Can Biofuels Bottom?

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 |  Includes: PEIX, VSUNQ
by: Kirk Shinkle

In the universe of absolutely battered "green" stocks (See: For Green Energy Investors, a Particularly Tough Ride), biofuels have been among the worst. Falling prices and oversupply led to an industry-wide slump as ethanol prices sank along with other fuels, while being squeezed at the same time by a smaller drop in prices for crops used to make the stuff.

The damaged caused a few analysts to question the future of the entire ethanol industry. Happily, a few early signs are appearing that the floor might be in. On Friday, Merrill Lynch came out with a report predicting a possible surge in ethanol prices next year as demand continues, oil prices rise and grain prices soften under the weight of a global recession.

Oversupply worries are improving as well. Merrill now says biofuel output will fall to 1.9 million barrels per day, lower than earlier estimates of 2.1 million as refiners cut back. A few examples: VeraSun (OTC:VSUNQ) into bankruptcy, closing 12 of its 16 ethanol plants. Northeast Biofuels and Renew Energy filed as well, and Pacific Ethanol (NASDAQ:PEIX) is only running one of its four plants, Merrill says. Also, the credit crunch has crimped second-generation biofuel projects that might skew prices at a time when more capacity is the last thing the industry needs. As for oil, Merrill estimates crude needs to head back above $60 a barrel from around $45 today for most refiners to break even without help from government subsidies. "In our view, US ethanol prices could increase against a backdrop of rising demand and falling inventories," Merrill says.

Also on Friday, 24/7 Wall Street noted that Brazil (the world's ethanol capital) is earmarking $1 billion for ethanol storage that could help smooth out at least a bit of the volatility that continues to plague the industry. And in Washington, the ethanol lobby is prepping for a "slugfest" to get more ethanol into the gasoline mix according to the NYT.

It may not mean a quick rebound, but an end to the pain in the ethanol sector would be nice.