Todd Becker couldn’t stop checking prices on his iPhone as he prepared to speak at a Nov. 21 investor conference in Manhattan. Ethanol was rising, and corn was falling, he says, driving potential profits on the gasoline additive to some of the highest levels in six years.
Becker, chief executive officer of Green Plains Renewable Energy, says he didn’t want to wait for a bank loan. Instead, he ordered deputies to wire a third of the company’s cash — $108 million — and buy two ethanol plants, in Nebraska and Minnesota, from creditors of BioFuel Energy. He says he worried that if he didn’t jump, rival Valero Energy in San Antonio would snatch the properties, robbing him of a chance to expand annual production by almost a third, to 1 billion gallons.
Such is Becker’s confidence in a U.S. industry rocked by at least a dozen bankruptcies since 2008. Some investors are still spooked after BioFuel defaulted on its debt amid a 2012 drought, making David Einhorn’s Greenlight Capital, its largest shareholder, a victim of ethanol’s volatility.
Political challenges are piling up, too. Big Oil lists minimum ethanol requirements as its top policy concern for 2014 and wants to eliminate them. Government officials are already backtracking. A week before Becker bought the BioFuel plants, the Environmental Protection Agency proposed lowering its 2014 requirement for corn-based ethanol in U.S. gasoline to about 13 billion gallons from 14.4 billion.
Sens. Dianne Feinstein (D-Calif.) and Tom Coburn (R-Okla.) want to scrap mandates for corn-derived ethanol entirely. Ethanol consumes 44 percent of the U.S. corn crop, inflating food prices while harming the environment and potentially damaging vehicle engines, Feinstein says. Rising U.S. crude output diminishes the need for ethanol, says Scott Faber, vice president of government affairs for the Environmental Working Group.
“Ethanol is bad news for anyone who eats, drives a car or cares about the environment,” Faber says.
Becker isn’t deterred.
“It’s a contrarian play,” he says, driving along Interstate 29 east of the company’s Omaha headquarters. “But the fundamentals of ethanol are as good today as we’ve ever seen them.”
Becker says ethanol, a form of alcohol made by fermenting starch from corn and other crops, will thrive because it contains the octane that modern, high-compression engines need. Ford and others are designing cars to run on ethanol mixtures greater than today’s 10 percent. And at $1.92 a gallon, ethanol costs refiners 28 percent less than petroleum products used to make gasoline.
“We’re the cheapest molecule in the fuel tank,” Becker says.
As for the environment, growing corn for ethanol is less harmful than drilling, refining and using oil for gasoline, Becker says. The technology isn’t yet commercially viable to make ethanol from switch grass and other cellulosic sources, which would require less energy to produce and release fewer greenhouse gases during manufacturing, use and disposal, Becker says.
“I’m not a dreamer,” he says. “I want to make money.”
In the six years that ended in 2013, Becker built Green Plains into a company with $3 billion in annual revenue and 700 employees. How did he do it?
He buys plants on the cheap and converts them for low-cost production, says Matthew Farwell, an analyst at Imperial Capital. Green Plains also deploys sophisticated futures trades, options and swaps to make fewer wrong-way commodities bets than such rivals as now-liquidated VeraSun Energy.
As corn soared 66 percent during the first half of 2008, VeraSun, the industry leader at the time, stumbled. The company bet that prices would continue to rise, buying futures contracts that would require it to pay more for corn than its rivals if prices fell. And prices did fall. Corn tumbled 61 percent; ethanol, 51 percent.
VeraSun lost $476 million on revenue of $1.1 billion in the third quarter of 2008 and filed for bankruptcy.
Becker keeps his grain purchases and ethanol sales in lock step. He rarely has more than a day’s worth of corn that hasn’t been sold and assigned a slot in his ethanol production. That helped him charge premium prices for ethanol when corn was expensive and protected him when values of both tanked.
Green Plains lost a comparatively small $880,000 on revenue of $105.9 million during 2008’s third quarter and had enough cash to buy two VeraSun plants. For last year’s fourth quarter, Green Plains reported profit of $25.5 million, up 281 percent from a year ago, excluding a one-time gain on the sale of grain elevators in 2012. For all of 2013, profit almost quadrupled, to $43.4 million.
Companies that trade the commodities separately can wind up with big inventories and wide price swings, says Michael Cox, a Piper Jaffray researcher. The survivors use Becker’s strategy now, he says.
Becker’s tactics made Green Plains, with its 12 plants, the fourth-largest U.S. ethanol producer by production capacity in 2013, behind Archer-Daniels-Midland, a consortium called Poet, and Valero Energy — and ahead of Flint Hills Resources, a subsidiary of Koch Industries.
