Rising Gas and Falling Corn: Good for Ethanol Producers

Corn prices have fallen 25% since their early March highs and the weather the past two weeks has lead to a surge in planting with up to 40% increases in some areas. The beneficiary? Ethanol producers.

VeraSun Energy Corporation (VSE), who recently experienced a 31% increase in revenue, reported a quarterly loss and said the culprit was increased corn prices that had them paying $4.05 a bushel in Q1 and a inexplicable $33 million "loss" contributed to hedging. How do you lose money hedging against higher corn prices when corn prices go higher??

When you consider Aventine Renewable Energy Holdings, Inc. (AVR) reported a profit and said they paid $3.58 a bushel in Q1, VeraSun's results seem to be an indication of poor management rather than rapidly deteriorating fundamentals in ethanol. Considering estimates have ethanol being profitable to produce at corn prices up to over $4.80 a bushel, ethanol will remain profitable for the foreseeable future. Archer Daniel's Midland (ADM) reported Q1 results recently and while they do not release their price paid for corn (I presume this is due to it being dramatically lower than their rivals and would put pressure on suppliers to provide these prices to others), they reported an increase in Q1 corn processing results. Shares of Pacific Ethanol Inc. (PEIX) are traded up 12% after their earnings actually came in it a profit

Now that we have a record corn crop going into the ground at a rapidly increasing rate, corn prices look to plummet before the summer is finished. When you add the fact that new ethanol production capacity that was scheduled to come online has slowed due to the higher corn prices, anticipated demand will not materialize. For ethanol producers who managed their businesses well during the price spike, this will mean a series of earnings estimate beating results will come rushing in.

Ethanol producers are in a unique position to be able to hedge their input prices against spikes. The rise in corn prices seems to have taken no one other than VeraSun by surprise and producers actually benefited from it. Now that prices are falling and gas prices are going in the opposite direction, more good news is in store for investors.

With the current outlook poor for the sector, shares ought to spike on the unexpected good news.

Comments

[info1:]

like the post---the ethanol situation is interesting t. boone recently said it costs about $4.00 a gallon to produce a usable product---hopefully some of the alternatives will work in the future---we still like oil and gas long term------love the commodity related stock angle-------adding your blog to our list of regulars---------pk

2007 May 17 11:34 AM

[Todd Sullivan:]

I heard him say that. i have to go back to the peix CEO who stated that ethanol selling at $1.50 a gallon is "very profitable". i think t.boone may be adding in costs that are not specific to ethanol (ie. the costs of growing the corn that would be grown anyway).

2007 May 17 12:34 PM

[Everyday Fi...:]

This ethanol frenzy is a complete scam by the politicians and those in the industry. They all know it's a net loss when considering the increased cost of food worldwide, the cost to produce/transport it, etc. And to top it off, a gas boycott yesterday. Ludicrous. For this and more, visit

everydayfinance.blogsp...

2007 May 17 11:39 PM

[Edward Dryg:]

No one seems to take into consideration the ethaonl dehydration process which may become the achilles heel for the ethanol boom. To make fuel grade ethanol you must remove the 5-10% latent water content to produce a 98% ethanol that can then be blended with gasoline. Without a dehydration commodity supply sufficient to complete the proces then ethanol dies on the vine.

2007 May 18 10:21 AM