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GREEN PLAINS INC

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Green Plains : Ethanol Industry Reels as Trade Dispute and Policy Changes Cut Demand

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09/04/2019 | 07:52am EDT

By Jacob Bunge and Kirk Maltais

The ethanol industry is suffering from weaker prices and oversupply as that pillar of the farm economy has been hurt by regulatory changes and the trade dispute with China.

Producers of the corn-based fuel additive, including Green Plains Inc. and Poet LLC, have closed plants over the past year in Indiana, Iowa, Minnesota and other states. Companies such as the grain giant Archer Daniels Midland Co. are scaling back their ethanol business.

"This is probably the worst downturn we've seen in the industry's history," said Geoff Cooper, chief executive of the Renewable Fuels Association, a trade group for biofuel makers.

Ethanol is a celebrated cause in rural America, where roadside signs hail corn farmers' role in helping the U.S. wean itself from foreign oil. The federal mandate for oil refiners to blend ethanol into gasoline, established in 2005, helped turn the ethanol sector into a $28 billion industry and created a major new source of demand for crops. About 38% of corn grown in the U.S. is used to make ethanol, according to the Agriculture Department.

Demand this year has been hurt in part by regulatory exemptions for U.S. oil refiners to blend ethanol into gasoline. The ethanol industry says such exemptions unfairly benefit oil companies at its expense. The Environmental Protection Agency said it weighs refiners' requests against regulatory requirements.

Also hurting the industry is the trade dispute. China has halted ethanol imports from the U.S. that last year totaled 53.9 million gallons. That is less than 1% of U.S. output, but China was the fastest-growing foreign market for U.S. ethanol, according to the Renewable Fuels Association.

The combination of factors has led to increased supplies of ethanol, lower prices for the biofuel and higher losses for producers, according to people in the industry. The resulting plant closures are leading to job losses and reducing corn demand in rural areas where President Trump has drawn strong support.

In Cloverdale, Ind., farmer Kim Ames sells about three-quarters of his corn crop to a nearby Poet ethanol plant. After Poet said last month that it plans to close the plant, Mr. Ames said he would have to sell his grain to poultry producers in the Southeast, who tend to pay less. Ethanol plants can pay higher rates than animal-feed makers because they typically need a guaranteed supply to fulfill supply contracts with gasoline makers and maximize efficiency.

"Ethanol was good for me, it was good for this community," Mr. Ames said.

Ethanol futures fell during most of this summer. Since rising in June, ethanol traded on the New York Mercantile Exchange has dropped 21% to $1.35 a gallon. Prices for corn, the main ingredient in ethanol, have fallen 21% in that time.

A survey conducted in August by the trade publication Farm Journal after the EPA granted waivers to 31 refiners to reduce their ethanol use found 71% of 1,153 farmers polled approved of Mr. Trump's performance, down from 79% in July.

Green Plains' Chief Executive Todd Becker, who introduced Mr. Trump at an Iowa campaign event in early 2016, said the farmer vote was the president's to lose. "They're not voting for someone else, but they do have to show up and vote for Trump," he said in an interview.

American Farm Bureau Federation President Zippy Duvall said he urged Agriculture Secretary Sonny Perdue to address the ethanol industry's struggles in August.

"It's our job to remind the administration of the risks, and how important it is," Mr. Duvall said.

An EPA spokesman said ethanol production and exports have grown during the Trump administration to a record high in 2018. The administration in May allowed the year-round sale of gasoline with a higher ethanol mix, aiming to boost ethanol producers and the farmers who supply them. President Trump said on Twitter last week that he would do more to help the ethanol industry, while also aiding oil refiners.

"It will be a giant package, get ready!" he said.

Brazil said Monday that it would increase its ethanol import quota to 750 million gallons, up from 600 million. The move is expected mostly to benefit U.S. ethanol producers, although groups such as the U.S. Grains Council criticized Brazil for not securing a deal to eliminate the quota.

U.S. ethanol consumption declined last year for the first time in over two decades. Ethanol producers have on average lost money on every gallon produced since July 2018, according to estimates from Iowa State University. Four plants have halted operations since May. In addition to saying it would close the Cloverdale plant, South Dakota-based Poet reduced production at 14 other plants, while laying off workers.

ADM's bioproducts division, which includes ethanol, lost $100 million over the first six months of 2019. The Chicago company plans to separate some of its ethanol-producing mills into a stand-alone business that it could sell or spin off.

Omaha, Neb.-based Green Plains last year closed a plant in Virginia and sold three others to Valero Energy Corp. In August, Green Plains reported a $45 million loss in its latest quarter, estimating that the company lost 24 cents on every gallon of ethanol produced during the period.

Near Maricopa, Ariz., where Pinal Energy LLC idled its 50-million-gallon-a-year plant in February, livestock producers once fed leftover grain from ethanol production to their animals. Now they are hunting for pricier alternatives, said Eric Wilkey, president of Arizona Grain Inc., a sister company to Pinal.

"There's a cost of not having a local supply," he said.

Write to Jacob Bunge at jacob.bunge@wsj.com and Kirk Maltais at Kirk.Maltais@wsj.com

Corrections & Amplifications

This item was corrected on Sept. 6, 2019 to show that the U.S. Grains Council criticized Brazil for not eliminating a quota on imports of U.S. ethanol. An earlier version incorrectly said the council had criticized President Trump for not securing a better deal from Brazil in the 17th paragraph.

Stocks mentioned in the article
ChangeLast1st jan.
CBOT ETHANOL FUTURE (EH) - CBR (FLOOR)/C1 -1.43% 1.378 End-of-day quote.7.28%
GREEN PLAINS INC -0.18% 11.08 Delayed Quote.-15.33%
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Financials (USD)
Sales 2019 3 234 M
EBIT 2019 -136 M
Net income 2019 -160 M
Debt 2019 491 M
Yield 2019 4,54%
P/E ratio 2019 -2,76x
P/E ratio 2020 -11,5x
EV / Sales2019 0,28x
EV / Sales2020 0,28x
Capitalization 424 M
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