Dismal ethanol profits should improve this year

By Timothy Gardner - Analysis

NEW YORK (Reuters) - U.S. ethanol producers have suffered dismal margins in recent months but profits should improve later this year as companies abandon or delay plans to build new distilleries.

"There may be some light coming at the end of this tunnel," Mark Flannery, an analyst at Credit Suisse, said in a teleconference on Wednesday.

Amid generous government incentives, the U.S. ethanol industry went on a building binge over the last year that boosted capacity 50 percent to 8.5 billion gallons per year (gpy).

That led to a supply overhang of the alternative fuel that has pressured margins to as low as 15 cents per gallon, much thinner than last year at this time.

But the pace of new distillery builds has slowed on tighter credit markets, more expensive steel and other building materials, and record prices for U.S. ethanol feedstock corn.

Archer Daniels Midland (ADM.N: Quote, Profile, Research), ConAgra (CAG.N: Quote, Profile, Research) and private company Poet, for instance, have delayed or canceled plans for ethanol distilleries this year. Late last year at least four others did the same.

CAPACITY CUTS

Flannery said delays and cancellations of ethanol plants should mean short-term ethanol distilling capacity will rise only about 3 billion gpy, versus 5 billion gpy projected by the Renewable Fuels Association, an industry group.