Good News for Ethanol as Corn Dips and Pipeline Test a Success

Corn prices settled below the $4 mark Wednesday for the first time since last October. December corn, the front-month contract, fell 23 1/4 cents to $3.88 per bushel. In the past month, corn prices have fallen $1.74 (31%) due to the rapid decline in both crude oil prices and the stock market. Luckily for U.S. ethanol producers, ethanol prices haven't been hit as badly as ethanol's crush spread has improved:

(what do I mean by ethanol's crush spread?)

Last month I mentioned that Kinder Morgan Energy Partners (KMP) plans to run a test batch of ethanol through its 105-mile long underground gasoline pipeline and, if successful, the pipeline could transport ethanol on a commercial scale by year's end.

Well, the results are in and the test ended up being a success. Kinder Morgan spent 18 months on the ethanol pipeline test as it made more than $10 million in upgrades. The upgrades consisted of replacing "a number of parts, including seals, gaskets and other components" and cleaning "the pipeline with a device called a "pig" that ran through the line and scoured the interior with brushes and chemicals." Kinder Morgan still has to make some more modifications, however, it expects to be transporting ethanol for customers by mid-November. If you put things in perspective, spending $10 million is miniscule in comparison to the $1 million per-mile price we would have to pay if we were to construct a separate pipeline strictly for ethanol.

Stock position: None.

Comments

[NOWHEREMAN:]

As a person who runs a Blogging site, you are more qualified than most who post these articles. At the very least, you have access to those who are crying and whining about their misfortunes.

The drop in oil prices exacerbates Peak Oil. This is not a contrarian opinion, just, IMHO, a view of reality.

There were a number of Oil Projects which were feasible with oil above 100 which are not any longer. Deep sea fields which would have delayed Peak Oil are now on hold or postponed indefinitely. Credit Market woes mean even the deep pocket producers must use their own capital to proceed with the Ultra high investment cost projects which are no longer feasible. If their revenues are going down because of lower oil, why decrease their cash to start/keep projects which keep their revenues down?

Meanwhile, Venture and Institutional capital which was funding all of The Alt. Energy coming into vogue has vanished. Lehman was the primary mover in these markets, good luck in finding another Institutional investor of that size. First they are still in the process of selling assets to give money back to investors, second they will have to recapitalize through safer investments before handing out money without an immediate return.

So, with oil at these levels and oil production rates declining every year at a 4-5% rate Globally, whatever usage is reduced by a Global recession will be offset. But when demand increases, the projects which should have been in place, won't be. Demand will grow, but inventories will be low and new supplies will be harder to come by.

You get what you pay for. High cost projects are not paid for by low cost oil.

2008 Oct 17 10:27 AM

[NOWHEREMAN:]

Devon Energy's CEO was on CNBC Friday night. Extraction costs at Haynesville are greater than the price of Nat. gas. They will produce 33% less in 2009 then previously forecast. He feels other producers have similar problems and with Credit Unavailable, expansion will have to curtailed overall to preserve what cash they have to pay for ongoing expenses.

2008 Oct 18 02:01 PM