GPRE
#The corn basis has definitely firmed up here in the last several weeks.
As the farmer goes into the field, plants his corn, he is going to wait to see what he has coming at him.
So if to get old crop corn right now, the farmer is absolutely in charge.
And we are going to have to wait for him to come out of the field and spoonfeed us some corn.
So the corn basis has definitely started to have an impact on the overall crush spread.
But we had most of what we needed locked in for the second quarter, and we have a good start on the third quarter for procuring corn.
What's interesting though, <UNK>, is what we are seeing in the fourth quarter.
We are starting to see commercial hedgers sell us corn at more historical levels earlier in the season.
And we think that's probably to make room for some soybeans, as well, as we will probably have a bunch of soybeans this year.
So we have started to see in places in Iowa at the 25 to 35 under numbers, which we typically wouldn't see this early, where commercial hedgers are starting to let go of some corn.
So that's a good thing.
The interesting thing is the East and the West are basically at parity now, once again, where the East typically with trade at a premium to the West; but we are starting to see where the West has accelerated corn basis, which is why we see such good margins on our Eastern plants versus our Western plants.
So that is impacting the market a bit as well.
Overall our view is the farmer is going to get into the field, and he's going to plant the corn.
We think that he hasn't ---+ well, from what we are hearing, he is not buying the most expensive hybrid.
But we still think that he's still ---+ you know, the numbers are solid, what we've seen in the market on corn acres.
And we expect that under normal growing conditions, we are going to have another good crop year with not a big draw into carryout.
So overall, hopefully, that's a favorable fundamental for ---+ looking forward in the fourth quarter for the crush.
Yes.
So we think that gasoline demand will be up 2%-ish to 3% this year.
Ethanol blending is up 3% to 4% year over year already for the first part of the year.
So we've seen more blended ethanol into the gasoline as driving has gone up.
As the charts have indicated, we are continuing to push up ahead of the five-year demand run rate for gasoline.
And so with all that said, you can have a 138 billion gallon, 139 billion gallon gas demand, which then leads to a 13.8 billion gallon, 13.9 billion gallon at base ethanol demand.
If you had a add 800 million to 1 billion above that, we are starting to see some of the evidence that stocks will draw a bit.
Now, the industry has shown that they can produce 15 billion gallons for one week or two on a run rate.
I'm not sure we can annualize that.
So we are probably capable as an industry somewhere between 14.2 billion and 14.5 billion on an annualized basis, which then leaves us somewhere close to parity, if not starting to draw.
Again, I can only ---+ and we'll get charts out to everybody ---+ is to take you back to the fact that when you look at the overall tightness of days, overall with the increased gas demand, some of those numbers we used to look at in the past aren't correlating very well with margins right now, where these stock numbers would typically correlate with a lower margin structure.
But the fact is that we haven't seen this gas demand really for about four years to know what the stopping number needs to be.
In addition, in discussions with others ---+ I'll give others credit.
They also pointed out that all of the new tanks that have been built to store ethanol across the United States gives you another baseload of supply that you can't always access when you look at tank bottoms that are there all the time, that are not accessible as well, which could be another 0.5 billion barrels that we can't really ever get to.
So overall I think that when you look at gas demand and the increase we have to take into consideration, between exports and gas demand, we need higher stocks anyways.
And it doesn't feel like it's very loose right now.
So we ran the numbers, and obviously the currency is helping us over the last week or so.
And while there was a slight window for a day or two when the currency was at its weakest, that window has closed.
And while somebody might have shoved a boat in trying to fulfill an agenda, it may not have been the most economic thing to do.
So right now it appears that the US is cheaper as an origin overall.
It appears that there is not a window today to import Brazilian ethanol.
And if you go out really much past July, it is advantage US fully into the world market.
And really could not ---+ there's really not a window at all for imports to come in here from Brazil.
<UNK>, do you want to comment on that.
No, that's exactly right, which brings some less competitive delivery to the Southeast Asian markets, also.
Sure.
So we had indicated on the last call, <UNK>, that this next 100 million gallons that we are going after is obviously more expensive than the first debottlenecking effort we had over the last five years.
And that's going to be costing in the range of $0.65 to $0.70 a gallon, which is still the cheapest ethanol gallon we can go after.
