Ethanol Is Dead: How You Can Still Profit From It

 |  Includes: ADM, ANDE, AVR, PEIX, VSUNQ, XNL
by: Everyday Finance

There are several confluent factors driving the demise of ethanol in the US, and there are ways you can profit from the high price of corn. For years now, several astute investors, economists and consumers alike have decried the US ethanol policy as ill-conceived and perhaps the biggest ruse pulled on the populace in decades.

Given the following recent events, the government is finally being forced to seriously reconsider its ethanol policy and investors are looking to exploit this movement:

  • Corn prices continue to break new highs as a result of midwest floods, demand for corn driven by the ethanol mandate, tariffs on imported ethanol and overall input/energy inflation in part due to a weakening dollar.
  • The season's year end stocks could be the lowest since the end of WWII. I had posted recently on this problem with some useful visuals here (also outlining a double digit yield fertilizer stock).
  • Based on the Texas governor's request to seek some relief by way of repeal of the prior ethanol legislation, the EPA has been forced to reconsider the ethanol mandate and has to make a decision on July 22 on the waiver request, 90 days after Texas submitted the petition. If this petition overturns prior legislation, you can expect ethanol stocks to plummet.
  • Another tool at the disposal of the government is to remove/reduce the tariffs on ethanol from Brazil, which is currently deterring importation.

What's an investor to do?

Well, in looking at some of the big ethanol names, it's tough to find some decent put options to buy since they've all dropped 50-80% from their previous highs to the low dollar range. The best I could do on Friday was to buy some $2.50 August puts on Aventine Renewable Energy (AVR) and Verasun Energy (VSE), each of which are sub-$5 stocks; they were also downgraded recently by Goldman Sachs.

VeraSun Energy Corp. on Wednesday raised to three the number of newly built production facilities whose startup is being delayed due to "volatility in the market." Additionally, 12 small to midsize biodiesel and ethanol plants have declared bankruptcy in recent months according to various reports. Things aren't looking good for the industry.

While some of these stocks popped slightly on Friday, take a look at a once year chart of these once high fliers:

The puts were $.10 to $.15 each, so with just a hundred bucks or two, if the worst for these occurs and the government takes any meaningful action (or if even the perception of such action given further degradation in corn supply occurs), these stocks may very well drop below $2.50 and you can see a 10x or more return on your investment.