US ethanol output faces sharp cuts

FT -- Large numbers of small to mid-size ethanol producers could shut down over the coming months after flooding across the US midwest caused irreparable damage to the year's corn crop and pushed corn prices up sharply, says a report by Citigroup.

At least five small to mid-size ethanol plants had shut down in recent days, said David Driscoll, Citigroup's US food manufacturing analyst, in an equity research report.

The widespread flooding, on a scale the region has seen only twice in the last 25 years, had forced down ethanol margins over the past 10 days, leaving small and mid-sized ethanol producers running at substantial losses against cash costs, Mr Driscoll said.

"As a result of the rapid margin deterioration, we believe that many, if not all, of the small to mid-size producers will be forced to shut down over the next few months." This could result in as much as 2bn-5bn gallons of ethanol going off-line in the next few months, he said.

Mr Driscoll said corn - now selling at more than $7 a bushel, compared with about $4 a year ago - meant extreme tightness in the corn market, suggesting the increased potential for political intervention in ethanol markets.

The intervention would be aimed at cutting ethanol output and bringing corn to the food market. Corn prices have risen by $1 in the last 10 days.

"Just the spectre of political intervention will likely cause the market to question the magnitude of future biofuel growth, adding further pressure on valuations across the ethanol industry," Mr Driscoll said.

This has led Citigroup to reduce its earnings-per-share estimates for ethanol companies and drop ratings to "sell" on those that are strictly into ethanol production, including VeraSun Energy and BioFuel Energy.