The U.S. ethanol industry was preparing for growth in recent years, but the momentum has stalled in the face of President Donald Trump's trade war with China, a major buyer, and his administration's decision to align itself with the oil industry on demand-cutting waivers from biofuel laws, Becker said.
The sustained downturn in margins will finally begin taking its toll as some producers run out of money and begin a host of austerity measures to weather the storm.
"Some plants will slow down, some will shut down, some will shut down forever," Becker said late last week in an interview with Reuters.
Trump fulfilled his promise to lift the summer ban on sales of higher ethanol blends of gasoline, but the infrastructure needed to deliver it requires time to be built. There are some 1,000 retail stores equipped to supply so called E85 gasoline, but the industry needs 10,000 stores to boost demand, Becker said.
U.S. ethanol production in early June reached almost 1.1 million barrels per day (bpd), the highest seasonally on record, Energy Information Administration data showed. While that might seem like good news, margins to produce ethanol are at the lowest seasonally since 2015, according to Refinitiv Eikon data.
Ethanol production fell 2.5 percent to almost 1.04 million bpd, according to the latest weekly EIA data. But inventories still rose to nearly 23.7 million barrels, the highest for this time of year on record.
Becker said the industry has been undisciplined, continuing to ramp up production in the face of weak demand growth and growing supplies. He says the company has decided to cut production in the past, but this time they have the capital and operational plan to sustain weak or negative margins.
"We can't be the governor of supply alone. We have the liquidity and the balance sheet and we are going to let other people do the job," Becker said.
Green Plains is the fourth largest U.S. ethanol company with a market capitalization of $400 million. Green Plains, which has seen its share price drop by 40 percent this year, agreed in October to sell three of its ethanol plants to Valero Renewable Fuels Co and suspended its quarterly dividend in June.
Ethanol traders expect companies to start announcing output cuts soon. Plymouth Energy, based in Merrill, Iowa, said in a statement last week it decided to suspend production until further notice because of the weak margin environment.
One trader said production needs to fall by about 10% or demand needs to increase by the same amount to help steady the market.
EFFECTS OF REFINERY EXEMPTIONS
The U.S. Renewable Fuel Standard (RFS), a more than decade-old law, requires refineries to blend corn-based ethanol into their gasoline to help farmers. The program also provides waivers to small refining facilities that can prove compliance would cause them financial harm.
Since Trump took office, the Environmental Protection Agency has more than quadrupled the number of waivers it has granted, saving the oil industry hundreds of millions of dollars but enraging another key constituency - corn growers - who claim the move threatens demand for one of their staple products.
"The SREs (Small Refinery Exemptions) are a political football for the president, and he's going to have to take a look at how it's affecting agriculture and farmers," said Mark Marquis, CEO of privately-held Marquis Energy, which operates ethanol plants in Illinois and Wisconsin. "I can't say I'm happy with the way the administration has handled implementing the RFS."
While Marquis supports Trump and intends to vote for him in the next election, he said the increase in SREs granted is "troubling."
The administration has delayed decisions on the some 40 applications for 2018 waivers amid a Trump-ordered review of the program. The previous rounds of waivers exempted some 2 billion gallons of fuel production from the RFS.
The refining industry says despite all the cries of demand destruction, there is little evidence to show that has actually happened. Federal government data shows demand has remained steady, despite the waivers, and that the industry has a supply problem, not one of demand.
ï¿½There is no statistically significant evidence that SREs are responsible for ethanol demand destruction," Susan Grissom, chief industry analyst at American Fuel and Petrochemical Manufacturers, said.
Becker says the oil industry is lying and they know it. He says the exemptions have slowed refiners from utilizing higher blends of ethanol and noted blending rates fell last year, though modestly, for the first time in years. (Reporting By Jarrett Renshaw and Stephanie Kelly Editing by Chris Reese)