more volatility than the guys who came in and built 110 million-gallon plants," Horowitz noted.
The smaller outfits often buy local corn, sell ethanol locally, have no debt on their balance sheets and pay nothing to CEOs.
Horowitz said their profit margins might be smaller, but profits go directly to the bottom line.
Lakers believes the number of ethanol producers will be reduced from 150 companies to 50 in the next three to five years.
Previously, in order to consolidate, ethanol producers bought for the assets.
Today, prices have come down to more reasonable levels at considerable discounts.
Horowitz said he expects that in the years ahead, new owners will purchase unfinished plants and take them to the finish line.