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?
