Why are first-gen biofuels companies having so much trouble making money?

October 9, 2012 |

Yesterday, Renewable Energy Group, the leading US biodiesel producer, announced unexpectedly that it now expects to report Adjusted EBITDA ranging from a loss of $2 million to a loss of $7 million. The company’s prior guidance for Adjusted EBITDA was a gain of $10 million to $15 million. The company expects to report gallons of biodiesel sold in a range of 60 to 63 million, compared to prior guidance of 55 to 60 million.

The good news

REG CEO Daniel Oh said that “Despite these fluctuations in our markets, we remain optimistic about the long-term prospects for REG and the biodiesel industry. The recent finalization of the [1.28 billion gallon biodiesel obligation for 2013] provides growing demand for the next year. Our flexible feedstock technology gives us a long term advantage as a low cost producer, since we can adjust to fluctuations in feedstock prices. Furthermore, REG continues to have a strong balance sheet with cash to sustain our growth strategy.”

What’s going on?

In biodiesel, the change in REGI guidance is directly related to movements in commodity prices, a steep depreciation in the price of RINs and tighter margins than expected.

On the ethanol side, it’s been commodity margins that have led to rough times. Caused, in turn by drought-induced steep corn prices, falling gasoline demand and the resulting overcapacity in ethanol production leading to surplus ethanol stocks.

Accordingly, Biofuel Energy announced in late September that it has decided to idle its Fairmont, Minnesota ethanol facility until further notice. The plant ceased ethanol production as of the end of last week. The Company reported that its second plant in Wood River, Nebraska continues to operate.

Low-cost ethanol capacity

Company Symbol Capacity (mgy) Market cap ($M) Value / gallon
Pacific Ethanol PEIX 200 43.62  $0.22
Biofuel Energy BIOF 220 39.69  $0.18
Aventine Renewable Energy AVRWD 312 5.34  $0.02
Green Plains Renewable Energy GPRE 740 179.71  $0.24
Ethanol total 1472 268.36  $0.18
Renewable Energy Group REGI 201.58 220  $1.09

The market caps on publicly traded pure-play ethanol stocks are averaging $0.18 per gallon of installed capacity, a fraction of the construction cost. Biodiesel is down on the weaker outlook for REGI, but still substantially better.

Relief in sight?


Date Corn Ethanol Ratio
Dec-12 7.460 2.385 0.32
Mar-13 7.462 2.376 0.32
May-13 7.400 2.397 0.32
Jul-13 7.342 2.391 0.33
Sep-13 6.580 2.31 0.35
Dec-13 6.300 2.191 0.35

For first-generation ethanol capacity, there’s marginal relief in sight starting in mid-2013 when corn prices are expected to climb down from the $7.40 range – first falling to $7.34 next July, according to the futures price at CBOT this week, and then falling into the mid-$6 range by September. But, with ethanol prices expected also to fall, there are modest improvements expected in the ethanol-to-corn price ratio, but it’s not exactly time to strike up “Happy Days Are Here Again”.

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Category: Fuels

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