By IAN BERRY
U.S. ethanol producers faced with slowing growth in demand are turning to a fledgling market for corn oil to help boost revenues.
Several of the nation's largest ethanol companies, including Green Plains Renewable Energy and Valero Energy Corp., have invested in equipment to produce the oil. Extracted during the production of ethanol, corn oil is mainly used to make animal feed and biodiesel, but it also can be produced for cooking.
The volumes ethanol producers plan to make are expected to be small compared with the two-billion-gallon U.S. market for soybean oil, which is nearly interchangeable. Still, the new product adds an important revenue stream for ethanol makers who face flattening demand, historically high corn prices and volatile energy markets.
Ethanol production has been profitable throughout 2011, with the Renewable Fuels Association projecting production at a record 13.7 billion gallons. Still, the rapid gains in demand are seen slowing. The industry is nearing 15 billion gallons, the annual amount that federal law requires refiners to blend into gasoline by 2015. Further gains past the federal mandate are hampered by weakening support in Congress, concerns over the effects that increased ethanol use would have on older engines and changes that gas stations would have to make to their pumps.
Ethanol producers are "going to have to be creative in ways to generate more profit," said Jason Ward, an analyst with Northstar Commodity in Minneapolis. Demand "really can't go much higher," Ward said.
Green Plains Renewable, after making a $20 million investment in 2010 to produce corn oil, projects between $30 million and $40 million in new, annual revenue from the liquid. Producing corn oil is "low-hanging fruit," the company's chief executive, Todd Becker, said.
In the quarter ended June 30, corn oil accounted for $6.4 million in operating income, up from zero the prior year. Operating profit was $11.6 million for ethanol production.
Other large companies, including South Dakota-based Poet LLC, the world's largest ethanol producer, and Valero ,are adding similar equipment to their existing plants. The investments are a natural progression for the industry, said Jeff Lautt, Poet's president, whose company is in the midst of an effort to diversify revenue.
"You look at any other industry that's developed over the last 100 years, once they mature they start to broaden out, and ways to create new revenue or bottom-line margin," Mr. Lautt said.
The new supply of corn oil from ethanol plants isn't food grade, although Mr. Lautt said Poet may try making food-grade corn oil eventually.
A spokesman for Valero, which entered the ethanol business in 2009 after buying plants from Verasun Energy Corp., said the decisions to invest in corn oil reflects the relative health of the industry as it puts money back into the business.
Ethanol plants have a ready buyer in the biodiesel industry, which can use either corn oil or soybean oil in production. And corn oil right now sells at a discount to soybean oil, said Sander Cohan, an analyst at ESAI Inc.
Although increased corn-oil production provides added competition for soybean-oil makers, it isn't likely to saturate the market, industry officials said. Even if all producers adopted the technology this year, total output would be under 270 million gallons, said Mr. Becker of Green Plains.
Corn oil is a byproduct of ethanol production, a fermentation process in which the starch is separated from the kernel and turned into sugar. The technology employed by most ethanol plants extracts corn oil in fermentation process.
Corrections & Amplifications
An earlier version of this article incorrectly stated that Poet was based in Iowa. The company is based in South Dakota.
Write to Ian Berry at email@example.com