We are able to do that and be more aggressive on the volume because we have registered RIN capacity at several of our facilities.
For example, Lakota, Iowa, that already had extra RIN capacity without any pathway needed to go after that capacity.
So that project alone, <UNK>, is 20 million gallons.
So that project alone is 20 million gallons, and we don't have to ask for any pathway from the government to go after that ---+ go after those gallons.
So, overall, we expect by the end of 2015 to be able to produce 100 million gallons more in our platform than the start of 2015 at a cost between $0.65 and $0.70 a gallon.
Well, we built Birmingham at around $17 million.
And we are still on track for a three-year payback ---+ again, EBITDA.
It is being used by a multitude of customers, including ourselves, who put volume through the terminal.
And those are longer-term take-or-pay contracts that we have in place.
So overall, that strategy worked well.
And it has done exactly what we said it was going to do.
Well, overall, when we look at Q3, what we mentioned is we were 10% hedged and looking to add to that position, as margins have continued to expand right through our hedges and are showing right now high teens on the board.
And we are making a decision now on how much we want to extend coverage.
Now, we are doing that basis ---+ the fact that we have some corn basis bought in the third quarter.
And then we are estimating on what it would take to buy the rest of the corn basis that we would need for a hedge program.
If we feel like we can't achieve those values, we don't want to take the risk of being short the corn basis in the third quarter ---+ but feel like the farmer will let go of some of that corn if they are staring at a big (technical difficulty) corn crop.
And it looks like conditions are off to a great start.
Without a doubt, the farmer is in charge of the US corn basis today.
But they are going to carry in a lot of stocks.
When you looked at the carry-out could be pushing 2 billion bushels, the farmer is going to have to let go of some corn.
Like I said, we are starting to see some commercials let go of corn in the fourth quarter, which is earlier than we expected.
But we need the farmers to let go of some of the corn in the third quarter.
So we feel like as the corn basis rallies ---+ you know, the farmer really looks at it from a flat price perspective.
But when we say filling hedges for ourselves, we would do what we normally do, which is lock in margin.
So it's a matter of making sure we can buy the corn basis.
Well, we continue to see Canada being one of our strongest customers.
We have Brazil in the first quarter and late last year became a strong customer.
We have the Philippines; we have India.
We have other countries like that.
<UNK>, do you want to comment any more on ---+.
I think the only one you missed that came back in ---+ we missed them in January ---+ was UAE.
They are back on the list breaking forth right now.
Back in a strong way.
Yes.
We are seeing other interest from newer countries, as well.
We think there's expanded countries coming as well.
And that's ---+ when we look at it, when you look at ---+ there is 30-plus renewable mandates around the world today, ranging from 2% to 10% and growing.
So when you look at that ---+ as you look at the price of ethanol, people are discovering the price of US ethanol globally is a very competitive fuel.
These mandates are going to start getting filled.
And when you start filling these mandates, we believe by mid-2017, global demand will be greater than global supply, when you take into consideration utilization rates around the world of the ethanol.
Now, there's more ethanol production available globally than global demand; but when you run utilization rates in the mid-80s globally, you really have to see a very big margin structure to bring back that extra 1% or 2% or 3% of ethanol production, which we don't think necessarily just comes on that easy.
A lot of it is stuck in Brazil with the current sugar issues.
But that's something that we believe is very fundamentally in our favor on going forward, where utilization rates just can't come up, but assumption rates continue to increase.
And that doesn't even take into consideration the E15 initiative that is in place in the United States today, where when you look at three years out, and five years out, and 10 years out, when you start to get 30% and 40% and 50% of the fleet E15 ---+ with an E15 cap on the fuel tank, all of a sudden it becomes the standard, not the exception.
And you'll see more wide-range use of and selling of E15 as well.
And that is another factor ---+ doesn't even include the 2017 numbers I have given you.
In the US I think that you will see capacity come online.
I think you will see some expansions take place, as we are already seeing with a couple of plants across the US, and our expansion, and some more debottlenecking.
So there's more debottlenecking to happen before I think you have to sit and build a plant.
But I still think you will see a plant here and there get built, if they can see the demand down the road.
Obviously, if demand doesn't materialize and we overbuild again, then obviously we are going to have to deal with that.
