Ethanol producer Glacial Lakes Energy riding out the drought

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As drought conditions worsen across the Midwest cornbelt, corn prices are soaring and corn processors — especially ethanol plants — are feeling the pinch.

Local cash prices for corn hovered around $7.40 a bushel Tuesday and ethanol producers like Glacial Lakes Energy (GLE) in Watertown watched as already slim or non-existent profit margins deteriorated further.

The high price of corn is combining with growing corn production concerns and flagging ethanol prices to put ethanol producers in a precarious position.

“Well our margins have been tight or negative for several months now,” Jim Seurer, CEO of Glacial Lakes, said Tuesday.

Another part of the problem, Seurer said, was over-production by plants as they ramped up ethanol output in the final months before the federal blenders tax credit expired at the end of 2011.

“Now everybody’s trying to work that surplus off and it’s just not happening,” Seurer said. “Fuel mileage is also up, so we have a few things working against us.

“May was pretty good (for margins), but June was ugly and I don’t think July is very good.”

Monday, the price of corn on the local market jumped about 36 cents a bushel, a hike that was partially offset by an increase in ethanol prices the same day.

“Ethanol went up 10 cents (a gallon) which, with the way we look at it, would cover 30 cents of the corn increase,” Seurer said. “If corn goes up 3 cents, ethanol has to go up 1 cent to maintain an equal margin.

“So with the 36-cent increase in corn Monday, we didn’t do too bad. We lost about 2 cents (in margin).”

Seurer said GLE weathered the last big increase in corn prices a couple of years ago and came out in pretty good shape.

“We actually did pretty well a year and a half ago when corn was over $7, but then ethanol was also up,” Seurer said. “That’s not happening this time, so the margins are definitely a challenge.

“It’s a two-sided equation.”

After what appeared to be a good start to the 2012 cropping season, the weather that followed is lowering corn production estimates as the heat and dry conditions takes a toll on projected yield numbers and overall crop conditions.

That has ethanol producers also worrying about corn supply this fall as well.

“That’s another challenge,” Seurer said. “Locally, it (the crop) doesn’t look too bad yet, but not too far away (it’s worse).

“I was in Minnesota over the weekend and their corn is looking very good, so that opens up another market for us, but for everybody else, too. It could get pretty competitive.”

The cooperative that owns GLE, Glacial Lakes Corn Processors, also operates an ethanol plant at Mina, an area where crop conditions are worse than around the Watertown area, Seurer said.

“The Mina plant could be hurt,” he said. “But we’re expanding our markets there, too — going into North Dakota and other areas.”

GLE produces about 120 million gallons of ethanol a year and reducing that production or even shutting the doors for a while to save money are ways the plant could try to ride out the corn price surge.

“There are a lot of plants that have shut down or slowed production,” Seurer said. “We’ve looked at those options but, actually, it’s cheaper for us to keep running, so we opted for that.”

He said that may sound strange but there are underlying factors.

“We have fixed costs that are there all the time and rail cars are a big one,” Seurer said. “We’ve got all these rail cars sitting here and we’re paying the lease on them.

“We’ve got the corn here now, so we haven’t got to that point (production cuts) yet.”

The extreme heat of the last couple of weeks has forced occasional cuts in production at GLE because the high temperatures impact the corn fermentation process and production has to slow.

“When it gets too hot, it can kill the fermentation,” Seurer said. “We’ll get a break (from the heat Tuesday and Wednesday), but by the weekend it’s supposed to heat back up again.

“We’ve been running at that 120 million gallon rate and when you look at the economics, it makes sense to do that.”

Seurer said GLE was able to put itself in a good financial position over the last few years and that is helping the plant get through the lean times the industry is seeing today.

“We’ve had a very good run here since May of 2009,” he said. “We generated operating cash of over $130 million, paid down our debt by about $80 million and were able to pay out some (dividends) to our members.

“We also built up a working capital base of about $50 million, so it would be a significant amount of time before we would really be tying our hands. The challenge will be to maintain that base.”

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