A U.S. glut of fuel-grade ethanol has major producers, including Green Plains Inc (GPRE.O) and industry pioneer Archer Daniels Midland Co (ADM.N), pursuing other markets and idling excess capacity in an effort to rebuild sagging margins.

A truckload of corn is dumped into a chute at the Lincolnway Energy plant in the town of Nevada, Iowa, December 6, 2007.

ADM and Green Plains both said on Tuesday they are converting fuel-ethanol capacity into beverage and industrial alcohol production, as well as idling some mills. The announcements follow Pacific Ethanol's (PEIX.O) decision in June to buy a beverage-grade facility in Illinois, a diversification away from fuel ethanol.

The shifts are the latest moves by the once-booming corn-ethanol sector that has struggled with thin margins for the past two years amid industry overcapacity.

U.S. ethanol inventories hit a record 23.705 million barrels in April, according to U.S. Energy Information Administration data, as demand failed to keep up with growth in supplies.

"The ethanol crush margin has been on a constant downward trend. The industry is figuring out how to deal with it," said Tanner Ehmke, senior economist with CoBank, a lead lender to ethanol makers. ADM said it was reconfiguring its Peoria, Illinois, corn dry mill to produce more beverage and industrial alcohol. It will steer the plant's fuel to export markets, taking 100 million gallons of annual production out of the domestic market. "That reconfiguration allows us to focus on the profitable products that we wanted to maintain," ADM Chief Executive Officer Juan Luciano told analysts on a conference call on Tuesday.

ADM has capacity to produce about 1.8 billion gallons of ethanol at its wet and dry corn mills, more than 10 percent of the 16 billion-gallon annual industry output. The company put its dry mills on the selling block last year but has yet to find a buyer.

Green Plains said it idled about 50 million gallons of capacity at nine plants during its second quarter. The company said it was transitioning its plant in York, Nebraska, to industrial-grade ethanol that can be used in paint and cosmetic products and will eventually upgrade that facility to produce beverage ethanol. Green Plains' profit margins in fuel ethanol in the second quarter averaged 7 cents per gallon, down from 15 cents per gallon in the same quarter last year. That ate in to returns, despite the company selling larger volumes of fuel in domestic and export markets. "The ultimate weakness in the ethanol margin during the quarter was a result of too much ethanol being produced by the industry," GPRE Chief Executive Officer Todd Becker told analysts.

Source: Reuters