But that just still takes your lowest-end, most inefficient plants will be the first ones to close.
So overall I don't know that we are going to see some rapid build.
I think we have to see evidence that demand will be greater than supply.
But I still think in the meantime you will see some capacity expansion come online.
I can't hear you.
Can you repeat that.
I think you'll see an increase in the need for more fleet, potentially.
Yes.
But I also think when you look at it ---+ so it depends; if they run slower, will they add more locomotives and more power.
That's the first thing.
The second thing is: we have now seen cars offered to us at $600 to $700 a month for one-year terms, and that's off of $3,000-plus off the highs.
So the market is coming back in our favor from a railcar-leasing perspective.
We've seen rate increases because of some of the slower speeds start to take shape, but we'll have to see how that transpires.
Yes, I mean it's very early.
Obviously, in the West this is great, clear weather to plant corn.
So let's not complain too much about no rain.
Let's get the crop planted in a big way and then start to watch the forecasts after that.
We are starting to see some of the forecasts get wetter, but I think the farmers' at full planting mode in the West.
In the East I think they are off to a solid start.
We need to make up a little bit in the Southwest in terms of ---+ we are behind there.
But I think overall it looks like we have a clear window.
And we have good soil moisture east of the Mississippi.
And it looks like a good forecast in our favor, if we can achieve that forecast once the farmer is done planting.
So overall, not too concerned just yet with weather, but watching some of these dry spots closely, as you are.
Yes ---+ look, I mean, it's not like last year, where we saw a curve just explode.
But I think when we look at long-term structural margins for the industry have been between $0.18 and $0.25 a gallon is kind of what we had said.
We have seen some years like last year, where we saw $0.30, $0.40-plus margins.
We do see some of those in the East today.
Hard to say what the year will be, but the first quarter will definitely not be the defining quarter for our year.
So our trailing 12 is still strong.
It should remain strong for the after the next couple of quarters.
And we will continue to focus on paying down our debt and managing our Companies overall.
It may not be like last year, which was a great year for us.
But we feel like getting rid of the first quarter and moving on to the second will give us some opportunities then for the forward curve.
Well, we don't give year EPS guidance.
But I would say the difference now is the fact that we have 1 billion gallons of production versus what we had ---+ 300 million gallons back then.
And we have $100 million or so of non-ethanol operating income, inclusive of our corn oil revenues, so ---+ and growing that as well.
And then, obviously, some other things that are happening around the space in terms of ---+ we can now run harder because of the investment that we've made in SMT; and maintain yield, which ---+ it's a little bit different story than in the past, as well.
So we don't give full-year guidance on EPS, but when we say that, it is obviously a very different platform than it was in 2012, and even more so than it was at 2009.
So you can kick out the highs and lows, but I would say we probably missed the highs last year as a company anyway.
So our average crush for a lot of the quarters was around $0.30 to $0.35 a gallon.
But the daily averages were higher than that, as you can see at other companies that report at times.
But overall, like I say, we believe that this isn't a one-year deal for us.
And we've built the Company to withstand these cyclicals, and we saw a cyclical in the first quarter with oil doing what it's doing.
And the small loss had very minimal impact on our strategy.
Look, we are.
We are 90% exposed to spot today.
So I don't think we will come into any quarter fully in the spot.
But with the strength of our balance sheet, obviously ---+ you can see we came into the first quarter exposed to spot.
It was a wrong decision, actually.
And so like I said, we are often criticized and often applauded for our strategy, and this is one we got whipped a little bit on, thinking that spot margins were always going to be the best place to be.
I still think there's lots of other reasons from a strength of Company, generation of cash, that you lock a certain percent away, with the size and scope and scale that we are.
But you can see, I think we went through the worst of it.
And I'm not sure we will aggressively lock Q3 away, but we still believe that a majority of our shareholder base and our owners expect some percentage of our forward book to be locked away when the opportunity is there.
So we make the best decisions that we can, but obviously the balance sheet is a little bit different than in the past, where we could stay unhedged longer, as long as we feel like that's the right thing to do.
So I wouldn't say we are aggressively going to go to 80% in Q3 today.
But when you are staring at $0.19, $0.20 a gallon and then $0.30 in the East on some of your plant, it's not such a bad place to start.
