GBE presses on despite tightening ethanol market

Economists say the relative price of these three commodities will determine whether ethanol plants planned throughout the country will come to fruition this year.

Market conditions for ethanol producers aren’t nearly as favorable as they were in 2006, when Gulfstream Bioflex Energy LLC of Mount Vernon rolled out its plan to build a $185 million corn-based ethanol plant on 252 acres east of Rogersville. Organizers intend to produce 100 million gallons of fuel-grade ethanol annually.

The Missouri Department of Natural Resources is on the verge of approving an air-pollution permit for the plant – a project that’s still moving forward despite an industry-wide tightening of profit margins and a pending lawsuit by nearby property owners.

When GBE formed two years ago, corn prices were hovering around $2 a bushel, and Gov. Matt Blunt had just signed a law requiring all gasoline sold in Missouri to contain 10 percent ethanol by Jan. 1, 2008.

But late last year, the ethanol market faltered. There was a surplus of the alcohol fuel additive, and corn prices had soared to nearly $5 a bushel. Dwindling profitability prompted Wall Street investors to cut financing for some ethanol plant projects – mainly throughout the Midwest – that were still in the planning stages. For instance, Kansas City-based Alternative Energy Sources Inc. had planned to open three corn-based ethanol plants – two in Illinois and one in Iowa – this year, but financing delays prompted the company to scale back its plan to two plants that would open in 2009. Last month, the company entered a management agreement with a potential buyer, according to Securities and Exchange Commission filings.

Public opinion about corn-based ethanol remains mixed at best, with mainstream media challenging federal subsidies for producers and scientific studies questioning the fuel’s energy efficiency and its ancillary environmental impacts.

“A biorefinery that produces 100 million gallons of ethanol a year would use the equivalent of the water supply for a town of about 5,000 people,” according to an October news release from the National Research Council, a private, nonprofit organization that recently released a report on the impact of domestic biofuel production. “Biorefineries could generate intense challenges for local water supplies, depending on where the facilities are located.”

The study’s conclusion echoes the worst fears of Webster County residents who sued GBE in October 2006, alleging the proposed plant would adversely affect their groundwater supply. A judge, however, ruled in the company’s favor, and the plaintiffs – known collectively as Citizens for Groundwater Protection – appealed. The case is pending.

Permits suggest momentum

GBE executives Charles Luna of Gainesville, Greg Wilmoth of Springfield and Jeff Negre of Aurora have been scarce since the judge ruled in the company’s favor last May. All three men have a business background in trucking and fuel distribution.

Jim Kaiman, a fourth executive from the St. Louis area who briefly replaced Wilmoth as CEO last year, told Springfield Business Journal he’s no longer affiliated with GBE. Kaiman, who said he’s not an investor in the ethanol plant, referred all questions to Luna, who declined to comment. Wilmoth and Negre could not be reached for comment.

GBE initially submitted an incomplete air-permit application to DNR in February 2007, but later filed a revised application in July. DNR Permits Section Chief Kyra Moore said the permit will receive final approval this month.

DNR won’t actually issue the permit until GBE pays the required review fees, which Moore said are $50 an hour. She said staff typically spends at least 300 hours reviewing air-permit applications for ethanol plants, bringing the fee total to at least $15,000.

Moore said there is a 30-day appeal period after the permit issue date, but grounds for an appeal are limited.

“The appeal would be anything in the permit they believe does not address our rules and regulations,” she said. “It has to be something that the permit is lacking.”

Once the air permit is issued, GBE has two years to begin construction on the site along U.S. Highway 60, Moore said, adding that DNR has approved permits for five plants that are not yet under construction.

GBE has not applied for a site-specific permit that’s required if the company discharges cooling water into retention ponds on the plant site. That permitting process typically takes about six months, said Kristen Pattinson, water pollution permitting and assistance chief at DNR’s Springfield office.

Market gauges

The ethanol industry’s profit potential is a far cry from spring 2006, when prices peaked at nearly $4.50 a gallon.

Ethanol futures are trading at about $2 a gallon, according to the Chicago Board of Trade, and despite a record 13.2 million bushels of corn produced in the U.S. last year, the National Corn Growers Association says corn prices were trading upwards of $5 a bushel last week.

Oil is hovering at about $90 a barrel, down from $100 in early January, according to the U.S. Energy Information Association.

“The financing of ethanol production facilities is mainly market-driven,” said Scott Richman, senior vice president of Informa Economics Inc., a Memphis, Tenn.-based agribusiness consulting firm. “There are some well-positioned plants that continue to receive financing, but the pace has slowed down somewhat. … For 2008, the good news for ethanol producers is that crude oil prices are expected to remain high.”

While private investment in ethanol production is down, Richman said domestic demand for ethanol received a boost from the 2007 Energy Independence and Security Act passed by Congress and signed by President Bush in December. That legislation set a new renewable fuels standard of 36 billion gallons by 2022 versus the previous standard of 7.5 billion gallons by 2012.

“We basically have that much capacity right now,” Richman said.

In Missouri, Gov. Blunt recently proposed a $2 million tax incentive program to increase the number of gas stations statewide that offer E85 fuel, which is 85 percent ethanol and 15 percent gasoline. Tax credits through the proposed program would help offset the cost of installing or modifying pumps to dispense E85, which ranges from $3,000 to $40,000. As of Jan. 3, only 92 of Missouri’s 4,312 service stations were capable of dispensing E85, according to Blunt.

Despite myriad government incentives, planned ethanol plants throughout the country continue to slog toward construction and, ultimately, production, said Chad Hart, an agricultural economist at Iowa State University.

“You did see construction costs go up. You did see the margins for ethanol decline, where it’s a much tighter industry. And you did see more people getting concerned about having an ethanol plant located next to them,” Hart said. “You put all three of those factors together and that explains a lot of why these planned plants are still sitting in the planning stages today.”

GBE’s attorneys told SBJ in October 2006 that the plant would be financed through a combination of private equity groups, senior lenders, subordinated lenders and possibly government incentives, but the current status of the project’s financing is unknown.

In assessing the project’s risk, agribusiness consultant Richman said the plant’s potential investors or lenders would likely view the air permit approval as a plus that would need to be weighed against GBE’s ongoing litigation.

“If that (lawsuit) is perceived as having a good chance of delaying the project or even succeeding, then that would likely be seen as a negative by potential debt holders,” he said.

“They don’t want to take on any more risk than they have to.”