Floods Threaten to Cause Ethanol Disruptions and Higher Pump Prices

March 26, 2019

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by Mario Parker and Michael Hirtzer (Bloomberg) Midwest rail lines have washed out, delaying biofuel shipments; Gasoline futures rise to five-month high before peak season -- Flood waters spilling across the U.S. Midwest have swamped ethanol shipments, disrupting refineries and threatening to push up gasoline pump prices ahead of the summer driving season.

Last week’s major winter storm sent the Missouri River and its tributaries over rail lines across the central U.S., interrupting deliveries of the corn-based biofuel and prompting trade group Growth Energy to ask Transportation Secretary Elaine Chao for help.

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The loss of ethanol -- which is blended with refinery-made fuel to meet environmental requirements in some parts of the country and to boost octane -- will further tighten supply that was already reduced by upsets at refineries from New Jersey to Texas to California.

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Multiple rail lines were washed out or under water in Missouri, Iowa and Nebraska, rail carrier BNSF said Wednesday. Union Pacific reported lines out in Nebraska, Iowa and Kansas.

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While each of Cargill Inc.’s three ethanol plants are operating, its mill in Blair, Nebraska is seeing rail challenges, said April Nelson, a company spokeswoman. Nebraska, the second-largest U.S. ethanol maker, was the hardest hit by the floods with 80 percent of its counties declaring emergencies. READ MORE

Midwest flooding shuts 13% of U.S. ethanol production (Seeking Alpha)

‘A punch in the gut’: Farmers hit by tariffs see crops swept away by flood (Washington Post)

Floods Hit Ag Businesses Hard: Transportation Disruption Means Soaring Costs for Ethanol Plants, Feedlots (DTN The Progressive Farmer)

Ethanol Traversing Floods and Demand Issues (AgWeb; includes VIDEO)

How Will the Devastating Midwest Flooding Affect U.S. Ethanol? (Motley Fool)

Ethanol plants work together as flooding disrupts transportation network (Nebraska TV)

USDA and Nebraska Officials Discuss Flood Damage (AgNewsWire.com)

Gov. Ricketts speaks to Siouxland Ethanol Shareholders (Siouxland News; includes VIDEO)

Midwest floods threaten ethanol supply, could affect prices at the pump (Fox News)

Floods Hit Ag Businesses Hard: Transportation Disruption Means Soaring Costs for Ethanol Plants, Feedlots (DTN The Progressive Farmer)

Exclusive: More than 1 million acres of U.S. cropland ravaged by floods (Reuters)

Floods Hit Ag Businesses Hard: Transportation Disruption Means Soaring Costs for Ethanol Plants, Feedlots (DTN The Progressive Farmer)

As Some Midwest Farmers Struggle With Historic Flooding, Ohio Valley Ethanol Producers See Profit Boost (WFPL)

U.S. disaster aid won't cover crops drowned by Midwest floods (Reuters)

Excerpt from DTN The Progressive Farmer: J.P. Rhea, feedyard manager for Rhea Cattle Company in Arlington, said with the ADM Columbus and other ethanol plants down in the area, his operation has had difficulty sourcing distillers grain.

ADM LOSSES

ADM has taken a major financial hit in the first quarter as a result of flood-related damage.

ADM said in a news statement on Monday it has sustained tens of millions of dollars in losses.

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According to the Nebraska Ethanol Board, infrastructure damage continues to significantly affect ethanol plants' operations.

Five plants are dealing with major rail disruptions, the NEB said. If the plants aren't able to ship their products out, they are forced to shut down.

"Some plants are supplementing by trucking, but it's much more expensive and you can't move near as much product as a railroad, or as fast to maintain full production capacity," said Sarah Caswell, NEB executive director.

Four ethanol plants continue to run at reduced capacity as a result of power outages and lack of rail access. In addition, two plants are in scheduled maintenance this week and one is beginning maintenance next week. One additional plant is considering starting early maintenance because of disruption to rail service.

Troy Bredenkamp, executive director of Renewable Fuels Nebraska, told DTN following Nebraska Gov. Pete Ricketts' agriculture flood roundtable in Lincoln on Monday that it may be another two to three weeks before rail service is repaired.

About 20% of the nation's ethanol production has been affected by the flooding, he said.

"So they're trying to look at something maybe more mid- to long-term that could help them to get over this hump to get that product out," Bredenkamp said.

"Obviously, your only other alternative is truck, and you guys know the situation with the highway system. It's a double whammy for them in terms of being able to move ethanol product out. Where that really becomes a problem is, obviously, you don't want to idle a plant if you don't have to, but also, if we're not making ethanol, we're not making distillers grains."

DISTILLER GRAIN DIFFICULTIES

Nebraska ethanol plants are having more acute issues in being able to meet distillers grain contract needs for feedlots.

"So we've actually had some plants that are out of the disaster area who have been converting their dry mill, or their dry finished product, to a more-modified wet distillers just so they can make it available to the local market, and hopefully it will alleviate some of this production that's not taking place right now because of the floods," he said.

The ADM ethanol plant that sits along a main line in Columbus has seen its rail loop flooded.

Bredenkamp said railcars that had water above the axels will need the axels replaced.

"So now you're talking about literally thousands of axel systems that will have to be replaced for those train cars to be able to go back into production," he said.

"It's kind of insult to injury. A lot of those cars are privately owned by the ethanol plants, so there's a lot of moving parts to be able to get this thing back up and running."

