CHICAGO -- The U.S. ethanol industry does not expect to repeat its stellar financial performance of 2006 this year, but investors think business will remain profitable despite easing oil prices and a surge in corn values.
There has been no cutback in ethanol production or scrapping of plans to build more plants even though profit margins have slipped since last year, analysts said.
"Generally speaking 2006 was a very good year for the ethanol industry. There was an abomination of anomalies that came together to do that...," said Monte Shaw, executive director for Iowa Renewable Fuels Association.
The association is a proponent of alternative fuels like ethanol and biodiesel, made from vegetable oils, in a state that is a top producer of corn and soybeans.
While crude oil prices soared last summer, ethanol prices neared $3.50 per gallon in the Chicago spot market just as the CBOT corn futures market sputtered around $2.30 per bushel.
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Markets then whip-sawed, with crude oil and ethanol tumbling as investment funds bought Chicago Board of Trade corn futures, boosting prices above $3.50 to a 10-year high in November on its way to the current level of just above $4.00 per bushel.
"This year, because of the forward contracting of both (ethanol) inputs and outputs, I think will be a good year but it's not going to be 2006," Shaw said. "We may never see another year like 2006."
Despite heightened concern about ethanol profitability, there is no sign plants have reduced production, JP Morgan Chase Bank said in a research note to clients this week.
Given energy price forecasts, 2007/08 ethanol demand for corn should remain large, JP Morgan said.
Don Roose, an analyst and president of U.S. Commodities, Des Moines, Iowa, said he is an investor in five separate ethanol plants and the profitability of each plant varies.
There has been no slowdown in ethanol production per plant and there have not been any plans to scrap building of new ethanol plants, Roose said.
Shaw said plants 30 miles apart could have a different profitability depending on how they manage the risks.
"If plants locked in a lot of their corn before it went up they're going to do a lot better than their neighbor who thought they were going to buy at the harvest low and there wasn't one," he said.
Experts said it is short-sighted to look at the spot or cash price of ethanol, crude oil or corn as an indicator of profitability for an ethanol plant because most ethanol deals are struck six months to a year or more in advance.
The cash or spot price for ethanol in Chicago was $2.08 per gallon as of Feb. 9, down from $2.50 in early January and sharply below $4.33 per gallon at the end of June 2006.
"We're not keeping track inch-by-inch in each place because it's a job in itself keeping track of all those averages such as who has the best bid (for ethanol)," Roose said.
"It's kind of a competitive situation, kind of like the various corn bids here and there," he said.
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