Smooth sailing

CASSELTON, N.D. -- Corn ethanol producers had a rough year in 2012. While major players in the Northern Plains ethanol business see a volatile but profitable 2013, they foresee perhaps smoother sailing in 2014 and 2015.

Ryan Thorpe is chief operating officer of Tharaldson Ethanol Plant LLC, one of the two largest ethanol plants in the state and the seventh-largest nationwide. The plant consumes about 50 million bushels of corn per year, mostly from a 60-mile radius.

Tharaldson Ethanol produces about 153 million gallons of ethanol per year. The plant was built with about $300 million and has been in operation since late 2008. It is privately owned by the Tharaldson family, Thorpe says, referring to a group of individuals and entities, generally founded by Gary Tharaldson, a successful Fargo, N.D.-based motel and hotel businessman. Thorpe, 37, also is director of corporate affairs for Tharaldson Hospitality Management the company that runs hotels and other enterprises out of the same offices.

Despite volatile corn prices and the elimination of federal ethanol subsidies more than a year ago, Thorpe says his plant and others in the region are likely to make money.

He says 2013 is already looking good, but volatile. He expects stable profits in the next two years if drought doesn't push corn prices to more than $10 a bushel, and if ethanol fuel mandates remain in place.

"The future looks very good for good-operating plants, in good locations around the countryside," Thorpe says.

Improving margins?

The ethanol business hasn't been easy or predictable. Tharaldson sold off 140 hotels to Goldman Sachs in 2006, which financed the ethanol plant investment. "When we organized in 2006, ethanol margins were $1 per gallon," Thorpe says.

But by the time the plant started operations on Dec. 31, 2008, the economics had slipped. The ethanol industry developed quickly and became oversupplied. On top of that, corn prices shot to $8 per bushel.

And if all that wasn't enough, the plant's distiller's grain drying system didn't work as expected. "It was a prototype -- serial No. 1," Thorpe says. "It promised to revolutionize the industry, from an energy consumption standpoint." So in late 2009, the company installed a "proven technology" dryer that has run well, Thorpe says.

Tharaldson has since had modest profits.

In 2010, the industry average profit margins ranged from 10 to 15 cents a gallon. In 2011, that increased to 15 to 20 cents a gallon. (This is earnings before interest, taxes, depreciation and amortization, or EDITBA.)

As renewable fuels mandates increased, petroleum blenders figured out they could get an octane enhancement through the use of ethanol. Thorpe says many blenders refined their gas manufacturing to a rating of 84 octane level, and then mixed to get to the minimum 87 octane rating for retail. Ethanol is the cheapest form of octane enhancement.

The Tharaldson factory produces E98, or pure alcohol, at an octane level of 113. Methyl tertiary butyl ether (MTBE), another oxygenate, has been phased out because of environmental reasons. The next closest octane-enhancer costs $8 a gallon, while straight ethanol costs about $2.50 a gallon.

Refiners "get a couple more gallons of gasoline out of every barrel of oil they process," Thorpe says. "It's very profitable for them to do this."

Blenders also had a blender's tax credit that started at 54 cents per gallon, but declined to 45 cents in 2010 and was eliminated Dec. 31, 2011. The credit level amounts were split between blenders and consumers, and never went directly to ethanol producers.

Loss to profit

"Most plants lost money in 2012 -- and some of them a substantial amount of money," Thorpe says matter-of-factly. More than 20 plants closed down for a variety of reasons.

Gasoline demand peaked in 2007 at about 140 billion gallons in the U.S. and has declined annually. Today, the U.S. is burning only 132 billion gallons, partly from the recession and partly from improved vehicle gas efficiency. The U.S. has imported Brazilian ethanol.

The 2007 Energy Independence and Security Act set ethanol use goals at 36 billion gallons by 2022. The U.S. currently manufacturers 13.8 billion gallons of corn-based ethanol. This ethanol mandate was instituted to reduce U.S. dependence on foreign oil supplies, but the U.S. still imports $1 billion in oil a day, or a total of $360 billion per year.

Ethanol margins perked up in early March, to levels not seen in the previous year, Thorpe says. This is partly because of the effect of plant shutdowns in 2012, and partly because of ethanol mandates, which increase by 600 million gallons per year.

Running with RINs

Ethanol usage is tracked by a renewable identification number (RIN), assigned to every gallon of ethanol produced.

"The blenders get my RINs for free when they just buy the ethanol," Thorpe says. "However, you can separate those RINs and they can be traded on the free market. They're not regulated and those prices historically have been 1 cent to 5 cents a gallon. Last week, (mid-March) they traded for $1.10 a gallon -- the RIN alone, not the ethanol.

"We're not sure if it's a short-term spike or if it's something that will be here to stay. In the ethanol industry, things are very volatile," Thorpe says. "Things can turn on a dime."

Petroleum companies face penalties if they don't meet the mandate. "It's $25,000 per day per violation," Thorpe says. "Each RIN could be a violation." Total violations could be in the trillions of dollars.

