Article

by Carey Gillam

Another U.S. ethanol maker is moving to diversify its revenue stream as the industry continues to suffer depressed margins as costly corn supplies dwindle.

On Thursday, California-based Pacific Ethanol Inc said it was installing corn oil separation technology at one of its plants and planned to include its three other plants by the first quarter of 2013. The company said its corn oil business should start generating revenue in the first quarter of 2013.

Company officials said the first of its plants to be converted would produce about 12 million pounds of corn oil, which at current prices, could contribute as much as $4.5 million, or seven cents per gallon, of annual operating income.

Like other ethanol producers, Pacific Ethanol already sells co-products, including wet distillers grain (WDG), a nutritional animal feed.

The company's bottom line has been hammered by poor profit margins for ethanol. For the three months that ended March 31, the company reported a gross loss of $7.5 million, compared with a gross profit of $2.6 million a year earlier.

Company officials have said they hope demand will pick up in the summer driving season enough to strengthen margins.

More than 50 percent of U.S. ethanol producers are estimated to have launched corn oil extraction strategies. They capture corn oil from the residual grains and solubles left over from the fuel refinery process and sell oils that can be used for human consumption and for biodiesel.

"It is evidence of a maturing industry that is diversifying its product and revenue streams," said Renewable Fuels Association spokesman Matt Hartwig. "It won't be the end of the product streams that come out of the plants. This is just the next step."

RFA estimated U.S. ethanol producers were providing 4.69 million pounds of corn oil daily.

Beleaguered by high corn prices tied to increasingly hard-to-get supplies, lackluster demand and the expiration of a industry-boosting blender's tax credit, many ethanol producers have been slowing or idling their plants. Producers need every extra penny in profit potential they can wring out of a plant, ethanol experts said.

Green Plains Renewable Energy Inc, the fourth largest U.S. ethanol producer, with 740 million gallons a year, generated $51 million of operating income from non-ethanol segments over the last year, including corn oil.

"We have worked hard over the last couple of years to diversify our revenue streams," said Green Plains spokesman Jim Stark. "Corn oil technology contributing to bottom line has helped offset the low tight margin environment."

Margins should improve with the harvesting of the new U.S. corn crop this fall, but until then, supplies are so tight that the industry could "run out" of corn, said Iowa State University economics professor Dermot Hayes.

About a third of the U.S. corn harvest is used to produce ethanol that is blended into gasoline.

If enough plants cut back on production, easing corn demand, margins could improve sooner, said Hayes. But with supplies so tight, nothing is certain.

"There is no guarantee it will be there at all. If you don't have corn, you can't make ethanol," Hayes added.