U.S. Ethanol Producers' Profitability Curtailed by Excess Capacity and Blend Wall

According to a new special report issued by Fitch Ratings today, several factors are curtailing near-term profitability for U.S. ethanol producers. Profitability is currently constrained by excess ethanol distillation capacity. This situation has been exacerbated by recent ethanol capacity additions and a limit on production as the U.S. ethanol industry approaches the 'blend wall', currently capped at E-10 (a maximum 10% blend of allowable ethanol in gasoline).

'Higher blend rates or more vigorous growth in gasoline demand will be needed to achieve the industry growth outlined by the Energy Independence and Security Act of 2007', according to Wesley E. Moultrie II, Senior Director.

An increase in the allowed maximum ethanol standard in the gasoline pool from E-10 to E-15 would raise the blend wall and increase allowed blending volumes in the industry. An interim step such as E-11 or E-12 would also be positive for ethanol industry profitability. While an increase has not yet been approved by the Environmental Protection Agency (EPA), it is under consideration, with a ruling possible this summer.

Broad product and geographic diversification should allow the major agribusiness companies to endure weak ethanol profitability for a short period. Corn-based ethanol is a very small part of Bunge Limited's and Cargill, Incorporated's product portfolios. In contrast, Archer Daniels Midland (ADM) has made a long-term commitment to the U.S. corn-based ethanol industry, and is one of the largest U.S. ethanol producers.

'ADM could sustain short-term periods of weak or negative ethanol profitability without rating implications, as long as its other segments were performing satisfactorily and liquidity was ample,' said Judi Rossetti, Director. 'Nonetheless, ethanol earnings are likely to be pressured for the remainder of 2010, or until higher blends are implemented in a meaningful way.'

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source: benzinga