Well, we were running at 92% of capacity for the team, but we are now running at 96% and pushing towards 100%.
So it was more from a standpoint of this was the decision we made.
I think you can disseminate from the information in the market that others had cut back as well, but others had kept running right through low margin, waiting to see what their returns were going to be.
So it's a combination of a little bit of both.
Overall, though, I think we are pushing back towards the higher level.
But the market seems to be leveling off here in this 920 to 930 range.
And probably we will see some continued weakness in production as turnarounds continue to happen.
We'll see when we come out.
You've got to remember: in the fourth quarter it was cold again ---+ and obviously, it's winter; so it always gets cold ---+ but in the fourth quarter and then the first quarter, we ---+ the industry ran full out.
Everybody had done their work on the plants.
The temperatures were perfect.
You could run these plants full out without the cooling capacity needed.
As we get into summer and spring here, then you have to start bringing cooling capacity on, which gives you limitating factors on how hard you can run.
So that will be some of the things that temper overall production rate back down from that 950, 960, 970 on a weekly basis.
But overall we are running back towards capacity.
Yes.
Basically, when you look at the corn basis in the East and corn basis in the West, you have parity.
So it could take you 15 over to buy corn in the middle of Iowa or Nebraska, and it could take you 15 over to 20 over to buy corn in the middle of Indiana.
So when you look at that, the price spread is approximately $0.11, $0.12 a gallon.
So when you get to there, you are looking at a $0.11 to $0.12 a gallon better margin structure just off of that.
And distillers have more value in the East and the Southeast, more so than the West.
So it's a combination of ---+ all those factors have brought a weaker margin structure in the West and a greater margin structure in the East.
Now, that has been consistent now for at least six months.
And what we were used to is where the West always led the way with the margin structure.
So Eastern plants have ---+ you know, the portfolio that we have ---+ and I'm talking about the Corn Belt.
I'm not talking about the coast.
So Eastern Corn Belt, Western Corn Belt.
The geographic portfolio that we have ---+ we get the benefit now of the East, while the West is a bit of a drag where the past comes up.
No.
I don't have a plant out there, and I really can't comment on that.
I know that they've had ---+ for a while Los Angeles was a very hot market in Q1 relative to everything else, the LA market or the West Coast market.
But overall I don't have a view on margin structures out there.
Not at all, actually.
The site in Shenandoah ---+ we basically increased our ownership there.
We have a new management team running the business now.
We are focused on streamlining and getting some kind of straight-line production in terms of some of the variability that we have seen in the past.
The site in Shenandoah performed consistently throughout the winter, but that is the most difficult time, typically, for an autotrophic algae growth initiative.
But we've discovered new ways through our ethanol plant and synergies to use the ---+ beyond waste heat and CO2 ---+ to grow algae in winter in our facility.
Now we can take what we learned this winter, which ---+ we operated, literally, straight through the winter, which we've never done before without much downtime.
We found the robust cultures that we needed within that time period.
And now we are actually incorporating that for use in some trout fish feed trials that we are going to start here shortly.
And we are collaborating for piglet trials, as well, for our feed product.
We are still seeing strong interest in protein and superfoods, with the aspect of algae for direct human consumption.
It's one of the fastest-growing categories in health food and supplement market.
What we are making sure is that we can get our strains registered from an Omega-3, DHA, and EPA standpoint, which is very lacking in vegetarian diet.
So when we look at it, we have discovered a lot of new opportunities within the platform.
We still are making changes to the technology to make figure out what we can grow for the cheapest CapEx and the highest yields.
We think there's more to come on that.
But our silence is not a viewpoint that what we are doing is anywhere near ---+ in comparison to our silence.
We just don't want to overpromise and underdeliver.
We'd rather underpromise and overdeliver down the road.
And we feel like what we're doing right now in that platform is now running it, and trying to run it and make it look more like a business than a science project.
So I think we're making a lot of progress there, but more to come in the next couple of quarters, most likely.
It depends.
We just want to be able to sell something and make money doing it.
I don't know how significant the CapEx is going to take to do that.
There are smaller, niche markets that we can go after.
What we really want to do is ---+ yes, our goal is to get to a point where we make a decision to say: we are going to grow a ---+ we're going to build a commercial farm to grow our algae.
