Growth in Corn Harvest Means Good News for Ethanol Producers

Good news for ethanol producers like ADM (ADM), Verasun (VSE) and Pacifc Ethanol (PEIX).

The U.S. Department of Agriculture forecast that farmers will harvest 12.3 billion bushels of corn, up more than 570 million bushels from last month's estimate of 11.7 billion. That's down 6% from last year's record crop of 13.1 billion bushels, but 17% above the 2006 harvest.

Average corn prices this year are expected to drop to $4.90 to $5.90 per bushel, down 60 cents from last month's forecast of $5.50 to $6.50.

Corn prices soared to record levels near $8 after the floods, the worst to hit the Midwest in 15 years. But cooler, wetter weather since then will boost corn yields to 155 bushels per acre, up from last month's estimate of 148.4, the department said.

Corn prices have already dropped to almost $5 per bushel, though that is still higher than in 2006, when a bushel cost $2.

In its recent earnings release, ADM said it expected to see higher ethanol selling costs this quarter and this news ought to bring down corn costs that saw a "significant increase in the prior quarter".

The recent Kiplinger Reports said that refiners are trying to slip extra ethanol in mixes because of the 88 cents per gallon cost differential. What this means is that there is no demand issue with the product, refiners cannot get enough of it.

We are about 4 billion gallons per year short of making all US gasoline E10. This year the industry will produce roughly 9 billion gallons and the mandate for next year is 11.1 billion. This will easily be absorbed through the system.

It all boils down to increases profits for ADM and the others.

Disclosure: Long ADM

Comments

[Shenandoah:]

Hey-Where are all those ignorant negative posts which usually follow any article on ethanol?

2008 Aug 13 11:03 AM

[redbaron:]

You want some comment, Shenadoah, so I will oblige. Corn is still at $5, and most of the ethanol plants were built when corn was at $2. A good friend who has contacts at local ethanol plants told me that there was no way ethanol was going to work if corn stayed at $5, and then it went to $8, and is now back to $5. Sure, $5 is better than $8, but that just means the losses will be smaller. And what if McCain is elected, and the mandate goes away completely? What then?

I own ADM also, but if the ethanol mandates and subsidies go away, I will be a seller.

'Hey-Where are all those ignorant negative posts which usually follow any article on ethanol?' Now there is a real inteligent comment (not), from someone with a very non-open mind. Grow up! No one has all the answers, but those with as closed a mind as this, will never learn anything new.

2008 Aug 13 12:52 PM

[NOWHEREMAN:]

I assume. Thats an "ass between u and me".
The rosy forecast for the grain complex has been ripped to shreds by the farmers themselves.

Go sell as many naked puts as you can and and use the proceeds to buy calls on the Ethanol play of your choice. If you can't bring yourself to do this, then examine your own "exuberance".

2008 Aug 13 01:39 PM

[wheels14:]

Dear Red Barron,

Most of the plants were built when gasoline was $1.85/gallon. $5 corn is still profitable if gas is $3.75/gallon.

If the mandates go away so does my position. Removing the subsidies would have no effect on the ethanol companies if the mandate is still in place. The subsidies are paid to the refiners and blenders, not the ethanol companies.

2008 Aug 13 02:53 PM

[bouzerdad:]

Exactly my thought Wheels.
Necessity/demand brings invention /efficiency and we are just getting over the growing pains. Efficiencies will continue to benefit Ethanol going forward.
FYI - I hold PEIX.

2008 Aug 15 11:48 AM