Q&A: Upstart Ethanol CEO Tells Why He's Upbeat
VeraSun picked the right time to challenge ethanol industry giant Archer Daniels Midland, with a lower-cost method of producing the alternative fuel. The Brookings, S.D., company, which was founded in 2001, just four years later–with oil and ethanol prices climbing–became the No. 2 ethanol producer. Its two huge plants–one in Aurora, S.D., the other in Fort Dodge, Iowa–have a total capacity of 230 million gallons per year, and three more are under construction. Don Endres, founder and chief executive of VeraSun, which went public eight months ago, talked to U.S.News & World Report about why he's optimistic concerning the future of the business–despite the challenges of falling oil prices, rising corn prices, and potential future competition from new technologies to make ethanol from feedstocks other than corn.
You must have been happy to hear the president setting a 35 billion-gallon-a-year renewable-fuels goal in the State of the Union address.
It was good to hear him underscoring that as a key part of energy policy and the vision going forward, and we're convinced our industry is up to the challenge. From an industry perspective, in '06 we were at 5 billion gallons [annual production], and there's another 6 billion in construction over the next three years. The industry is growing, robust, and we're convinced it's going to continue to grow.
The ethanol business is based on what you've called the "inherent spread" between the price of grain and the price of energy. That spread happened to reach historic levels in 2006. But can the business continue to be profitable now that those trends have reversed? There've been some analyses that ethanol is not profitable under $50 a barrel.
They may be looking at some of the higher-cost producers. ... We invested in our business back when we had $35-to-$40-a-barrel oil, and we worked very hard to be a low-cost producer as well. You can look at the overall economics–the corn-ethanol spread. And over the long term, the economics is going to stay solid.
Ethanol provides octane to the [oil] refiners, [improving fuel-burning efficiency], and that's highly valued. It enables them to produce a suboctane blend. It improves their economics and increases their output, so it's a valuable blend component, and there's going to be strong demand because the economics for them is positive as well.
But corn prices have risen 100 percent in the past year.
Corn is the principal driver of cost, and it has moved up. We think that's a normal market response and an indication that farmers' corn is in demand. We're convinced they will step up to the challenge and plant more acres of corn. Farmers are business people just like we are. They are looking at the acres and making their decisions based on the economics. I grew up on a family farm, and both my brothers are farmers, and I can tell you there's definitely an enthusiasm over planting more corn. We are convinced the bushels will be there. And prices, over the long term, will moderate.
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