Repairs to rail lines are ongoing, he said, but railroad companies are having to do things as "efficiently as possible" as well with fewer employees.

"I think there's been a decrease in personnel over time, it's real hard to bring that personnel back in a time like this when you need as many people who know how to reset a rail as possible, and they're just not around anymore," Bredenkamp said.

"And you've had catastrophic conditions along the Platte River; there's nothing holding up that rail except the two ends, and it's a very sad situation. And until we can get that back, it's going to be hard for us to get back to 100% power on the ethanol side. Especially at a time when ethanol is actually starting to turn a corner and get a little better price wise. It probably couldn't have hit at a worse time for Nebraska's ethanol plant situation."

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IOWA CONDITIONS

Monte Shaw, executive director of the Iowa Renewable Fuels Association, said biofuel producers in Iowa have been virtually unscathed.

"We have not done a comprehensive survey," he said, "but last word we had was that no plants in Iowa flooded. Several had to reduce run rates to align with [their] ability to source corn, which was degraded by flooded roads for farmers or flooded farmer grain storage, and to align with slower rail car return times." READ MORE

Excerpt from Motley Fool: Farmers were already quietly suffering through a crisis. Falling income, rising debt, and reduced land values have ripped across the American Corn Belt in recent years without attracting many headlines. Then came the devastating floods in mid-March.

Early estimates of livestock and crop losses in Nebraska alone exceed $1 billion. Some farmers in the state are feeding stranded cattle by boat, while the Nebraska National Guard has resorted to pushing bales of hay out of helicopters. Cattle aren't the only assets in the agricultural value chain that are stranded.

A number of ethanol production facilities have idled operations after nearby rail lines became submerged. The idling could have national consequences, as Nebraska and Iowa alone account for 40% of the country's total production. That all but ensures shareholders of ethanol producers such as Archer Daniels Midland (NYSE:ADM), Valero Energy (NYSE:VLO), and Green Plains (NASDAQ:GPRE) will need to prepare for an impact on first-quarter -- and perhaps full-year -- 2019 earnings results.

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An initial report from Reuters estimates that 13% of ethanol production capacity in the United States was taken offline as a result of the flooding cutting off rail lines.

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Green Plains Partners LP(NASDAQ:GPP) operates as the ethanol equivalent of an oil and gas midstream business. It generates fee-based revenue from the volume of ethanol moved through its network, not the price of ethanol. While that business model has insulated it from slumping ethanol prices in recent years, it doesn't mitigate the risk of natural disasters.

In fact, although the contracts with the parent include minimum annual volume commitments, they also include force majeure clauses that list flooding as an acceptable trigger. Investors will need to closely monitor the situation from the recent Midwest flooding and await updates from Green Plains Partnership management. Considering the partnership generated 56% of operating income for Green Plains, shareholders of the parent will also need to remain watchful. READ MORE

Excerpt from Reuters: The USDA has no mechanism to compensate farmers for damaged crops in storage, (U.S. Agriculture Under Secretary Bill) Northey said, a problem never before seen on this scale. That’s in part because U.S. farmers have never stored so much of their harvests, after years of oversupplied markets, low prices and the latest blow of lost sales from the U.S. trade war with China - previously their biggest buyer of soybean exports.

The USDA last year made $12 billion in aid available to farmers who suffered trade-war losses, without needing Congressional approval. The agency has separate programs that partially cover losses from cattle killed in natural disasters, compensate farmers who cannot plant crops due to weather, and help them remove debris left in fields after floods.

But it has no program to cover the catastrophic and largely uninsured stored-crop losses from the widespread flooding, triggered by the “bomb cyclone” that hit the region in mid-March. Congress would have to pass legislation to address the harvests lost in the storm, according to Northey and a USDA statement to Reuters.

“It’s not traditionally been covered,” he said. “But we’ve not usually had as many losses.”

Indigo Ag, an agriculture technology company, identified 832 on-farm storage bins within flooded Midwest areas. They hold an estimated 5 million to 10 million bushels of corn and soybeans - worth between $17.3 million to $34.6 million - that could have been damaged in the floods, the company told Reuters.

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Some Congress members have expressed interest in pursuing legislation to provide aid for damaged crops in storage, Northey said. But passing legislation could require a lengthy political process in the face of an urgent disaster, U.S. Sen. Charles Grassley told farmers at a meeting in Malvern, Iowa.

“If we have to pass a bill to do it, I hate to tell you how long that takes,” said the senator from Iowa, who joined Northey on the helicopter tour.

With farm incomes declining for years before the flood, many farmers had planned to sell their grain in storage for money to live, pay their taxes or finance operations, including planting this spring.

THROWING AWAY CROPS

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Farmers will have to destroy any grains that were contaminated by floodwater, which could also prevent some growers from planting oversaturated fields.

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The USDA does not have a program that covers flood-damaged grain because farmers have typically received more advance notice of rising waters, allowing them to move crops and limit losses, said Tom Vilsack, who ran the agency under former President Barack Obama.

In this case, floods inundated fields quickly after multiple levees failed when rain and melting snow filled the Missouri River and other waterways. The frozen ground was unable to soak up the water.

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Time is short for a solution, said Carol Vinton, supervisor of Mills County, Iowa, one of the state’s two most heavily damaged counties.

Vinton said she was getting calls from farmers whose grain was damaged and are worried about making good on previously signed contracts to deliver those crops to elevators. READ MORE