Right now, blenders have an excess supply of RINS. "Being they knew this was coming in 2009, 2010 and 2011, they blended in excess of the mandated amounts," Thorpe says. "The EPA [U.S. Environmental Protection Agency] allows you to carry forward up to 20 percent of what you blended each year, but you can only carry it forward one year. The ethanol I make this year has a shelf life -- the RIN -- for 2013 and 2014."

Even though blenders have 2.6 billion gallons of excess RINS built up, they're still paying $1.10 per RIN, so they don't fall short and have to pay penalties.

Thorpe thinks the solution is to increase ethanol content in gasoline from the current E10 standard to E15. Thorpe says petroleum companies are averse to blending E15, even though the EPA has approved its use for cars that are 2010 and newer -- 80 percent of the car fleet today.

"They don't want to do it because they're giving up another 5 percent of their market share," he says. "When Exxon-Mobil makes $10 billion a quarter, 5 percent is a big number to give up."

Ethanol on March 15 was trading at $2.62 per gallon on the Chicago Board of Trade, and gasoline was at $3.16 per gallon. That's a 54-cent-per-gallon discount.

If the industry misses its mandate by only 1.3 percent in 2015, the penalty would be astronomical. Thorpe doesn't think that's going to happen, because the fine is too big, and because the blenders will switch to E15.

What is efficient?

Thorpe says ethanol plants are becoming more efficient. He defines "efficient" production as anything around 2.8 gallons of ethanol per bushel and above. Initial plants were 2.5 gallons per bushel.

On the energy consumption side (natural gas or coal), today's efficient plants produce ethanol with 27,000 million Btus (MMBtus) per gallon and below, compared with 32,000 MMBtus. Ingredients -- chemicals and enzymes -- now are 8 cents a gallon, compared with 10 to 12 cents in the past. Thorpe reckons his plant is among the top third in the nation.

He says independent, unbiased university studies show a ratio from 1.5-to-1 up to 3-1 of energy produced to energy used to make it. "My whole take on that is even if it were 1-1, it's local jobs, products that are from here, the end products are used here. It's a big cycle, it's American made. We're not sending $1 billion overseas then," he says.

North Dakota is in a prime place to succeed in ethanol production, Thorpe says.

In 2012, a year that had the biggest drought in the U.S. since 1956, North Dakota raised a record corn crop. "Not only was it a record, it was double what we did in 2011," he says. "Farmers planted 50 percent more acres and we had an improved yield. We like to think of ourselves as the new Corn Belt up here. Acres will continue to grow. We can process a good majority of them right here in the state, and it's value-added."

Marketing security

Clifford (N.D.) Farmers Co-op Elevator Co. procures 100 percent of the Tharaldson plant's corn needs. Two of the co-op's employees -- Keith Finney and Brad Kjar -- have offices in the ethanol plant. Farmers have the security of selling to "one of the strongest co-ops in North Dakota" and getting a dividend back, Thorpe says. It takes about 2 minutes to dump a truck and the plant handles up to 400 semis in an eight-hour period. Tharaldson Ethanol has 6.8 million bushels of storage.

All of the corn at the facility is owned by Clifford until it crosses the bulkway.

About 75 percent of the corn comes by truck and 25 percent comes by rail. About 95 percent of the plant's needs come from within 60 miles away.

Tharaldson has a $5 million grain warehouse bond -- the largest in the state of North Dakota, Thorpe says. "That's for the protection of Clifford. I pay for my corn three times a week, so I'm never in excess of that warehouse bond. We'd like to think that farmers selling to Tharaldson Ethanol have more protection than any elevator in the state."

Historically, about 80 percent of Tharaldson Ethanol's revenues are from ethanol. The other 20 percent is from dried distillers grains. (With higher-priced corn, the DDGs can account for 25 percent of revenues.)

The plant produces enough DDGs to serve those needs for 250,000 head of feeder cattle per day. That's considerably more cattle than are available in the local region. About 97 percent of the high-energy distillers grains are dried from 68 to 10 percent moisture and shipped around the nation and world, primarily Texas and Montana in the U.S. Much of the rest goes to Mexico and Canada. The plant takes about 3,500 tons of wet distillers grains and dries it to about 1,000 tons of DDGs.

Significant impact

Beyond the corn, Tharaldson Ethanol is a significant economic engine, Thorpe says. The plant employs 54 people and has a payroll of just more than $4.5 million. The plant produces numerous indirect jobs, including in trucking.

The factory uses 1 million gallons of water a day -- about 7 percent of Fargo's wastewater production -- all treated and piped 26 miles to the plant. "It's so clean that we have to add salt to our boiler," Thorpe says. "We send back gray water to them, they treat it and discharge it into the river just like they do all the other water."

The plant consumes 12 megawatts of power per day, compared to about 5 megawatts for the city of Casselton, a town of about 2,000 people. The plant uses 11,500 dekatherms of natural gas, making it one of the largest single point users of either energy source in the state.

"It's very positive as long as the rules don't get changed," Thorpe says. "We can make 'gas' cheaper than the oil companies can. It's renewable. It's jobs, right here. It's all U.S. products -- home grown, is what we like to say."