Yes, there is life after tax incentives, ethanol industry leaders say

Written by Jonathan Eisenthal

To paraphrase Mark Twain, rumors of the death of the ethanol industry have been greatly exaggerated. Following the lapse of the 45 cent per gallon federal blender’s credit at the end of 2011, some financial analysts seemed ready to pronounce time of death, but after two quarters standing on its own, the farm-based energy’s vital signs indicate a long life ahead.

So say a group representing four leading ethanol producers who gathered for a panel discussion about the affect of the end of the Volumetric Ethanol Excise Tax Credit, or VEETC (often pronounced Vee-tech).

The panel held its conversation at the beginning of June as part of BBI’s International Fuel Ethanol Workshop, in Minneapolis.

The panel were: Mark Marquis, president and GM of Marquis Energy; Ray Defenbaugh, president and CEO of Big River Resources; Randy Doyal, CEO of Al-Corn Clean Fuels and Walt Wendland, president and CEO of Golden Grain Energy; with Tom Bryan, vice president of BBI International, offering questions to the group.

“It’s a scary time,” Doyal freely admitted, saying that the end of VEETC had no real direct impact on the profitability of his ethanol company, but it signaled very graphically the change in the level of support among lawmakers for grain ethanol production. “This is something for folks to take back home from this conference. We need everyone to get back to contacting their legislators and reminding them what ethanol has accomplished and why it continues to be so important.”

VEETC, which paid the blenders (read oil companies) to use ethanol, was a tool that ensured the movement of product and ultimately helped the ethanol industry grow itself.

“The impact of losing VTEEC hasn’t been as great as the (delay) of E15 to get to the market–they took our incentive away before they gave us the opportunity to grow our market and that’s what is really hurting us,” said Wendland.

In some ways the tax credit became a political liability whose negatives outweighed the economic benefits, because it gave ethanol opponents ammunition for charges that the industry only exists through public support and doesn’t have economic value independent of that support–something all four leaders say this period after the end of VTEEC is proving to be false.

The FEW conference opened with a video message from Sen. Amy Klobuchar who praised the leadership of the ethanol industry, saying that if ethanol can stand on its own, that shows that a mature industry like oil, which realized a trillion dollars in profits in the past decade, can give up government support, and so can many other industries.

“We were a proponent of VEETC going away from early on,” said Marquis. “Our concern was the damage to ethanol’s image.”

One of the practical effects of the way VEETC ended is that ethanol’s main customer–the oil industry–bought up as much ethanol as possible before the credit ran out, to take advantage of the extra revenue for them.

“We had a great fourth quarter (in 2011), but in the first quarter of this year it was a bit of a hangover,” said Marquis. “Since the oil companies bought ahead, there was a glut in the market, and to make things worse, exports haven’t been as vibrant during the first two quarters as they had over the past two years. The financial industry was saying that since VEETC was going away they believed we were in trouble, and they took those two factors to say it looked like we fell off a cliff, but the reality is not that way.”

He noted that indications of a huge corn crop this year are something of a “golden lining” that may bring a much needed boost to margins. Since 2008 some two score of ethanol plants became “distressed properties” that were scooped up by better capitalized businesses. Marquis asserted that benchmarking and the new focus on margins are what keep him in business.

“If we can stay in the top half of the industry, by these benchmarks, we’re going to make it–that’s our theory,” said Marquis. Various experts said in this time period the difference between companies with favorable benchmark metrics versus laggards is 4-plus percent profitability versus losses around three percent.

Big River Resources’s first plant came on line in 2009, and the farmer-owned company has put in writing its intent never to sell the company. The Illinois-based company has grown to four plants in three states and produces 400 million gallons of ethanol each year.

Big River’s Defenbaugh told the audience: “I tell my children, never sell your (farm)land and never sell your ethanol stock. Ethanol stock is what allows you to keep your land. We are the greatest food producing country in the world. We have seen countries where poor government policy has destroyed great food producing capacity. …we can’t allow that to happen here.”

Defenbaugh asserted that politically, the most important item on the agenda is protection of the Renewable Fuels Standard. RFS is the key to ensure farmer prosperity and guarantee the strength of our food production–that’s how fundamental ethanol production is to the health of the farm economy.

 

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