Limited ethanol distribution channels and slowing production growth means surplus railroad tank cars

Implications: Two years ago, the ethanol industry went into overdrive in expanding production facilities and ordering railroad tank cars to move the expected flood of new production. No one, however, looked at how the ethanol was to be handled at the customer end of the distribution network and that has produced a major problem for the new industry. Even with corn prices well above $5.00 per bushel, ethanol producers could make about $0.20/per gallon if they could get their product to the final customer, the US motorist. Unfortunately, there are only four terminals ready to handle unit trains of ethanol and the shipment of small carload lots is just too slow to move the expected production. Tank car lessors who ordered large numbers of railcars to move ethanol have been left holding the bag this time waiting for the gasoline distributors to get with the program.

Analysis:  In 2007, the industry produced around 6.5 billion gallons of ethanol, up from roughly 5 billion gallons in 2006. By the middle of 2007, the industry capacity was over 7 billion gallons and another 6 billion gallons was set to come online before the end of this year. To meet the demand for transportation, tank car builders and tank car lessors were added 12,000 ethanol cars to the national fleet last year and planned to add a similar number of new cars this year to handle the expanding production. Near the end of last year however, the growth in production slowed to a crawl and all reports since January hint that the total production for 2008 will be closer to 7 billion gallons than to the expected 9-10 billion gallon output previously expected. Last year there were dozens of tank cars looking for a home; this year, the number of surplus cars will reach into the hundreds and thousands as producers cut back because they cannot get their product to market.      Despite the record level of corn prices, it has been a buyers’ market for ethanol since last summer. Perhaps that is why the USDA has forecasted that farmers will plant fewer acres of corn in 2008 than they did in 2007. If that forecast comes true, ethanol product will probably cap out for a year or so until the distribution networks along the Atlantic and Pacific coasts are built to handle all the ethanol that is ready to flow from the Midwest. In the mean time, companies like Trinity Industries (TRN), GATX Corp (GTM), The Andersons (ANDE) who have made commitments for ethanol tank cars will have to grunt and bear it for a year or so more.