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Green Plains Ethanol Biz Rallies, Algae Project Close At Hand

Green Plains Renewable Energy provided some green shoots fodder for the ethanol industry to nibble on this week. The No. 4 ethanol producer in the U.S. posted a profitable second quarter, two plants purchased last spring are now on line and execs with the company noted slightly improving margins in the third quarter. Green Plains also is expected to begin producing algae by the end of September as part of the BioProcessAlgae project.

Green Plains net income was $627,000 in the second-quarter compared to a loss of $1.2 million in the same period last year. The company's ethanol production segment generated $2.6 million in operating income and experienced an improvement in its margins, CEO Todd Becker said during a conference call with investors.

Becker said he was encouraged by growing demand for ethanol and the renewable fuels mandate, which requires an increase to 12 billion gallons of ethanol in 2010.

"Currently supply and demand is close to equilibrium," Becker told investors this week. "With a 1.5 billion gallon increase in demand coming we are optimistic it will stay that way."
The ethanol industry still faces a number of challenges. It is still difficult to secure any kind of financing, and overall demand for gasoline is fairly stagnant. And its future is tied in large part to whether the Environmental Protection Agency increases the ethanol-blend limit to 15 percent. POET CEO Jeff Broin argues that without the increased blend wall, development of second-generation biofuels will come to a halt.

What's interesting about Green Plains is that it's growing while much of the industry is still struggling. And that's hardly something to scoff at considering at least 10 ethanol producers have filed for bankruptcy protection in the past year. Meanwhile, Green Plains has grown from a single 55-million gallon plant to six plants capable of producing 480 million gallons of fuel grade ethanol.

Green Plains produced 77 million gallons of ethanol in the second quarter. That number is expected to reach 100 million gallons in third quarter with the addition of its two recently purchased plants in Nebraska, Becker told investors this week.

The company bought in May two plants in Nebraska for $123.5 million, which boosted its capacity for 45 percent and made it the fourth-largest producer in the U.S. It helps that Green Plains paid the equivalent of 82 cents an operating gallon for the plants.

A number of companies have delved into the algae business in the past several months. But Green Plains' BioProcessAlgae project is interesting because of its focus on carbon sequestration along with advanced biofuels production capability. Using algae to for carbon sequestration may help ethanol producers clear the EPA's proposed biofuel regulations.

Ethanol producers would have to meet tougher lifecycle assessments for greenhouse gas emissions, under the proposed rules. The rules are controversial because of the so-called indirect land-use impact, which measures emissions generated when agriculture land in the U.S. shifts to the production of ethanol and in turn, causes farmers in other parts of the world to clear forests to for food production. The EPA recently conducted a peer review of the rules.

Corn-based ethanol must emit 20 percent less greenhouse gas than gasoline. Under the proposed rules it would fail to meet those standards. Granted, current corn-based ethanol producers would likely be grandfathered in under the rules. I expect scrutiny of corn-based ethanol will only get harsher and tighter rules may come down the line eventually, which makes Green Plains' algae project a worthwhile experiment.