Ethanol Industry to Cut Overcapacity as Federal Subsidy Ends

NEW YORK -- Some ethanol producers who rushed to increase inventory ahead of the Dec. 31 expiration of the federal tax credit are now facing lower profits, and potential forced plant shutdowns, according to a MarketWatch report. The frenzy of production resulted in ethanol inventories of 21 million barrels, an all-time high up 7 percent from February 2011.

At the same time that the excess production was in full swing, export demand for ethanol weakened, as did domestic demand for gasoline, in which ethanol is blended. As a result, biofuel futures last week were down 11.6 percent from the same time one year ago. Some ethanol producers, such as Green Plains Renewable Energy Inc., have already announced reduced production schedules, with further reductions possibly yet to come.

Ethanol producers have said that the supply overage is temporary and will be burned through in a matter of months, MarketWatch reported. Industry officials took a similarly optimistic stance as the subsidy drew near, noting that the ethanol industry is more mature now than when the tax credit first came into effect.

However, reaching normal supply levels will require both recovering export demand and a seasonal jump in domestic gasoline usage, according to ESAI Inc. analyst Sander Cohen. "The glut is more likely to stick around than go away," Cohen said.

In the past, inventory gluts have resolved through growing demand due to federal requirements for ethanol use. But with producers already blending gasoline with 10 percent ethanol, there will be less room for demand to grow domestically. Multiple producers also have predicted less export demand in 2012, primarily due to the weakened currency of Brazil, which bought approximately 40 percent of U.S. ethanol exports last year.

Still, not all predictions are negative; in a recent conference call, ADM Chief Operating Officer Juan Luciano acknowledged the shaky outlook, but predicted "a little bit of a pickup in the ethanol margin" by the end of the current quarter.