13-06-08 Five US ethanol plants have recently shut on rising corn prices and "fairly massive shutdowns are in the offing," according to Citi analysts who downgraded ethanol stocks.
In a report June 12, the Citi analysts cited a jump in corn prices to record levels above $ 7/bushel that has taken place in the wake of heavy Midwest rains. The US Department of Agriculture raised its corn price estimate for the 2008-2009 season and predicted US corn stocks may hit their lowest levels in more than a decade due to bad weather.

The Citi report said ethanol margins have shrunk to just 4 cents/gallon for ethanol plants with more than 100 mm gal/year of capacity. Smaller plants have moved from break-even to a 45 cent/gal loss, according to the report.
"As a result of the rapid margin deterioration we believe that many, if not all, of the small to midsize producers will be forced to shut down over the next few months with a total potential reduction in ethanol production at 2.0-5.0 [bn gal/year]," said Citi.

They said five undisclosed mid to small ethanol producers have gone offline recently and more are expected to follow suit.
"We estimate that there are 85 plants that are less than or equal to 50 mm gallons," said the Citi report. "Total annual production from these 85 plants is approximately 2.9 bn gallons. There is also an additional 1.9 bn gallons of ethanol produced by plants that are between 50-65 mm gallons (totalling 33 plants) that could also be at risk. Thus, we estimate that 2.0-5.0 bn gallons of ethanol capacity is at risk, representing 750-1,900 mm bushels of annual corn demand."

The analysts also expressed concern that record corn prices will fuel the food-versus-food debate and prompt US legislators to cap the Renewable Fuel Standard.
"In our opinion, just the spectre of possible political intervention will likely cause the market to question the magnitude of future biofuel growth, adding further pressure on valuations across the ethanol industry," said Citi.