Green Plains in the Hunt for Profits

This week ethanol producer Green Plains, Inc. (GPRE: Nasdaq) announced a joint investment with Ospraie Management in privately held biofuel and biochemical technology developer Fluid Quip Technologies.  Detailed terms were not disclosed.  However, it appears that Green Plains and Ospraie have taken equity positions in Fluid Quip in exchange for access to its biochemical intellectual property and engineering expertise.    Ospraie, which is an asset management firm focused con commodities and basic industries, was also rewarded with warrants for Green Plains common stock. 

There is never a dull moment for Green Plains investors as its leadership beats the bushes for profit of any kind.  There is precious little profit margin coming from the company’s historic ethanol business.  Indeed, management is trying quite hard to shed its image as an ethanol producer, adopting instead a self-identity as ‘biorefiner.’ 

Some investors may find the experience more like the adventures (or misadventures) of the hapless buddies in the movie Dumb and Dumber.  There was a cattle feedlot operation, which after about five years was scuttled in late 2020.  Green Plains took a 90% equity stake in joint venture with BioProcess Algae to commercialize algae production technology.  There is fish feed in the Green Plains story as well as high-protein animal feed.

This latest move to bring on technology from Fluid Quip is an interesting turn in the road given that Fluid Quip’s history lies in ethanol production.  Fluid Quip even has patents for its corn-to-ethanol dry grind process.  Thus, it would seem that Green Plains to going back to the basics with this latest partnership. 

Fluid Quip expertise has given rise to a system it calls Clean Sugar Technology and markets as a means to build multiple revenue streams from corn feedstock.  The system ‘bolts’ onto an ethanol plant and produces a stream of high-purity sugar.  The process increases oil recovery from the corn kernel, boosting profit margins on biofuel production.  Protein and fiber are commercial co-products.  Corn goes in and highly marketable products come out.

Those revenue-earning products are what the Green Plains ‘bros’ are interested in.  The company has dabbled in corn ethanol by-products, but its protein and fish feed efforts have not yet delivered the kind of results that would restore consistent profitability.  That is what Green Plains leadership is looking for - consistent, predictable profits. 

In Green Plain’s most recent financial report for the nine months ending September 2020, sales totaled $1.44 billion, well off the same period in the previous year when sales were $1.70 billion.  Ethanol production resulted in a segment loss of $100.9 million in the 2020 period, down from the $147.4 million segment loss in the previous year period  -  but a stinging loss nonetheless.  

The global ethanol market is growing.  Grandview Research, an industry research firm, has forecast 4.8% compound annual growth over the next seven years to reach $129.4 billion by 2027.  In the U.S. which dominates the global industry, operating returns have fluctuated widely.  Beginning in the late 2018, operating returns over costs all but disappeared on rising corn costs and an inventory overhang that stalled selling prices.  A partial recovery in 2019, was derailed by a demand destruction from the onset of the coronavirus in early 2020.  The Grandview analysts may expect demand growth, but profitability will hinge on the relationship between ethanol prices and corn prices.

Ethanol producers like Green Plains have tinkered with the corn ethanol production process enough to find greater efficiency.  By the end of 2020, on average ethanol plants were yielding about 2.8 gallons of ethanol for every bushel of corn.  Unfortunately, if the price of ethanol does not compare favorably with the price of corn, even high demand cannot generate profits. 

Green Plains wants to improve the by-products in its production process to generate multiple revenue streams from a single kernel of corn.  Importantly, the factors that impact demand and selling prices of such by products are different than ethanol.  For example, animal feed proteins can be impacted by prices of feed substitutes and even natural events.  Yet another example, is demand for high-purity sugars from the pharmaceutical industry to improve stability in drugs.  Drug production would represent a more consistent and less seasonal demand source.               

According to Green Plain’s leadership, Fluid Quip’s technology will be incorporated in Green Plains production process sometime during 2021.  Green Plains had $150.4 million in the bank at the end of September 2020, after the company generated $76.4 million in operating cash flow in the first nine months of 2020.  In last December 2020, the company sold one of its ethanol plants and certain rail transportation assets for a total of $49 million in cash.  An earnout provision could bring in an additional $75 million from fuel credits in the years ahead.   The cash kitty should provide enough working and investment capital for the company’s plans, giving shareholders some hope that Green Plains may eventually find success in its hunt for profits. 

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.