The top five now control 45.2 percent of the industry, up from 39 percent in 2008, the trade group Renewable Fuels Association says. Unlike the others, Becker relies exclusively on corn-based ethanol. ADM is 30 times as big as Green Plains, and the unit that includes ethanol accounts for 13 percent of the company’s revenue.
“Todd has a disciplined approach to maintaining margins and growing through acquisitions,” says Sam Halpert, manager of a Van Eck Associates fund that owned 407,600 shares in September. “He’s got a fair amount of stock, which we like.”
In January, Becker had options to buy 250,000 shares at any time for $12 or less each. He already owned 509,584 shares.
Green Plains’ headquarters is humming on a frigid December day in Omaha. Becker, who is 6 feet 3 inches tall, thrusts his hands as if throwing a basketball to emphasize a point during a 30-minute strategy session.
He grills his two dozen traders on corn hoarding in Nebraska and animal-feed demand in China. Back at their desks, they pore over potential plant-by-plant profit breakdowns, using futures contracts that cover a matrix of commodities and time frames.
Becker doesn’t waste time when deals pop up. After his subordinates wired cash to buy the BioFuel plants, Becker took control of the Wood River, Neb., facility at 5 p.m. that day. By lunchtime the next working day, his traders had sold most of the ethanol and animal feed Wood River would produce in December and bought most of the corn it would need, plus natural gas to heat it.
In half a day, they generated an operating profit of as much as $10.2 million, a 10th of the plants’ purchase price, says Jason Ward, a Northstar Commodity Investment analyst.
Becker bet big in 2011, when he sold ethanol and bought corn futures for most of the following year. Corn had dropped as Europe’s debt crisis cut demand and Ukraine tripled exports. Becker figured that he could make 20 cents per gallon of ethanol, a third more than usual. He got lucky when a drought pushed corn from $5.50 a bushel to $8.24 in July 2012 and he didn’t need to buy any.
Green Plains earned $11.8 million in 2012; Becker got a $4.3 million paycheck. Valero had an operating loss of $47 million on ethanol that year.
Becker started a separate Green Plains hedge fund that had $55 million in assets as of early February. He hopes to reach $1 billion in assets.
“There’s always another bottom coming in the commodity markets,” Becker says. “We prepare for that, and when margins turn, we can generate significant amounts of cash.”
Jim Barry, now chief investment officer of renewable power at BlackRock, the world’s biggest money manager, recruited Becker for a forerunner to Green Plains in 2007. Becker took charge at the Chicago start-up, which later bought out Green Plains, gaining its name and stock listing.
“Since what we were really doing was playing in commodities, we needed a guy who could do that,” says Barry, a Green Plains director whose various BlackRock funds own 1.3 million shares.
Becker learned to temper risk with caution after watching his grandfather, a Russian immigrant who ran a scrap yard and grew soybeans before opening a Los Angeles deli. “Millions of dollars passed through his hands, but he died with nothing,” Becker says.
The first of his family to attend college, Becker chose the University of Kansas because of its scholarships. He interned at what’s now CBOE Holdings in Chicago.
Becker experienced what he calls a perfect trade in 1993. He was working at Farmland Industries, then the biggest U.S. farm cooperative.
Farmland sold so much wheat that competitors became convinced that it had huge reserves. In fact, Farmland’s traders were also shorting wheat, or selling borrowed grain with hopes of profiting when prices fell. Becker says the sheer volume of wheat they were selling confused rivals.
When competitors started dumping their reserves, Farmland was the only buyer. It resumed wheat sales and made huge profits, Becker says.
“It was like a trifecta,” he says.
Becker modeled Green Plains after Farmland. Rail cars, storage elevators and shipping terminals complement his trading desk and ethanol plants.
Fifty miles southeast of Omaha, in Shenandoah, Iowa, Green Plains produces 65 million gallons of ethanol a year in towers that emit a sweet beerlike scent. The company wrings 175,000 tons of animal feed from leftover parts of the corn. It converts some feed to corn oil, adding a nickel to its typical 15 cents-a-gallon ethanol profit. It saves 3 cents a gallon by grinding corn thoroughly.
Becker is sure lawmakers will scrap minimum ethanol requirements. “It’s just a matter of when,” he says.
Meanwhile, Green Plains is ready for that once-in-a-lifetime trading opportunity, that breakthrough revenue multiplier, whatever it might be. “Green Plains hasn’t had an event like that, but we will,” he says. “We could grow quickly into a $10 billion or $20 billion company.”
The full version of this Bloomberg Markets article appears in the magazine’s March issue.