Investors in dedicated corn ethanol producers started the first trading day of the year off with a bang, with share prices managing to outpace a broader market that was itself celebrating news of the fiscal cliff "resolution" (see figure). Shares have mostly continued to climb in the days since, with Rex American Resources (REX), Pacific Ethanol (PEIX), and Green Plains Renewable Energy (GPRE) all outperforming the S&P 500 to varying degrees. The real standout, however, is BioFuel Energy (BIOF), which has climbed nearly 40% YTD at the time of writing.
BIOF data by YCharts
The catalyst for this action was the news that the fiscal cliff resolution contains a number of subsidies for biofuel producers, particularly the establishment of feedstock parity between lignocellulose and microalgae for the purposes of the Cellulosic Biofuel Producer Tax Credit, and the retroactive revival of the Biodiesel Mixture Excise Tax Credit. The former provides a bit of a boost to producers of biofuels from lipids and cyanobacteria while the latter benefits both producers of biobased diesel (i.e., biodiesel and renewable diesel) and petroleum refiners. Completely missing from the fiscal cliff legislation, however, is any reference to corn ethanol production. In fact, a search of the full text yields no hits for the word "ethanol", while "biofuel" is only used in the context of cellulosic biofuel, a category to which corn ethanol does not qualify.
Does corn ethanol benefit?
The recent movement in corn ethanol producer shares is even more mystifying when compared with shares of the major beneficiaries under the legislation. Petroleum refiners receive an implicit subsidy under the legislation as it moves the financial burden of the revised Renewable Fuel Standard (RFS2) from refiners to taxpayers for 2013. The value of this subsidy is in direct proportion to each refiner's market share, yet Valero (VLO), the biggest beneficiary among refiners, is up less than 1% YTD (see figure). Biobased diesel producers such as Renewable Energy Group (REGI), Solazyme (SZYM), and Syntroleum (SYNM) have performed well, but that's to be expected given the explicit and valuable provisions made to the fuel category in the legislation. What isn't expected is the performance of dedicated corn ethanol producers such as Biofuel Energy and Pacific Ethanol, which are performing as well as or even better than the biobased diesel producers.
REGI data by YCharts
Admittedly, the economic environment for corn ethanol producers has brightened somewhat since last summer, when it was beset by the brutal combination of very high feedstock costs, worthless Renewable Identification Numbers (RIN), and overproduction. As of late autumn, U.S. corn ethanol production had fallen by nearly 12% from its January mark (see figure), ending the overcapacity situation and causing RIN values to increase to $0.05/RIN. The mandated volume of corn ethanol under the RFS2 is also set to increase to 13.8 billion gallons in 2013, which will require a 12% increase in production from December 2012 levels if it is to be met.
Monthly US Fuel Ethanol Production data by YCharts
The long-term outlook for the corn ethanol industry is still bleak, however. Indeed, little has changed since I wrote on the topic last summer with regard to the Blend Wall, E15 adoption rates, unpopularity with consumers, and the 15 billion gallon per year mandate cap in 2015. Furthermore, I can find no evidence that Congress is seriously considering a revival of the Volumetric Ethanol Excise Tax Credit (VEETC), or "blender's credit", which expired at the end of 2011 amidst Congressional proposals to phase it out by 2016. Such a revival would be the only explanation for the recent movement in corn ethanol producer share prices.
Investors in biofuel production companies have been on a roll so far this year, with shares in most companies greatly outperforming a broader market that hasn't exactly been doing poorly. These price movements are in response to the news that the fiscal cliff resolution package passed by Congress earlier this week contains several new and revived subsidies for biofuel producers and petroleum refiners. The legislation explicitly identifies the biofuel pathways that benefit, however, and the corn ethanol pathway is notably absent from this list. Despite this, shares of some dedicated corn ethanol producers are outperforming even shares in those companies that are beneficiaries under the legislation. While corn ethanol's economic environment has improved somewhat since last summer's panicky days, this shift doesn't explain the surge in share prices since the legislation was passed. This appears to be a case of "irrational exuberance" with corn ethanol riding on biobased diesel's coattails. Investors in dedicated corn ethanol companies should thank Lady Fortuna and view this as an excellent opportunity to sell.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in BIOF over the next 72 hours.