Ethanol Is No Field of Dreams

by: Thomas Smicklas June 20, 2008 | about stocks: AVR / CAG / PEIX / VSE    

Thomas Smicklas

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If you haven't sold ethanol securities yet, too bad for you. There have been plenty of warnings about ethanol stocks and the choice of ethanol as a fuel of subsidy and political hucksterism. Now, ethanol producer profit margins are being crushed by soaring corn and natural gas prices. It's enough to make your average greenie weep. It's enough to make your average investor weep as well, except for the shorts.

New ethanol plant cancellations continue. VeraSun (VSE) on Monday announced the delay to the start up of two nearly completed plants. Twenty-four other ethanol plants have also been delayed or canceled in the past few months around the United States that were supposed to produce 2,195mgy's of fuel annually. Further plant delays and outright cancellations are anticipated because of the aforementioned low margins.

Four ethanol companies trading publicly have been put on many analysts' hit list:

  • Aventine Renewable Energy (AVR)
  • ConAgra Foods (CAG) for reasons including, but not limited to, ethanol
  • Pacific Ethanol (PEIX)
  • VeraSun Energy

Some argue that a rebound in ethanol is inevitable. I cannot quarrel with that train of thought. There is a season for practically every investment sector. However, there are at least three risks that may knock ethanol out of the box regarding a price recovery relative to gasoline.

If ethanol economics improve, the rapid return of partially constructed or mothballed plants would likely make the recovery a brief event.

The political situation for corn ethanol is uncertain in post-November's landscape. Corn ethanol has become a controversial topic this past year once the negative unintended consequences of grain for fuel became known. The current meteoric rise in corn prices due to the flood crisis in the mid-west may put pressure on the incoming President and Congress to take action. There is a good chance that the Renewable Fuels Standard (ethanol mandate) will be altered - in the battle of food vs. fuel, food wins.

The price of corn is well beyond the ability of ethanol companies to control (or even forecast). Casting the blame on Global Warming is getting a well-deserved cool reception at present. "Acts of God" such as the flooding are always possible. Feedstock is vital to our country and other countries that import our meat, grain and grain by-products for human consumption.

There are hundreds of years of coal and, by reasonable estimates, a three generation supply of crude oil and six generation supply of natural gas that can be relatively easy to extract (given the political will to do so). Much of it is in North America and other friendly confines. Food riots, inflation, lowered standards of living and life choices imposed by environmental elitists on us mere mortals are not options that will prevail.

Still, there is the chance that the spike in corn prices will reverse next year. Credit Suisse Analysts have pointed out that after the severe floods suffered in the corn belt during 1993, crop yields grew dramatically the following year vs. 1991-2.

For the ethanol crowd, this kernel of hope may stalk naysayers and produce positive results in 2009 and beyond.

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This article has 14 comments:

  •  
    Jun 20 09:36 AM
    lets go after that hundreds of yrs of coal ! make it clean.
    > jack
    Reply | Link to Comment
  •  
    Jun 20 10:08 AM
    I think your title is very misleading. We both know ethanol can be made from products other than corn. Instead of stating the obvious, why not do a little homework and discuss the potentials/drawbacks of cellulose based ethanol?
    Reply | Link to Comment
  •  
    Jun 20 10:23 AM
    As I recall, the reason corn ethanol exists at all was to help out farmers who were going broke at the time due to depressed corn prices. How it mushroomed into its present manifestation is simply another typical governmental misadventure.

    As a result of the initial Arab oil embargo and its devastating effect on their economy, the Brazilians also decided to get into ethanol in a big way. With one important difference, Brazil chose SUGAR as the feedstock instead of corn.

    Due to the nature of this product (...sugar contains 6X the energy of corn), they're now in the driver's seat, as it costs less than $2 per gallon at the pump and all the country's vehicles utilize it. We could do this, too, but we haven't shown any such inclination so far.

