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Bearish on Ethanol Producers

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November 15, 2007 – Comments (3) | RELATED TICKERS: VSE

Ethanol producer VeraSun’s EPS fell to 9 cents per share vs. 40 cents in the same quarter a year ago in its most recent quarter.  The cost of corn is up and the price of ethanol is going down. Ethanol production in the U.S. is increasing so rapidly supply is exceeding demand. In 2005, President Bush signed the Energy Policy Act of 2005 which required the use of 7.5 billion gallons of renewable fuel (mostly ethanol) by 2012. This policy created a rush to build ethanol plants. There are currently 131 ethanol plants operating in the U.S. with another 73 plants and 10 plant expansions under construction. When all this capacity is completed the U.S. will have the capacity to produce 13.5 billion gallons of ethanol annually. This amount of ethanol is almost twice what the government is currently requiring gasoline blenders to buy. Too much production equals low ethanol prices equals zero operating margins for the ethanol industry. The solution for the ethanol industry is to go to Washington and get their friends in Congress and the Bush Administration to raise the RFS so the gasoline blenders are required to buy more ethanol which they didn’t want to buy in the first place. The Senate this past summer passed an energy bill which raised the RFS in annual increments to 36 billion gallons by 2022. The House has yet to take action on the proposal. The moral here is if you have a product that no one wants to buy, get your friends in Congress to require someone buy it. That’s what makes America great.  Unless there is some sort of miraculous technological innovation that makes ethanol production much, much more efficient eventually everyone will realize that ethanol is a joke.  Until then, the industry has a great deal of oversupply that will prevent producers from making money,

Deej

- No position in any ethanol companies in real life 

3 Comments – Post Your Own

#1) On November 16, 2007 at 3:01 AM, AnomaLee (28.56) wrote:

It's not that hard to feel bearish on the biggest gimmick we're being fed as an alternative energy. I wish I would've shorted every ethanol producer a year ago without having to cover for 2 years, but I don't think any of my brokers would let me.

This was a good post.

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#2) On November 16, 2007 at 8:22 AM, wingedcreat0r (44.09) wrote:

I'm no expert yet, and perhaps I'm wrong but I never want to invest in any company that relies on government subs for income.

I interned for a nonprofit company that relied on grants and subs from the local government which made up 80% of their income. They lasted about a year.

It's almost as if you're investing in the decisions of Congress and other policy markers instead of the company itself.

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#3) On November 16, 2007 at 3:55 PM, CraigCa (< 20) wrote:

The big hope for ethanol producers is cellulosic ethanol.  That would take their feedstock prices down hugely from the current high cost of corn.  I saw a show recently on I think it was Discovery Channel one of their EcoTech shows that said that a company had a microbe they were testing to turn cellulose into ethanol and somebody else was working on a microbe to turn cellulose into either starch or sugar, either of which could then be converted to alcohol by conventional brewing methods.   If either of these work out, (and don't create a super virus that will kill all mankind, (some of this genetic engineering makes me nervous)), then the input costs for the ethanol producers can drop quite a bit, restoring their profitability.  This is assuming of course that Congressmen from the corn states don't then get Congress to pass a bill that requires corn at the feedstock for the ethonal producers to help keep the price of corn high, (which benefits the fertilizer and farm machinery producers, in addition to the farmers, but hurts the average consumer and the overseas poor that rely on our donations of surplus corn to feed themselves).  These new microbes won't help the ethanol producers in the short term, as they are still under testing, but it could help long term, and help fill a small portion of America's energy appetite.

Craig 

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