Are We at the Bottom of the Ethanol Barrel? 17 comments
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One of the best scenes from the 1980s hit film "Back to the Future" was the setup for its sequel: Doc Brown drops banana peels and beer - can and all - into the Mr. Fusion Home Energy Reactor that powers his time-traveling DeLorean before zooming off for future adventures.
According to the script, Mr. Fusion was supposedly created in 2015. Don't bank on that actually happening, though. The best we can hope for, with our present technology, is to turn corn into ethanol for blending in motor fuel. Or turning kitchen grease into biodiesel. No banana peels or cans of Budweiser.
The U.S. government has mandated that 36 billion gallons of biofuels be produced domestically by 2022, of which 15 billion gallons will be ethanol. That's more than a fourfold increase from present-day production levels. Plainly, the Feds are in a hurry to get to the future.
The trouble is that U.S. ethanol production relies upon corn. And that, some say, is putting the squeeze on corn supplies. About a quarter of the domestic corn crop is now diverted to ethanol production.
For ethanol, it's all about the squeeze. Corn is squeezed - "crushed" in industry parlance - into the fuel additive, and by-products, at a growing number of plants throughout the nation's growing region. Ethanol refining starts out a lot like booze making. Corn is first ground, then mixed with water and enzymes, before being cooked to break down the corn's starches into sugar. The mash then goes into fermentation tanks where yeast converts the sugar to alcohol and carbon dioxide. The resulting alcohol is filtered out and the solid remnants dried into an animal feed known as distillers' dried grains and solubles [DDGS].
The reliance on corn as a feedstock has turned out to be a liability for ethanol-minded investors. Between 75% and 80% of the variable cost base in ethanol production, not surprisingly, is the input cost of corn. Corn, as HardAssetsInvestors.com readers know, has been on a tear, rising 31% so far this year after a 16% hike in 2007.
Every 10-cent increase in the bushel price of corn, in fact, equates to a 5-cent loss in the corn crush margin.
Corn Crush?
The corn crush measures the difference between the sales proceeds of finished fuel ethanol and the price of its corn feedstock. With current technology, one bushel of corn can be converted into 2.75 gallons of ethanol. To determine the potential refining profit, the prices of finished ethanol and corn must be rationalized. Ethanol, like the gasoline with which it is blended, is priced in dollars per gallon while corn is priced by the bushel. To reduce ethanol to corn terms, multiply the ethanol price by 2.75. The feedstock corn price is then subtracted from the converted ethanol price to obtain the crush margin:
Corn crush = [(Price of ethanol x 2.75 ) - Price of corn]
Using this method, you would have priced the corn spread between $8.42 and 53 cents over the past year. The wide spot was June 2006 when corn was cheap at $2.35 a bushel. Ethanol sold for $3.94 a gallon back then.
Margins bottomed out in September 2007, wrung by a double whammy of a 61% collapse in ethanol prices and a 58% bump up in corn prices.
Though corn prices continued upward to the $6 level, the corn crush actually improved as ethanol prices head upwards to top $2.60 a gallon. The crush is now over 96 cents.
Before you get your hopes up and rush out to buy shares of ethanol refiners, keep in mind that corn costs aren't the only variables in the ethanol equation. Between 20% and 25% of nonfixed refining costs arise from natural gas, which is used to cook the corn mash. A $1 per million BTU move in the cost of natural gas generally results in a 9.6 cent-per-bushel shift in the corn crush margin. Figure in the recent rise of natural gas prices and the crush margin shrinks to 50 cents per bushel before fixed costs.
Corn Crush
That makes the recent bounce in the share price of Pacific Ethanol Inc. (NASDAQ GM: PEIX) all the more surprising. Since the beginning of the year, Pacific's stock followed the corn crush margin southward, losing 64% of its value. On Monday, though, the Sacramento, Calif. renewable fuels producer posted surprisingly robust results. Excluding a one-time impairment charge, first-quarter profits of 6 cents per share astonished analysts who'd been expecting a 9-cent loss.
Though Pacific's average sales price decreased 4 cents a gallon from last year's first quarter, revenue surged 61% to $161.5 million, nearly $7 million more than Street estimates. As a consequence, Pacific Ethanol shares shot up more than 60% Monday to $5.14, on volume 13 times its recent average.
