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Chicago IL (SPX) Jan 18, 2011 According to a new report by Fitch Ratings, despite several positive developments for the U.S. ethanol industry over the last few months, producers remain vulnerable to future legislative activity. The 2011 renewal of the 45 cts/gallon blenders' credit and 54 cts/gallon tariff against ethanol imports and higher crude oil and gasoline prices should be favorable for producers in the near term. However, political opposition to extending ethanol subsidies remains high, and renewed congressional focus on deficit reduction will likely make these subsidies prime targets in years to come. In addition to the risk of future withdrawal of subsidy support, the industry remains vulnerable to another period of high commodity price volatility, similar to the 2008-2009 period. This is especially true for one-off facilities and single-plant project-financed facilities, which have relatively little cushion to deal with such events, while larger, better diversified agricultural and energy companies are better-able to overcome such activity. Despite the rash of bankruptcies seen among ethanol producers over the 2008-2009 period, capacity rationalization has been limited, as bankrupted facilities have generally re-emerged under new ownership or been sold to third parties who intend to run the plants. As a result, unless the industry becomes more consolidated and/or barriers to entry are raised, Fitch believes that asset quality will continue to be a key protection for producers, and that smaller stand-alone plants may be especially vulnerable in the current period of heightened commodity volatility. U.S. Environmental Protection Agency (EPA) approval of a higher ethanol blend in the gasoline pool this past October, while nominally favorable, is likely to have little near-term impact on ethanol demand given the ruling's limited reach, unresolved liability issues, and unclear incentives for filling stations to switch over to the new grade. Surging corn prices also remain a key concern in 2011, as is the ongoing potential for ethanol distillation overcapacity.
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