The economic doomsayers are having a field day. For them it is the best of times. Unemployment rises; consumers and businesses are having a harder time keeping current on debt obligations; the amount, value and, in many cases, the location of the derivatives of those debts is only loosely grasped. Every bit of good economic news is pooh-poohed by the economic Pooh-Bahs. At least this economic climate for the corn wet milling industry makes them feel that they are not alone in their struggles.
Although not all corn wet millers produce ethanol, many do, and the ethanol market continues to take its toll on producers with several — Verasun and Aventine among the largest — in or approaching bankruptcy. While all the capacity at Verasun and roughly half of that at Aventine is from dry milled corn, the ethanol from the process competes directly with ethanol from wet mills and therefore is subject to the same squeeze between ethanol and net corn prices. Wet mill plants have generally higher byproduct credits, so can be expected to weather the price squeeze somewhat more easily. For Aventine, although revenue increased by 42% to $537.2 million for the fourth quarter of 2008, losses reached $36.9 million compared to a profit in the fourth quarter of 2007 of $3.3 million. The Associated Press reported, "Its commodity spread on those gallons (277.9 million fourth-quarter 2008), however, declined to 63 cents per gallon from $1.17 per gallon during the previous year’s quarter. Commodity spread is the gross ethanol selling price per gallon less the net corn cost per gallon." The volatile corn market combined with the plunging crude oil and gasoline markets and the reduced gasoline demand in the United States to sink another ethanol company. It is not a good omen for the profitability of the wet millers that margins in ethanol and offtake are both extremely weak.
The starch market is another sore spot for wet millers. Recessions traditionally hit paper demand and it has again. Paper mills are on extended shutdowns. Coated paper sales have slumped with the advertising slump as print media has borne the brunt of reduced advertising revenues and consequently churned out fewer magazine pages. This downturn in demand unfortunately comes at a time when two starch plants have recently been recommissioned after extensive flood damage last spring, and one brand new plant sits in the wings in Iowa.
For HFCS, the graph on this page tells the story of declining demand for HFCS from 8.8 million tons in the 2003-2005 time period to 8.2 million tons dry weight in fiscal 2008. It appears that the 2009 fiscal year to date has brought further declines in volume as the recession took hold. The declines in HFCS sales volumes have been in no small part due both to the declines in nutritively sweetened carbonated beverage sales over the same period and also the high corn prices which forced high HFCS prices versus sugar. The USDA’s January 29th Sugar and Sweetener Outlook states that "The corn sweetener Producer Price Index (P.P.I.) from the Bureau of Labor Statistics has grown from 147.9 in calendar year 2006 to 176.7 in 2007 and 208.9 in 2008. Relative to 2006, the refined cane sugar P.P.I. has decreased 7.7% (150.3 to 139.5) and the refined beet sugar P.P.I. has decreased 9.6% (146.7 to 132.6)."
With all the bad news is it time to throw in the towel on corn wet milling? Not necessarily, for several reasons.
As the graph also shows HFCS still retains 57% of the U.S. sweetener market. The industry has developed an advertising and public relations campaign to address the "whisper criticism" of the product. In calendar year 2009 the corn sweetener P.P.I. increase will likely be less than refined beet sugar, arresting a trend that has been going on for two to three years. On the supply side, a corn wet milling plant in Decatur, Ala., is being shuttered permanently reducing the potential product overhang in coming years.
In ethanol, the bankruptcies and plant shutdowns, while painful for creditors, investors and employees, will also reduce supply bringing a better supply/demand balance to a currently over served market. The spread between ethanol and net corn will continue to be a source of concern, but the ethanol mandate continues to provide a growing market for producers who can manage commodity risk and maximize byproduct returns — the corn wet millers fit that description.
The hope for starch is that the economy will recover. Significant grind diversion given the problems with other product markets does not seem an immediate panacea, but cost control and patience are the obvious strategies until the paper industry rebounds.
All-in-all spring is just around the corner. Despite the real problems in the industry, perhaps for the corn wet millers the seeds of their recovery have already been planted.
This article can also be found in the digital edition of Milling and Baking News, March 24, 2008, starting on Page 43. Click