Biofuel Stocks Sag As U.S. EPA Eyes Lower Ethanol Mandate

   By Jacob Bunge 
 

Ethanol producers' share prices took a hit Friday after the U.S. government proposed trimming the yearly mandates for the biofuel in gasoline, raising questions about demand for a fuel source that has been a boon to the nation's farm economy.

Shares of Archer Daniels Midland Co. (ADM), a major corn processor and among the largest U.S. ethanol producers, closed 3.4% lower alongside declines in smaller biofuel-focused companies like Renewable Energy Group Inc. (REGI) and Green Plains Renewable Energy Inc. (GPRE). The declines came despite U.S. stock indexes closing broadly higher.

The U.S. EPA on Friday proposed for the first time to reduce the amount of renewable fuel--most of it ethanol--that refiners are required to blend into gasoline. It proposed 15.2 billion gallons blended in next year, about 16% below the amount specified by Congress in a 2007 law. Under that law, the EPA has leeway to lower the requirement.

"While we still think a large U.S. corn crop in '13 will benefit other ADM businesses, we see the [Environmental Protection Agency] renewable fuel proposal as adding risk to the shares," wrote Tom Graves, an equity analyst with S&P Capital IQ, who downgraded ADM shares to "sell" from "hold" Friday afternoon.

Ethanol producers vowed to push back against the proposal, though executives said they saw continued demand for U.S. corn ethanol from foreign countries such as Canada and Brazil. The proposal will be subject to a 60-day public-comment period before potentially being finalized next spring.

"Almost 10% of our production right now is being produced for export" due to corn sliding to its lowest price in several years, said Todd Becker, chief executive of Green Plains, which can produce about 790 million gallons of ethanol annually from 10 plants. "If the U.S. doesn't want it, the world will take it."

While Omaha, Neb.-based Green Plains doesn't anticipate idling any plants if the EPA follows through on its proposal, Mr. Becker said the prospect of the U.S. turning away a cheap and domestically produced fuel source was "disgraceful."

Renewable Energy Group CEO Daniel Oh said he was "disappointed" by the EPA proposal but that the Ames, Iowa, company's scale would "allow us to continue to succeed."

An ADM spokeswoman said in a statement that the agribusiness company "would be disappointed by any policy change that would undermine the [renewable fuel standard] and the government's commitment to ethanol as a component of America's energy supply." The mandate has helped create U.S. jobs and lowered the cost of gasoline for drivers, she said.

ADM CEO Patricia Woertz told investors this week that "the economics of lower corn" prices would help the Decatur, Ill., company cheaply produce and market ethanol, regardless of the EPA's decision.

"Keep in mind that the industry produced 14 billion gallons before, even though the mandate was only 12.8, back in 2011," Ms. Woertz said in a presentation. "So it could be another example of the industry producing to meet market demand, whether that be export demand" or domestic demand, she said.

The Renewable Fuels Association, which counts ADM and other agriculture companies like Monsanto Co. (MON) and DuPont Co. (DD) as members, in a statement Friday pledged to push back on the EPA proposal and warned of a blow to a "healthy farm economy."

"There's a lot more riding on this than just the ethanol industry," said Green Plains' Mr. Becker. "We're going to take advantage of the comment period and see where that takes us.

Write to Jacob Bunge at [e-mail]

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