MGP Ingredients exits fuel grade alcohol business

by Eric Schroeder
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ATCHISON, KAS. — Nearly three months after announcing it would curtail fuel grade alcohol production at its Pekin, Ill., facility until market conditions improved, MGP Ingredients, Inc. on Tuesday said it is exiting the fuel grade alcohol business altogether. MGPI said the decision, which principally affects its distillery operations in Pekin, was prompted by continued eroding market conditions.

In addition to halting fuel grade alcohol product, MGPI said it plans to temporarily discontinue food grade alcohol production in Pekin for a period of 90 days. The decision is not expected to affect MGPI’s ability to service existing food grade alcohol customers since the company will utilize existing inventories in Pekin while continuing to optimize food grade alcohol production at its Atchison facility.

"The cutbacks in alcohol production relate solely to our distillery operations in Pekin, where all but a small fraction of our fuel alcohol is made," said Tim Newkirk, president and chief executive officer. "A smaller percentage of the Pekin distillery’s capacity is dedicated to food grade alcohol. Recent adjustments to distillery processes and equipment in Pekin should enable us to more efficiently produce food grade alcohol in Pekin when the appropriate time to restart that portion of our operations is determined."

With the changes, Mr. Newkirk said MGPI will be able to focus on its distillery products segment and on strengthening the company’s role as a provider of food grade alcohol for beverage and industrial applications.

Approximately 85% to 90% of the Pekin distillery’s total available production capacity of 90 million gallons annually has been dedicated to fuel grade alcohol, with the remainder dedicated to food grade alcohol, MGPI said.

Mr. Newkirk said the decision to exit the fuel alcohol business "represents another huge step in our business transformation process, which is intended to ultimately return MGP Ingredients to profitability. Factors such as extreme and sporadic swings in ethanol demand, volatility in raw material prices for corn, and the impact of volatile oil and gasoline prices have made it increasingly apparent that the fuel grade alcohol market is not one in which we currently can create value for the company and our stockholders on a sustainable or predictable basis."

The food grade alcohol market, on the other hand, is an area Mr. Newkirk said provides much greater stability. The market also is one in which MGPI has had a solid presence since the company’s founding, he said.

The announcement comes just a few weeks after MGPI laid off 14 employees at Pekin in connection with reductions in fuel grade alcohol production. As the result of Tuesday’s announcement, temporary lay-offs involving another 45 union employees and 20 non-union employees at the Pekin site will take effect this week.

As previously announced, the company in November discontinued its wheat protein and starch manufacturing operations in Pekin, consolidating the production of these ingredients at its Atchison facility. Just prior to that, the company ended its wheat milling operations in Atchison after entering into an agreement with ConAgra Mills to supply MGPI’s wheat flour requirements for use in protein and starch production.

MGPI said the majority of the Pekin facility’s proteins consisted of commodity wheat gluten, which principally is sold for use in bread and other bakery products, as well as in certain pet food applications. Likewise, the bulk of starches produced at the Pekin facility generally were classified as commodity ingredients for a variety of prepared foods, as well as bakery products.

In connection with the latest and previously announced business transformation actions, the company estimates that it will recognize $17.4 million in special charges for the quarter, including $811,000 on equipment at the company’s Kansas City facility and $11.2 million of which had been previously estimated and disclosed. In addition, the company has recorded a charge of $5.4 million to cost of sales for unrealized losses as of Dec. 31, 2008, on a natural gas contract for its Pekin plant. With the shutdown of protein and starch operations and the reduction and temporary idling of distillery operations at the Pekin plant, the commitments for the purchase of natural gas through the remainder of the fiscal year under this contract are in excess of projected consumption. The company said it will continue to settle and mark this obligation to market monthly until its expiration, which is scheduled to occur on June 30, 2009.

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