Pacific's move triggered sympathetic stirrings in other pure-play ethanol stocks. Verasun Energy Corp. (NYSE: VSE) skipped $1.16, or 19% higher, to $7.35. Aventine Renewable Energy Holdings Inc. (NYSE: AVR) jumped $1.24, or 26%, to $6.05.
Earlier this month, Verasun posted a 257% first-quarter revenue increase and an earnings swing to 8 cents per share, while Aventine announced year-over-year revenue growth of 17% in its first quarter.
Ethanol Producers
Do these numbers presage a bottoming in the ethanol sector? Trading in the next few days will confirm whether ethanol producers have truly turned their fortunes ‘round or are just experiencing a dead-cat bounce.
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This article has 17 comments:
ethanol-biofuel based on corn is one of the silliest projects ever. billions of taxpayer's money are being wasted to essentially buy votes from farmers.
you know what? the global food stocks are running so tight - and will only get tighter over the coming years, that ethanol producers will have a hard time getting corn at all - at least not at prices they could afford.
btw, WATER will be the final nailin the coffin. You need plenty of water - which in turn is going to be one of the scarcest and most valuable resources on earth going forward. and at least it will be costing much more than today.
the sonner these idiotic ethanol-bio-fuel nonsense gets abandoned, the better for everyone.
farmers won't starve anyway - demand for grain will rise even without corn being wasted on ethanol fuel production.
a quarter or two of upside suprises, o.k. fine. a nice exit chance for remaining shareholders, i'd say.
Brazil, one of the leading ethanol producers, sees the percentage of replaced fuels by ethanol at a measle 5% in 2020 ... if they can reach it.
However, the bounce in these ethanol stocks can be best understood this way:
1/ In a "credit crunch" environment, the "squeeze" came from the speculators trying to trap the companies while their cash flow is constrained. The constraints are from the construction obligations and lately the price of corn.
NOW, since PEIX has shown that a) they can generate cash (EBITDA $12M) even at the high price of corn b) they are at the end of their construction plans (3Q08) and c) they finally have a CFO who can look under all the rocks of the financial contracts.... for all these facts, now Wall St can start pricing the stock on its relative value to oil/gas, without the 'squeeze' from the SHORT speculators.
Incidentally, except for ADM who has a lot of cash, most ethanol CORN plant construction will be done by 2008!!! The scarce about corn will be over soon.
I Brazil the minimum amount of ethanol in gas is 20% and fuel stations all also offer 100% ethanol fuel.
IMO the crush spread is now controlled more by ethanol prices than corn prices. The spread will stay between $1.00 and $1.50 per bushel and corn will fluctuate with ethanol. Ethanol production controls about 30% of the corn crop and will stop buying if their spread narrows, causing corn prices to fall. Corn could still fall, widening the spread of there is too much corn, but corn prices will not be able to overwhelm ethanol pricing for any length of time.
The U.S. is steadily moving to a point were all gas is 10% ethanol. The economics just make too much sense. That works out to about 18 billion gallons per year, double current production. At this time, there are no other viable sources besides corn and a few other grains like barley. Brazil could provide 500 million gallons max without out a serious, and expensive, ramp up of their production.
Most ethanol producers are actually at or over 2.80 gallons/bushel. The actually driver behind this years corn crop will likely be acreage allocation shifts which is probably going to be tough for corn due to a wet spring and high fertilizer costs leading to more soybean acres.
The weather could significantly impact price as the "slack" in the grain markets is gone and supply issues could lead to an upward inflection point in price. Risks abound on the corn side of the equation.
Have the idiots taken this into consideration? "Greenie weenies" should be hung up to dry in the hot sun (solar energy) to mature so their think process will be enhanced! All of the ethanol generated would be put to better use if the environmentalists and politicians would just drink about 2 gallons per day and quit dreaming up crap that gives us unintended consequences.
Viva Big Oil! Exxon is entitled to make less than 9% net profits based on revenue, as are the other large oil companies. The ten largest Western oil companies (Exxon, Chevron -Phillips, B.P., Shell, Etc., control less that 5% of the world's oil reserves. Just how could they control oil prices?
Helloo?? numerous studies have shown that producing ethanol based fuel from corn is an almost negative process from a net-energy balance point of view. in other words: vast resources spent to gain next to nothing
second: the process consumes water to an extent that it becomes unsustainable and /or unviable. communities and citizens will soon find out that they pay for the "economically viable" ethanol nonsense with higher water prices as ethanol plants consume vast amounts of water
third: food demand worldwide will rise further, crowding out ethanol plants's demand from the market
fourth: the whole thing is ethically obscene, to put it mildly
Those numerous studies were done by, or financed by the oil industry. Do you trust every thing the Tobacco industry tells you?
