This past winter, Archer Daniel Midlands Company announced that it would be closing its Walhalla, North Dakota ethanol plant and, in April, it shuttered operations at the site. In a Wall Street Journal article last week, Ethanol’s Long Boom Stalls (subscription required), some of the challenges of the corn ethanol industry were revisited, including how the industry is slumping.
In a recent post by Alan Novak, he discussed the Renewable Fuels Standard (RFS) and how a drop in gasoline demand is slowing demand for ethanol. This poses a problem because during the second half of last decade, ethanol production capacity tripled as federal government mandates and tax breaks spurred construction. There was a seeming race to finish line to fill the gallons required by the RFS.That race is now over and the ethanol supply has met, and perhaps exceeded demand, and smaller plants like the 30-million gallon Walhalla ethanol site are being idled or shut down. Because corn ethanol profitability is sensitive to corn prices, proximity to corn, and proximity to ethanol distribution, plants on the margin will be pressured to improve or shut down.
To add to these pressures, there is new ethanol capacity in the pipeline from advanced biofuels producers like INEOS Bio and second-generation cellulosic plants from DuPont and POET.So is the Walhalla plant closing a harbinger of things to come? It’s certainly an indicator that the industry is in flux. For example, a feed company is in talks to purchase the site, not for the ethanol, but for the plant’s capacity to produce the byproduct, Distiller’s Dried Grains with Solubles (DDGS), a key feed ingredient.
As far as the industry is concerned, current market conditions should make all ethanol producers look at efficiency and productivity gains to improve their margins. Even though ethanol has been around since the 1980s, it hasn’t had to go through much consolidation as the RFS mandate was always larger than capacity. Now that the ethanol pool is filled, some industry “right sizing” is in order. In the end, the industry will be more productive as a result.