Why Are Ethanol Investors Shunning Optimist News?

by: Konrad Imielinski

Looking at the current circumstances surrounding the Ethanol sector, it is dumbfounding that Ethanol producers have remained in the red. Investors are preposterously shunning the optimistic news:

Corn Prices: Monday, corn prices dropped by the widest margin since August 11th. September corn fell 20 cents (limit-down) to $3.34 per bushel as weather forecasts anticipated more rain than previously expected. Yesterday, corn futures continued their decline as September corn fell an additional 12 cents to $3.22 per bushel. This is great news for ethanol producers as profit margins will inevitably increase. Looking at VeraSun's (VSE) Aurora Plant corn bid for July 17th, the company is purchasing their corn at prices substantially lower than in their previous quarter ($4.05 per bushel). Yet, VeraSun (VSE) shares have fallen over 15% in the past five days. This should not be the case.

Ethanol Prices: Though the price of ethanol has experienced its steepest decline since 2001, it has managed to become cheaper than gasoline. Ian Horowitz, an analyst as Soleil Securities Corporation, believes this difference will continue through 2007. This is essential as Neil Koehler of Pacific Ethanol rightfully puts it "there's a compelling price advantage to using ethanol and we're currently in a mode where we're opening up new incremental demand." This "new incremental demand" is creating a sturdy support level as it is unlikely that ethanol prices will go any lower.

Crude Oil: Crude Oil on the NYMEX yesterday hit an intraday high of $75.35 a barrel; its highest level since August 25, 2006. Concerns over the closure of a North Sea pipeline and speculation that more operating refineries will increase demand for oil sparked this jump. In a report released Monday, Goldman Sachs reported oil prices could reach $90 a barrel this autumn and $95 a barrel by the end of the year if OPEC does not ease production cuts. Oil prices are further vulnerable with the US hurricane season getting underway. In correlation, the USDA believes gasoline prices will average $3 a gallon this month and rise to $3.07 in August.

Even with the Dow surpassing 14,000 for the first time, ethanol producers are getting no love. Corn prices are declining; crude oil is rising; gasoline prices are increasing; ethanol prices have a sturdy platform. What's wrong? I guess we will have to wait for the Quarter results to wake people up!

Disclosure: none