The Way I See It

November 1, 2007

BY Mike Bryan

It has been a difficult summer and early fall for some ethanol producers. Their landscape is changing just like the seasons. With ethanol prices lower than they have been the past two years and capital costs required for building new plants soaring, many new facilities are struggling.

Lenders continue to tighten requirements with some now requiring 60 percent equity. Bloated capital costs have driven the per-gallon construction costs back to where they were in the early 1990s, and the price of corn seems to be holding steady. Add to this the disparity between gasoline and ethanol prices, and it clearly indicates a temporary glut of ethanol.

It could be a long, chilly winter for some producers who have yet to pay off major debt. As a result, a number of projects that are in the planning stage have been put on hold. For those producers who have either paid off a major portion of their debt or are debt-free, the winter may not be quite as bone chilling.

With costs for a 50 MMgy ethanol facility well in excess of $100 million, the equity requirements are staggering. Often, local equity of $15 million to $20 million can be raised, leaving $50 million to $70 million required to meet the debt-to-equity ratio. Good projects will continue to receive bank financing, but the equity spread between local investment and total equity requirements is where the difficulty lies.

To begin an equity drive in the current conditions may be unwise. Once an equity drive is held and if the required equity isn't obtained, it is substantially more difficult on the second round. While many who have seen the ups and downs in this industry over the years have never been more confident in the future, some are now advising folks to hold off on the development of their projects. However, at this stage, no one is recommending canceling good projects.

The good news is that we have been through this many times before and will likely go through the same thing in the future. The market will catch up with production, just as it has in the past. With oil prices holding steady and consumption not significantly decreasing, it doesn't take a great deal of imagination to know that the continued growth in the ethanol market is a certainty.

So be prudent with your resources, and know that just as the seasons change, so will the economics of this industry. Remember that ethanol is a strategic component of our energy pool. Perhaps the economics have temporarily changed, but our future hasn't.

Mike Bryan
Publisher & CEO
mbryan@bbibiofuels.com

Advertisement

Advertisement

Upcoming Events

Sign up for our e-newsletter!

Advertisement

Advertisement