Ethanol's Short-Term Bottom

By Brad Zigler

The plunge in corn and natural gas prices has firmed up domestic ethanol refining spreads to levels not seen since March. Plainly, we weren't scraping the deck back in May when we limned the corn-ethanol spread in "Are We At The Bottom Of The Ethanol Barrel?".

No, the bottom (if, indeed, it turns out that way), came at the commodity markets' summer zenith when corn prices shot up to the $6- and $7-a-bushel range, crushing the spread to a mere 23 cents before ancillary costs and returns.

Corn prices have since been nearly halved and the crush has widened to 89 cents a bushel. Not great, but certainly better than before. Lower commodity prices, though, have been both boon and bane for ethanol refiners. While lower input prices make ethanol manufacturing less costly, output prices have also cheapened, dragged down by the weakness in fossil fuel prices.

Corn/Ethanol Crush And Components

So, what can we expect from here?

On the input side, corn stocks remain near record lows, though adequate to meet current demand. Current prices, however, have sunk below the cost of production. (Keep in mind that on-farm stocks of fuel and fertilizers are likely carried at their higher pre-crash costs.)

Going forward, corn's low return could curb production further into 2009. Corn's too cheap to market aggressively now, but in the post-harvest spring, the landscape may look a lot more barren.

We're likely to see higher corn prices then. For now, though, input costs are likely to remain soft, which should work in refiners' favor.

The output side's another matter. As long as pressure's put on the oil sector, ethanol prices will likely be leaden and that will be a drag on margins.

Such prospects can't be good for the primary ethanol refiners - Aventine Renewable Energy Holdings, Inc. (NYSE: AVR), VeraSun Energy Corp. (NYSE: VSE) and Pacific Ethanol, Inc. (NasdaqGM: PEIX) - who've seen budding rallies in their stock prices foreclosed by the recent market turmoil.

Primary Ethanol Refiner Stock Prices

We pondered the potential low point for ethanol producer share prices in an August column ("Ethanol Stock As Cheap As An Ear Of Corn"). Back then, the talk on the Street calling for ethanol producers' share price declines was getting pretty loud.

Each of the primary refiners' shares, you should know, is still selling for more than the price of an ear of corn. One company's shares - Aventine's - however, is now trading at $1.60, less than the current cost of a bushel.

With the downturn in corn prices, the naysayer's price target is now 4 cents a share. Anybody brave enough to short the refiners here?

Comments

[JOT:]

Clearly you misunderstand the entire ethanol complex. Ethanols price, as anyone can observe, has been correlated nearly 98% with corn for the entire period of 2008. Ethanol price is nearly completely unrelated to oil. The other point that all of you continue to miss is that your calculations of margin only take into consideration the CBOT price of corn. There is a little thing called basis that impacts that price. Growers are not moving any grain right now and probably will not until after the first of the year. this results in a higher basis. What does that mean? Well the board price may be $3.90 but in order to get the producer to move it from their feild or storage to the facility, plants are having to pay up to $0.50 over the board price. Obviously this changes your margin calculation drastically. It is very annoying to have this continued barage of articles written about ethanol by people who have no comprehension of the actual story of the industry, how it works and who actually is profiting...the oil companies!

2008 Oct 29 09:20 AM

[Bill6:]

My 12-month target price is $6 a share. Why do the oil companies want ethanol companies to got to .04 a share? Maybe so that they can buy them? Despite the oil companies predictions (or fantasies), ethanol is not going away anytime soon. See this article, about how very soon congress is going to mandate that higher blends of ethanol be added to every gallon of gasoline sold in the US. www.dtnethanolcenter.c...

2008 Oct 29 09:23 AM

[Managing Ed...:]

The board crush is admittedly simplistic, but it's a spread that is at least representational and can be easily followed by retail investors without ready access to local cash market quotes and transportation rates.

Using the board crush is akin to viewing a sketch rather than a measured drawing: you get a depiction of the scene without having to wade through extraneous detail.

The weekly ethanol and corn prices, by the way, varies considerably depending upon your vantage point. Since 2006, it's only 45%, though year to date it's 84%.

2008 Oct 30 12:03 AM

[Managing Ed...:]

The four-cent figure is the current price of an ear of wholesale field corn. It was mentioned as a reference to the linked article in which a wag forecast that Pacific Ethanol's stock price could cheapen to the price of an ear of corn.

I can only conjecture whether oil companies want refiners' share prices to drop to pennies. I can only say with certainty than one pundit does.

2008 Oct 30 12:15 AM

[ESQ118:]

vse bankruptcy immenient... why is that?

2008 Oct 30 09:55 AM

[Managing Ed...:]

The HAI weekly podcast (www.hardassetsinvestor...) entitled "Gold, Oil and Ethanol" has the answer.

VeraSun’s (VSE) problems arose, in part, it hedged its feedstock corn near the top of the market.The long-term forward contracts locked in what turned out to be higher-than-market prices. Meantime, VeraSun’s unfettered competitors could buy their corn more cheaply. That left VeraSun's hopes riding on high oil prices (ethanol bids firm up in a tight oil market). The recession, however, knocked the wind out of the petroleum complex and the accompanying credit crunch limited the company’s ability to finance its working capital needs.


On Oct 30 09:55 AM ESQ118 wrote:

> vse bankruptcy immenient... why is that?

2008 Nov 16 01:48 PM