By Mario Parker and Kim Chipman
Nov. 6 (Bloomberg) -- President-elect Barack Obama plans to support unprofitable U.S. ethanol producers and pursue the same policies that failed George W. Bush.
Obama, the Democratic senator from Illinois, the second- biggest corn-growing state, will maintain Bush's goal requiring fuel producers use at least 36 billion gallons of biofuels in 2022, said Heather Zichal, the campaign's senior energy adviser. The ethanol industry, which loses about 66 cents a gallon at current prices, will receive at least as much support as from the current administration, including tax credits to spur consumption, she said.
``Obama recognizes how important the renewable and biofuels industry is to creating jobs and meeting our goal of reducing dependence on foreign oil,'' Zichal said in a Nov. 3 interview. ``He's fully committed to it and sees tremendous value in the renewable fuels standard and continuing down this path.''
Ethanol makers are collapsing after wrong-way bets on corn prices overwhelmed $20 billion in federal aid and government- guaranteed demand for the fuel additive. VeraSun Energy Corp., the second-largest producer, filed for Chapter 11 bankruptcy protection on Oct. 31.
Bush's approach has been criticized for hurting the environment, increasing global food prices and contributing to riots from Haiti to Egypt. Earlier this year, at least 51 members of his own party, led by Texas Governor Rick Perry, called for relaxing the policy.
Distillers struggle to make money because costs to produce ethanol are rising while increasing supplies drive down prices of the fuel. U.S. output climbed to a record 647,000 barrels a day in August, more than double the 318,000 barrels a day in June 2006, when VeraSun had its initial public offering, according to the U.S. Energy Department.
Farm Politics
Rising feed costs caused third-quarter profit to plunge 92 percent at Tyson Foods Inc., the nation's largest meat producer. Pilgrim's Pride Corp. said Sept. 25 it may breach a credit covenant because of a ``significant'' loss in the quarter ended Sept. 27. Pilgrim's Pride shares dropped 24 percent on Oct. 17 amid speculation the company may file for court protection from creditors.
Record prices for corn, soybeans and wheat in the past 12 months helped boost net farm income to a record $95.7 billion this year, according to the U.S. Department of Agriculture. There are about 2 million farmers in the U.S., according to the USDA. Farm belt states that voted Republican in 2004, including Colorado, Indiana, Iowa and Ohio, went to Obama this time.
`Zero Margins'
``We know that corn farmers like ethanol very, very much,'' said Pavel Molchanov, an analyst at Raymond James & Associates in Houston. ``Corn farmers have a lot of political influence in swing states such as Iowa and Missouri. Certainly ethanol continues to enjoy some support because of its political and electoral significance.''
Corn futures traded in Chicago more than doubled in the past three years to almost $8 a bushel as worldwide demand expanded to make sweeteners and fuel. U.S. ethanol prices dropped 5 percent because output from new mills grew faster than demand, damaging profit for distillers.
``Obama has clearly said part of his energy policy has been for renewable fuels, including ethanol,'' said Ronald Miller, chief executive officer of Aventine Renewable Holdings Inc., a Pekin, Illinois-based ethanol producer, which delayed the opening of a plant in Aurora, Nebraska, until the second quarter. Producers ``are managing the day-to-day business on near zero margins,'' he said.
Advanced Biofuels
Obama, 47, plans to spend $150 billion over 10 years to develop renewable fuels and to create 5 million so-called green collar jobs. He will also require at least 60 billion gallons of advanced biofuels be produced by 2030. Ethanol is a form of alcohol created by fermenting and distilling the starches from corn and other crops.
Bush's Energy Independence and Security Act, passed in December, called for ethanol production to more than double to 15 billion gallons in 2015 from 6.5 billion last year. The U.S. pays oil refiners 51 cents in tax credits for each gallon of ethanol they blend into regular gasoline. A 54 cent-a-gallon tariff is slapped on imports from Brazil to protect and stimulate U.S. production.
Obama supports the mandate and wants to expand it and move toward so-called cellulosic ethanol, Zichal said. Cellulosic ethanol is derived from non-food crops such as switch grass and wood chips.
Speaking in Missouri in July, Obama said corn-based ethanol isn't ``our best strategy'' because of its impacts on food, adding the current additive will usher in commercial production of cellulosic.
Bad Hedges
``He very much sees it as an important bridge fuel and important source of revenue for many rural communities but something that is the beginning of hopefully a greater investment and greater commitment to advanced biofuels,'' Zichal said.
Falling margins caused Gateway Ethanol LLC, Heartland Ethanol LLC, LiquidMaize LLC, Greater Ohio Ethanol, Glacial Lakes Corn Processors and Abengoa SA to curtail production.
Biofuel Energy Corp., based in Denver, said in August that it didn't have enough money to cover $46 million in losses on contracts for corn, ethanol and the natural gas used to run its distilleries. The company locked in third- and fourth-quarter corn costs of $7.01 and $6.90 a bushel, respectively. Corn plunged to about $4 a bushel for December delivery on the Chicago Board of Trade.
Failure stems from ``the way they operate their companies rather than the government support,'' said Ian Horowitz, an analyst at Soleil Securities Corp. in New York. ``You can't policy your way out of bad hedging positions.''
To contact the reporters on this story: Mario Parker in Chicago at mparker22@bloomberg.net; Kim Chipman in Chicago at 1927 or kchipman@bloomberg.net.
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