Sustainable Energy Indices Mixed as Commodities Retreat (Week Ending 7/18)

By Mark Henwood 

Emerging Markets, EAFA, and S&P500 all rose this week partially on reduced pressure on commodities (DJP) which fell 7.8% for the week.

 

Biofuels shares responded mid-week to news that Verasun (VSE) was keeping 330 MGY per year of new capacity idle. As I wrote in my post for the week ending June 13th, with tight margins it comes as no surprise that producers are reducing production plans . With ethanol consuming somewhere around 30% of corn supplies, the cost of corn should respond to a reduction in ethanol production. Reduced ethanol supplies should be supportive of stronger ethanol prices. At some point an equilibrium will be reached.

Later in the week UBS upgraded the ethanol sector to a buy on "improving margins". VSE's price (and others) responded strongly gaining 21% on Friday and ending the week up a huge 49% at USD 6.12/share. With this big change I thought the margin on producing ethanol would have materially improved. True, corn has been dropping significantly since the start of July with the December contract closing Friday on the CBOT at USD 6.28/bushel. But ethanol has been falling also in July, with the December contract closing Friday at USD 2.36/ gallon leaving the "corn crush" margin at the same slim USD 0.2/ gallon it was in the middle of June when Verasun's stock price was below USD 5.0/ share. I'm not sure I understand the improving margin argument.

The LED-Lighting strategy continued to disappoint falling an additional 9.9% for the week, with a cumulative decline of 35% since we started tracking the sector at the end of March. Orion Energy Systems Inc. (OESX) lost 38.7% of its value for the week after it reduced its guidance for 2009 to a 25-28% growth rate, down from its previous 50% expectation. With its long term potential, I'm looking for signs this strategy may be fairly priced after this year's big correction.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks and has positions in Renewable Electricity.

Comments

[CaptBob:]

Our mistake is taking the one unassailable fact, of diminishing oil supplies with increasing demand, driving up all time energy profits, and thinking that will guarantee profits all around, in any scheme dreamed up by a collusion of Politicians and Farmers.

The fundamentals of Political leverage joined with constituent contributions has yielded plunder for all, too often in the past, and tempts both parties to engage in the proven pay trough, rather than consult 3rd parties expert in the industry.

Before the first ear of corn was snatched from under the snout of the first "Bacon on the Hoof". Before exclusionary tariffs were enacted to keep competing sugar ethanol out of the ring. Someone should have asked Captain Morgan -(with some experience in the field)-how to make cheap hooch. He would have told us that ever since the first barrel of Rum sailed east out of the Caribbean, it's been, "Sugar Baby sugar!". Corn belongs in a bottle wearing a "wooden" barrel label on the second shelf behind the Bar.

But if you can't substitute "Parasitic Politics" for tried and true Science, then that Pig ain't flying in 21st Century America!, especially with an empty trough!.

2008 Jul 22 11:13 AM

[User 230791:]

If the EPA reduces the 2008 9 billion gal mandate by 50%, ethanol price will go down a large %. If blenders have to pay the 51 cents to the ethanol suppliers there is no benefit to blend & no mandate.

2008 Jul 22 03:48 PM

[Tim Plaehn:]

In reality the corn crush margin is of little use to determine the profitability of ethanol producers. They do not sell their ethanol at the spot rate! The majority of ethanol contracts are with gasoline blenders and the price paid for the ethanol is linked to the cost of gasoline to insure the purchase is profitable for both ends. High gas prices continue to be good news for ethanol producers.

2008 Jul 23 09:20 AM

[wheels14:]

The only way ethanol could use 30% of the corn crop would be if 100% of the corn crop were used for ethanol. The ethanol plants remove the starch, about 30% of the corn's volume, and return the rest into the food supply.

2008 Jul 30 03:12 PM

[Dixon:]

The only way corn-based ethanol survives is with government subsidies which is a sop to the corn growers lobby, ADM, corn state senators and the rest. Our entire food economy is corn-based and if you think food prices are high now...you "ain't seen nothin yet".

Same thing with bio-diesel, using edible oils and animal fats. Our taxes pay the U.S. bio-diesel producers a $1/gallon subsidy so they can acutally afford to make & sell the stuff - - which they then promptly ship 40% of it to Europe! So much for U.S. energy independence!!

The bill passed by those wise and thoughtful "leaders" in Washington also pays a "splash and dash" subsidy to the bio-diesel makers. They "import" bio-diesel made in Malaysia with palm oil, off load it in the US, drip in a little regular crude oil diesel and then "ship" the blended product to Europe....and get paid a taxpayer subsidy! They don't produce anything of value - - just slurp at our taxpayer funded government trough.

Milton Friedman was spot on: "Subsidize anything and you will get more of it". In this case more silly corn-based ethanol (corn is a very poor ingredient to use to make ethanol), biodiesel for Europeans, and much higher food prices.

Madness!

2008 Jul 31 01:45 PM