1st signs of consolidation in US ethanol industry

The Associated Press
Published: November 25, 2008

SIOUX FALLS, South Dakota: The first salvo may have been fired this week in a long-awaited shakeout for the U.S. ethanol industry.
VeraSun Energy Corp., the No. 2 ethanol producer, announced it had received an unsolicited takeover bid one month after seeking bankruptcy protection, and just hours after the nation's biggest producer, Poet LLC, said it was talking with other companies about buyouts.
Neither Poet nor VeraSun will say if the two are negotiating a deal. VeraSun made the announcement just hours after Poet Chief Executive Jeff Broin told The Associated Press that his company was talking with a number of producers.
"They are one of the larger private guys that would have the necessary capital to actually do this," said Cory Garcia, a Houston-based senior research associate with Raymond James & Associates.
Todd Alexander, a New York partner in the renewable energy group of law firm Chadbourne & Parke, said a likely scenario would pair an existing producer with an outside financial partner.

"There have been rumors about the oil majors lurking in the shadows and keeping an eye on things," Alexander said. "But I have yet to see them get seriously involved."
"That doesn't mean in the future that they won't."
In recent years as crude prices soared and corn stayed cheap, money flooded into the biofuels sector. With tax breaks and a huge federal mandate to produce more ethanol, the industry appeared more ready than every to compete.
Few foresaw the steepest inflation adjusted price drop for crude in decades, however. The same forces that pushed crude and other commodities higher forced ethanol producers to hedge corn contracts and many locked in prices at or near record highs.
Corn prices, like crude, have since plunged leaving some producers paying well above market prices.
Frozen credit markets have also deprived ethanol producers of much needed capital.
Yet refineries have been built and the consensus is that if someone has the money to operate them, they will eventually pay off.
The country's renewable fuel standard, which was expanded by Congress in 2007, will require a total of 36 billion gallons (136 billion liters) of biofuels to be blended into gasoline by 2022.
Those companies that can make through what has become a very rough patch of near-zero margins stand to profit, Garcia said.
"If this difficult operating environment continues, some of these companies are going to go out of business, and it's going to be easy for these refiners to basically go in and scoop up the remains," he said.
That means the biggest and strongest ethanol companies could become much larger.
"Commodity businesses tend to drive toward economies of scale," Garcia said. "So I don't think this industry's an exception and I think there'll be several large producers."
With slim profit margins already weighing on the biofuels industry, VeraSun found itself short of cash in the third quarter after locking in at higher-than-market corn prices.
Trading of the company's shares on the New York Stock Exchange was suspended on Nov. 3.
Shares of smaller ethanol players such as Pacific Ethanol Inc., Aventine Renewable Energy Holdings Inc. and Biofuel Energy Corp. are trading at a fraction of what they once were, creating an environment in which it may be cheaper to buy an ethanol company than to build new plants.
"I think, quite honestly, some of the plants out there may be stranded capital," Broin said Monday.
Poet, which has been making ethanol from corn for more than 20 years, operates 26 plants that collectively can pump out about 1.54 billion gallons (5.83 billion liters) of the alternative fuel each year — accounting for about 14 percent of America's capacity of 11.05 billion gallons (41.83 billion liters), according to the Renewable Fuels Association.
VeraSun's 16 biorefineries, 14 of which are in operation, can produce 1.4 billion gallons (5.3 billion liters) of ethanol annually, or about 13 percent of the country's total capacity.