Ethanol Producers Will Surprise Many

Sector Snap: Analyst says end of ethanol oversupply in sight

In Alternative Energy Hunt, Ethanol Under the Gun

These two news items were right next to each other on the summary page for VeraSun Energy (VSE), the largest pure play ethanol producer.

The first article reported that an analyst from Oppenheimer & Co. announced he believes the current oversupply of ethanol will disappear in the next 5-12 months. I am not sure there is really an oversupply because, as far as I can tell, all ethanol producers are selling every gallon they are producing and I have not heard of any idle production. There has been a worry of an overbuilding of ethanol plants, but many have been canceled or put on hold, and it appears production capacity will really level off the middle of 2009.

The second article focuses on the twin problems of corn ethanol’s bad public image and high corn costs that really cut into margins. There are some interesting comments on the politics of ethanol and the belief that the next administration would not be a supporter of corn ethanol as a renewable fuel.

The article also discusses the hard times ethanol companies have fallen on, stock price wise, and getting financing for new plants. Again the cry for cellulosic ethanol is raised, but the article does point out that there are currently 134 producing grain ethanol plants and 61 under construction and exactly zero cellulose ethanol plants producing ethanol.

My own belief is that the U.S. will continue towards about 10% ethanol blend in all gasoline, for both clean air and reduced oil dependence reasons. This give an annual requirement of 18 million gallons and current production is about 7.5 million gallons with capacity peaking in 2010 at about 14 million gallons. The current Renewable Fuel Standard calls for 36 billion gallons by 2012 and the Democratic presidential candidates are calling for 60 million gallons by 2030. But of course they do not want it to be corn ethanol. I do not see any way to meet the RFS without significant corn ethanol production.

I also think that when/if cellulose ethanol becomes viable, it could benefit corn ethanol producers in several ways:

1. Corn ethanol producers are natural candidates to switch to cellulose with their already built and functioning plants.
2. Competition from cellulose feed-stocks should drive down corn costs as less is needed for fuel. Cellulose ethanol producers may be surprised what their feed-stocks cost once there is a market for them. See this story.
3. The government will need to support ethanol prices so all of their “friends” who build cellulose ethanol plants can get a decent return on their investments.

I think VeraSun Energy, on its way to becoming the largest ethanol producer, will surprise many with its profitability over the next few years. I have started picking up a small position at current prices.

Note: I am long VSE.

Comments

[lawsonson]

Lot of If's..

[lawsonson]

If and when production of cellulisic alcohol becomes economically viable then I would agree- but in the intermediate term fossil fuels will still have to be the major source of fuel- I would anticipate that LNG and CNG will become more popular as alternatives to diesel fuel and gasoline. I am bullish on NG- neutral on ethanol.

[paultaut]

Corn ethanol is virtually dead in the water. The corn ethanol producers see the writing on the wall and most politicians now see the problem of using food for fuel. The construction of new corn ethanol plants ended last year...cellulistic plants are being built...slowly.

[nickgogerty]

The DOE things cellulosic ethanol made in anything resembling cost competitive scale is 4-6 years away. Of course corn near $6/ bushel and producing a standard 2.8 gallons of ethanol, does shift the equation a bit. Ethanol producers will find it challenging to switch feedstocks that may not be located nearby and will have CAPEX related to the pre-processing of the new feedstocks.

[Scott Benson]

1) Corn ethanol will never displace any real quantities of gasoline or diesel -- it doesn't have enough BTUs (and we will never be able to grow enough corn to satisfy our vehicle fuel needs.)
2) 50% of corn is consumed by the animals we eat, but that part of the corn stalk is NOT the part that humans eat
2) Corn ethanol plants cannot be converted easily to cellulosic ethanol plants -- they are very different processes. Cellulosic means moving tons of "hay" all around, something the corn infrastructure can't do right away.
3) Profitable cellulosic is many years away -- they haven't found the right enzyme yet (after 30 years of trying). Corn is a sugar -- easily broken down. Cellulosic is plants and wood -- much harder to break down.
4) CNG production in the U.S. has plateaued for 30 years, with every new well depleting faster than the last. The rest of the world pays $15 to $20 per million BTUs for LNG, versus us paying $11 presently. They will outbid us. CNG & LNG isn't the answer either.
5) We Americans are just going to have to used to living less.

[John Egan]

I just heard part of an interview with a couple congressmen working on the re-write of the agriculture bill... They are looking at doubling the support for cellulosic ethanol.

The idea behind cellulosic is that corn waste is converted to alcohol and not the corn itself. However, having said that, 'switchgrass' is apparently more generous in it's conversion rate (if I remember correctly, 4X that of corn cellulose.) and it grows like a weed and can grow in salty water.. Sounds like a better choice than corn, but then what would be the point of opening election year in Iowa?? ;-)

Thx jegan

[AmesTiedeman]

Tim, stocks like Pacific Ethanol have been crushed. I can only hope these companies have a future. I am not certain however. I do not think Ethanol is the answer. I want to see the U.S. move to the Hydrogen economy now.

[HarMegiddo]

i'd still rather be in the fertilizers that must be used on these crops(POT,AGU,CF,MOS) or even in a processor like ADM.

[sorrentocapital]

"I want to see the U.S. move to a hydrogen economy now"........befor... posting, you may want to educate yourself, at least a tiny bit on the subject matter. Hydrogen will NEVER to central to any economy. It's beyond preposterous. Nothing against you personally.

1) There is no free hydrogen on earth. It has to be created using energy.
2) Gas hydrogen has basically ZERO energy density. A "tank full" would allow you to start your car and back out of the driveway. Then, you'd be empty.
3) Gas hydrogen can't be stored as it's too small a molecule. It leaks out at all times.
4) Liquid hydrogen can be created using MASSIVE, MASSIVE amounts of energy. Sort of defeats the purpose.
5) Liquid hydrogen will also boil off and leak out, emptying the tank within a week even if you don't drive.

I grow tired of hippies, actors and others who know nothing parroting something as silly as the "hydrogen economy". Never gonna happen.

[Tim Plaehn]

I appreciate all of the comments here. I tend to be an optimist about the future and we will work something out. In the 1890's they were blogging how more horse feed would get to the cities and what to to with all of the horse crap and people would just have to do with fewer and smaller horses! I take my shot looking at near term changes considering infrastructure, costs and public attitude. I see a slow conversion to a higher proportion of petroleum/biofuel blends and hybrid vehicles. Larger fleet like bus and garbage trucks (lots of driving in a small area) will put in their own infrastructures for CNG, LNG and possible H. Many of these types of fleets are already doing this. It has been illegal to put a diesel garbage truck into service in So Cal for years.

[tmilarry]

Cellulosic ethanol production may be closer than we anticipate. There are several companies that have a good story, some documented reseach and tests covering their cellulosic process, but no commercial size operation running. Take a look at BFRE, GFET and CLTH. All three have high hopes and promise, but may never get beyond the development stage. If you are lucky and have a high tolerance for risk one or all of these companies could make you rich or they could simply be smoke and mirrors and wishful thinking. You decide which it is.

[biofuelsblogger]

There is a commercial cellulosicethanol facility producing ethanol from wood chips in Upton,WY. The plant has been in operation since Jan. 29 of this year.