So we are getting closer to retrofitting our technology so that we can get to a cheaper CapEx at a yield point that makes sense, of a revenue break, or ---+ much like a farmer or much like any other production plant does.
So if we weren't feeling like we can at least get to a point to make a decision, we would stop the project now.
But we are not stopping the project, either from product development and/or technology development or CapEx decisions.
No, I don't think so.
I think that is a structural change that we felt across the US, where they are producing 84 base stocks.
If you look at the Magellan system, their base fuel that they ship is 84 octane.
Correct, <UNK>.
Correct.
So when you look at that, obviously, you can't leave their fuel terminal systems without blending ethanol, or you blend high-octane normal gasoline ---+ premium gasoline.
So the RINs have a world of their own.
It's a small-market supply and demand.
And when you import gasoline, oftentimes you have to buy a RIN.
And so that's often the market defining it.
But if you are a blender, and typically everybody right now, because of the economics, are blending to their required level.
So we have to wait for the RFS to figure out what those required levels are.
But we know 2014 will be a push down the road.
So when you look at that, I'm not sure ---+ I think the one thing you are missing, though, when you say we have record gas demand or a very good gas demand is the fact that we are producing this year at a 920 to 960 run rate.
And last year overall we didn't produce at that run rate.
So our daily available ethanol is higher with a higher gas demand.
So there is some equilibrium here.
And when you look at everything we produce against an 800 million gallon export program and the stocks number, we will see a draw in stock; but we don't believe we will see a draw in stocks to the point that we saw last year.
So we think stocks could still make a run towards below 18, but we don't think that stocks will make a run to below around the 15 range, like they did last year, when margins hit the highs.
So it's a combination of all of those things that defines the strategy.
It's not just a combination of ---+ to say that you have the best gas demand that we've seen in years.
Because you also have the most ethanol production we've ever seen, and you also have an equilibrium point where ethanol ---+ seems to have enough ethanol for the demand.
So it's combination of all those things.
Well, when you look at where we are heading right now ---+ I mean, when we looked at the 2015 initial RFS program, we would have expected that the whole program was based on 150 billion gallons of gasoline demand and driving miles going up.
Also, I don't think they planned for the electrification of the fleet and/or alternatives that were in place that are happening today, as well as these CAFE and the ---+ in terms of miles driven, but getting more miles out of your gas tank is a big factor, right.
So all of that weighs down on overall gas demand.
Obviously we are seeing the impact of low gas prices and people willing to drive more, because when you have $10 and you fill up at $2.00 a gallon, it's a lot different than when you filled up at $4.00 a gallon.
You can go a lot further and feel better about it, feel better about that.
So I can't comment on the 3 trillion miles.
Those are awfully big numbers for us.
But I can comment on the fact that there are other factors that have made the determination of where gasoline demand is going and probably where it's going to max out here.
And a lot of that has to do with CAFE, and electrification, and other alternative things that are happening in the market.
But overall we like it when we are pushing 138 and 139, because the industry with exports is definitely ---+ equilibrium turns in our favor.
We can see over the next five years an expanded use of E15 broadly and nationally, that's really what you make the spread up and can tighten things up much more than, say, gas running up another 142 or something like that, or gasoline demand running at 142.
That will only add 200 million gallons to the demand base.
We really need 1 billion gallon driver.
And the only 1 billion gallon driver that we can see coming is the potential E15 national expansion, which we are working on very hard.
Every 100 million gallons moves the needle.
That's how sensitive we are, right.
Because when you look at the supply of 21 million barrels or 880 million gallons of stocks ---+ if you take that down 100 million gallons or 200 million gallons, and your stocks number now goes to 600 million gallons, or 15 million barrels, or 16 million barrels ---+ then you've got some real opportunity, right.
Every 200 million gallons will make a significant difference at this point.
We are going to have to keep up with some of the expansions, but I think overall we can do that.
Thank you very much.
And thanks, everybody, for coming on the call today.
We appreciate it.
Obviously we are more optimistic about the rest of the year than our results in Q1.
But I think we've shown that the resiliency of our platform and the abilities to withstand a cyclical downturn once again has been proven out.
And we emerge as a company just as strong as when we started the quarter.
So we appreciate your call and appreciate your support.
And we'll talk to you next quarter.
Thanks.