    Reply | Link to Comment
  •  
    Jun 20 10:29 AM
    So, Brazil runs its economy on the world's chronic oversupply of cheap sugar, France produces 3/4 of its electricity from nuclear reactors, while we dither about whether to even utilize our known existing domestic energy resources. Like I said, just another typical Washington inspired misadventure!
    Reply | Link to Comment
  •  
    Jun 20 11:24 AM
    paulk8756-
    if you would please figure out how to drag the US southward so that we straddle the Equator, it would make it a lot easier for us to grow sugarcane. Right now we can only do it in South Florida. If we could get Iowa to, say, where Havana is, the US would be a sugarcane powerhouse. Please think on it and get back to me.
    Reply | Link to Comment
  •  
    Jun 20 12:18 PM
    Ethanol or E85 fuel is a good idea and a good place to start with a alternative fuel source, They just need to work out some of the BUGS and the flooding was a big set back. We need to look into solar and other fuels.
    Reply | Link to Comment
  •  
    Jun 20 12:45 PM
    Ethanol has some promise but the pols keep meddling in it and get in the way. Subsidies for corn ethanol and blocking measures to make sugar cheaper hurt ethanol in the end.

    Despite other ways to make ethanol here & now in the US ethanol means taking what should be bourbon, doritos, pork-chops, drumsticks, or ribeyes and burning it.

    Even if we go to other sugar sources for our ethanol we still have to divert land from raising food to raising ethanol raw material.
    Reply | Link to Comment
  •  
    Jun 20 01:09 PM
    There is no three generation supply of crude oil.
    Reply | Link to Comment
  •  
    Jun 20 02:09 PM
    We can grow the amount of corn needed for food and fuel,
    When i was a kid we would grow hundreds of acres of corn than the goverment would give us a set price to not harvest it and let it rot in the fields so the market would not be flooded with supply and keep the cost up. We just need to get back on track,
    Someone or something is stopping this.
    Reply | Link to Comment
  •  
    Jun 21 07:04 AM
    I'm not a chemist but is it possible to supplement the rapidly diminishing corn crop with sugar cane to ensure availability and bring down the average cost of a gallon of ethanol?

    ..and yes I realize that could cause a run up in the demand and cost of sugar cane.

    Is there some potential for investment opportunity in that area (sugar ?)
    Reply | Link to Comment
  •  
    Jun 21 08:55 AM
    The problem is the land set asides & similar as noted. The agricultural markets are subject to tinkering from government programs, subsidies, land set asides etc. In addition, for sugar there are a lot of barriers to the importation of cheap sugar.
    Reply | Link to Comment
  •  
    Jun 21 02:32 PM
    My 2-cents-worth barbaric yawp:

    a) as a person with asthma, it's distressing to me that ALL focus has turned to global warming, and NOBODY talks about pollutants any more. Excuse me for wanting the world to be less poisoned so that I can use my (also poisonous) inhalers less to survive. We hear about carbon every day - but when was the last time you heard anyone say "CFC" or "PCB" or "terratogen" or "carcinogen" or "sulfite" etc. etc.? A very successful manipulation of public thinking is at work here.

    b) Brazil has a thriving ethanol industry, thanks - it's old-school to them - keep in mind it was not engineered by the mentally challenged USA gummint

    c) if coal and gas can be made clean, I'm all for it, and agree we don't need the solar, wind, wave, geotherm and other alternatives - we can coast for 50-75 years and let our great grand-kids worry about it.
    Reply | Link to Comment
  •  
    Jun 21 04:30 PM
    Of all the specious arguments regarding energy substitutes, the use of Brazil as an example belongs near the top of the list. Some facts to puncture the illusion ethanol from sugar cane is some kind of a solution:
    1. Brazil uses 10 times as much oil as ethanol
    2. Brazil has less than one tenth as many vehicles as the US
    3. Brazil has a surplus of cheap labor willing to work 60 hours a week of back breaking labor for $200 a month.

    The real Brazilian energy miracle is all the oil they're finding.
    Reply | Link to Comment
  •  
    Jun 22 07:29 PM
    Also to add to the Brazil story... They are burning down hundreds of acres of Rain Forest to create fields and swamps to grow sugar cane, corn, etc.
    Reply | Link to Comment
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