Too many of you are harping about the polution generated, and energy used to make ethanol. Do you think oil drills, wells, pumps, oil tankers, refineries, oil transporters, oil resellers and gas stations run on smiles and rainbows? Maybe those fumes escaping from your refineries and tail pipe are a source of vitamin C?
At the current price of corn and oil, Ehanol cost less to make than gasoline. What more do you need to know?
It is utterly unsustainable and pointless. The corn is grown the wrong way, the process is energy intensive, farmers have been brainwashed into believing that synthetic fertilizer is necessary, etc, etc. They don't even bother to use solar thermal to cook the corn. To add insult to injury, the ethanol is burned in an extremely inefficient internal combustion engine.
No, gas and diesel infrastructure does not run on smiles and rainbows, which is one of the many reasons those fuel sources are a net loss for humanity.
Untill we build something better than the internal combustion engine, what do you think we should use for liquid fuel?
Lets discuss the nitrogen runnoff. Currently, cattle feeding and hog opperations release huge amounts of nitrogen that poison our streams, kill our fish and foul our ground water. Untill now, growing corn was not profitable enough, if at all, to justify the drying, shipping and spreading of these organic nutrients as fertilizer. Now it is and that will make farming/meat industry less poluting than before. We need investment and policy to switch from Natural gas fertilizer to organic waste fertilizer.
Herbicides: As long as we are growing food there will be herbicides. It is no worse now than before ethanol came around.
Subsidies? Ethanol has cut farm subsidies by $5 Billion a year. They don't subsidise corn growing when it is profitable. The subsidies go to the refineries not the ethanol producers. The refineries are owned by the oil industry and they don't want to share the pie with agriculture, the subsidies are a carrot held out to big oil.
Subsidies have nothing to do with Pacific Ethanol selling Alcohol for $2.30/gallon. And that was last quarter when gasoline was only 3.50/gallon.
Wheels14
That carbon dioxide made from the formenting of ethanol can be found in your Coke a Cola and budweiser. Where do you think the fizz comes from? That is food quality co2. It is captured and sold to the food industry. They also produce corn syrup and cattle feed as byprocucts.
P.S. Big oil should be allowed to make as much money as they can as long as they are not a monopoly. They also should not be receiving tax breaks that no other industry gets.
Less than 2 % of the US corn crop is used for human consumption as cereal grain. We use almost as much for pet food as we do for cereal consumption. About 6 to 7% of the corn crop is used to make fructose and sweetners. (It’s cheaper than sugar, and sugar is surplus)
The corn to ethanol industry only uses the starch portion of the kernel. All of the protein, oil, fibers, minerals, vitamins, and other components remain and are available for utilization as food for either human consumption, or for their traditional use as livestock feed. This remaining portion is commonly referred to as DDGS.
In the dry mill ethanol industry, less than 2/3rds of the energy in a bushel of corn ends up as a liquid fuel. The remaining Btu’s/calories are in the protein, fiber, oil, etc. (DDGS). When those products are priced by the marketplace, it pays four times as much for the liquid fuel as it does the food portion.
When you read or hear that it takes almost as much energy to produce ethanol as it yields, the 136,000 Btu’s per bushel remaining in the DDGS is conveniently or mistakenly overlooked.
The amount of water needed continues to decrease.
One needs to look back at the infancy of the oil industry. How efficient were they? As I recall gasoline was a byproduct no one knew what to do with. Do I think corn alone is the answer, no, but we are getting there. While not able to invest in them I look at Range Fuels technology being the great leap forward for this industry.
That's simply not true! I'm from Brazil and more than half of all cars today are flex fuel (FFV) and the vast majority of FFV car owners uses etanol, not gasoline, because it's about half price of gasoline. In fact, most gas stations there have more ethanol than gasoline pumps. Brazil is actually an example where a nation can become 100% independent of foreign oil nad they are. They don't care about the rising oil prices (which is just warming up believe or not). In fact, Brazil's economy and stock market has gwown to a record high in the past months despite of the global economic crisis driven by the US economic decline. Etanol is the solution for energy independecy (resources are endless).
One of the post above mentioned Brazil using "lots of corn", I thought most of the Ethanol in Brazil was made from cane sugar?