VeraSun Energy halts opening of third ethanol plant this month

In North Dakota, VeraSun Energy delayed a 110 Mgy corn ethanol plant in Hankinson, citing “current volatility in the market” as a reason for halting work on the plant, which was scheduled for opening next month.   “Ethanol is currently being sold at a deep discount to unleaded gasoline, which has caused us to delay the startup of these facilities until the outlook for ethanol selling prices and overall margins improve,” said Don Endres, VeraSun’s chief executive officer.

CNN Money commented that corn prices have settled at $7.475 per bushel, up almost 80 percent this year although down from nearly $8 a week ago, adding that Citi analyst David Driscoll warned that ethanol production could fall by up to 5 billion gallons per year in the next 12 months from planned levels due to high corn prices.

Corn crisis background

Earlier this month, VeraSun Energy said that it would delay the opening of two plants under construction in Welcome, Minnesota and Hartley, Iowa. The company said that it would continue construction on three plants, citing financial conditions for the delay. ICM president David Vander Griend commented “The best plant to shut down is one you haven’t started yet. With ethanol priced $1 a gallon below gasoline on the rack and corn futures hitting $7.50 today, the numbers just aren’t there.”

Corn futures passed $8 per bushel for the first time this month, prompting fears of an ethanol wipeout. Analysts downgraded BioFuel (BIOF), VeraSun Energy (VSE) and Archer Daniels Midland (ADM), among speculation that many ethanol plants, both operating under construction, would be closed or hibernated for the duration of the price crisis.

Heartland Ethanol announced that the company has scrapped plans to build seven 55 Mgy corn ethanol plants in Illinois, and will be dissolving the company, as a result of rising feedstock prices. The 385 Mgy multi-project cancellation is the largest yet announced as fallout from the Midwestern floods that have pushed up corn futures more than 30 percent in under a month. VeraSun Energy announced earlier in the week that it would delay construction at two plants representing 220 Mgy in capacity.

Credit Suisse analyst Mark Flanney dropped his 2008 ethanol capacity forecast from 10,000 Mgy to 9500 Mgy as a result of the feedstock crisis. The Renewable Fuel Standard requires 9 billion gallons of ethanol to be blended this year and 11 billion gallons in 2009. Meanwhile, the Renewable Fuel Association said that 400 Mgy in production capacity had been sidelined by the floods.

The US Department of Agriculture revised its 2008 corn crop forecast to 11.735 billion bushels, a 10 percent drop from 2007 and a 3 percent drop from the May forecast, owing to cold weather and rain. The report said that 2008 corn inventories were expected to drop to 673 million bushels by early 2009, a drop of 12 percent from last year. The weekly crop summary indicated that 89 percent of the annual corn crop had emerged, nine percent less than the 2007 rate. In other news, the USDA projected that soybean production would jump 20 percent from last year, but planting was also running more than 10 percent behind last year’s schedule owing to bad weather.

Wells Fargo Senior Agricultural Economist Michael Swanson projected that US farmers would plant 88 million acres of corn in 2008, and that demand in Nebraska from ethanol producers would exceed 1 billion bushels.

The USDA’s Office of the Chief Economist released 10-year projections for agriculture. The online version is available here. The report projects a very strong outlook for world agriculture including high petroleum and energy prices, a profitable outlook for corn-based ethanol, increased global interest in biofuels production, falling US soy production, and a reduction in meat production through 2013 before a return to growth in 2014.

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