High cost of corn punishes margins during first quarter
By MATEUSZ PERKOWSKI
Financial losses have escalated for a major West Coast ethanol marketer whose production facilities emerged from bankruptcy less than two years ago.
Pacific Ethanol, based in Sacramento, has reported a net loss of nearly $14 million in the first quarter of 2012, compared to less than $5 million during the same period last year.
The company blamed the steeper losses on "compressed margin environment" at the ethanol plants it operates in Oregon, Idaho and California, according to a filing with the U.S. Securities and Exchange Commission.
While Pacific Ethanol's total sales grew by 14 percent during the first quarter, to nearly $198 million, that amount was eclipsed by the $205 million cost of raw materials, which spiked 20 percent.
The net loss was even steeper due to administrative expenses and interest payments.
Aside from marketing fuel, Pacific Ethanol also sells the byproduct of ethanol processing -- distillers grains -- as feed to dairies and feedlots near its facilities. Part of the company's strategy is to sell the wet form of distillers grains to local livestock buyers.
The location of its facilities provides Pacific Ethanol with an economic advantage because many other ethanol plants must dry the feed and then ship it from the Midwest, according to an SEC filing.
The company said it expects an improved profit outlook because the U.S. Environmental Protection Agency recently approved blending ethanol with gasoline at a higher level. The blend will increase from 10 percent ethanol to 15 percent.
Demand for ethanol is also anticipated to rise during the summer driving season, presumably pushing up prices and improving margins, the company said.
Ethanol producers have an impact on many crops aside from corn because the demand for other types of feed rises as corn becomes more expensive.
When corn prices rise so high that it erodes the profits of ethanol producers, however, that limits ethanol production and reduces corn demand.
Due to the lag between the time Pacific Ethanol and other ethanol producers buy corn and sell the fuel, the industry was severely disrupted when ethanol prices dropped after the 2008 financial crisis.
The company had bought corn at high prices, but the finished ethanol sold at lower prices, creating "significant losses" and pushing its production facilities into bankruptcy in 2009, according to SEC filings.
Under Pacific Ethanol's bankruptcy plan, creditors took over ownership of its ethanol facilities, which the company continued to operate. It has since bought back a 34 percent stake in the plants.