Cargill to Boost Ethanol Production (ADM, VLO, GPRE, ANDE, PEIX)

There are more than 200 ethanol refineries in the US with a total nameplate production capacity of nearly 15 million gallons/year. One of the largest producers, privately-held Cargill, plans to add a third plant with a capacity of 115 million gallons/year to its existing 215-230 million gallon capacity. The new plant will employ about 200 people in Nebraska when it becomes fully operational in late 2013.

The odd thing is that Cargill, like other large ethanol producers Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), Green Plains Renewable Energy Inc. (NASDAQ: GPRE), The Andersons Inc. (NASDAQ: ANDE), Pacific Ethanol Inc. (NASDAQ: PEIX), and privately held POET, has seen demand for ethanol drop. So why build?

Ethanol makers are anticipating the day that federal regulators will give them the green light to switch to an ethanol/gasoline blend of 15% (known as E15) from today’s current 10% (E10) limit. It doesn’t take a rocket scientist to figure out that means a 50% boost in demand.

The other reason to build more ethanol-making capacity is to export the stuff, principally to Brazil, which can’t seem to make enough to supply its drivers. Last year the US exported 1 billion gallons of ethanol out of total production of 13.9 billion gallons.

There’s not much money to be made in the ethanol business today, but producers expect the E15 rules to be adopted and they expect exports to grow. That’s reason enough to stick it out for now.

Paul Ausick