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Ethanol Producers May be in Trouble Again



February 08, 2011 – Comments (7) | RELATED TICKERS: GPRE

Ignoring the absurdity of converting an inefficient source like corn to create fuel, I have decided to look at the current economics of the ethanol production business to see if these companies might be a solid investment idea.  There was a great article on the subject over at Seeking Alpha the other day, Looking for a Pure Play in Ethanol.

One company that was mentioned in the piece is Green Plains Renewable Energy (GPRE).  Here's what the author had to say about the company:

GPRE: A "change driver", this company is likely to be one of those that drives the consolidation process in this market. They're buying the small guys out one at a time as the opportunity arises. Only about half of their revenues are in ethanol production, the rest are byproducts and other related materials, plus use of their market distribution capabilities for the smaller producers. They are leveraged, Debt-to-equity is about 113%, but at the current size they are, their interest expense is only adding about 3 cents per gallon on their production cost, which is manageable if - and it's a big if - the margins stay high. They lost a lot of money in 2007 and 2008 learning this business.

This company is far from a pure play on the ethanol sector, as only half of its revenue comes from ethanol production.  Most of the pure production companies have come and gone because they ran into serious financial trouble, so this is probably a pure a play as we are going to get.

As the author noted, the company should not have any trouble covering its interest expense if ethanol margins "stay high."  That begs the question, what are ethanol margins like right now.  Here's a great chart on the subject from the CME Group. 

Ethanol Margins

As you can see, margins for ethanol producers are falling and falling fast as the rising price of corn outpaces the gains in the cost of their end product.  The ethanol-corn crush margin has actually been negative for the past two weeks.  Over the past seven months, the price of corn has nearly doubled, up 90%, while the price of ethanol has only increased 55%.  Producers are now losing one cent on every gallon of ethanol they produce versus making a $0.20 per gallon profit as recently as July.  This negative margin can be improved some by sellnig the byproduct of ethanol production, distiller dried grains (DDGs),  Still overall profit margins are low and according to the CME Group "most [ethanol producers] are barely profitable at present and some are already losing money.  The profit risks remain high for ethanol producers if corn continues to rally."

Needless to say, at this point I would stay far away from investing in any company that produces ethanol in CAPS and especially in real life.


7 Comments – Post Your Own

#1) On February 08, 2011 at 12:27 PM, Melaschasm (71.44) wrote:

There is one trend that does favor ethanol profit margins.

Rising crude prices should help ethanol become more competitive.  Specifically, if crude prices rise faster than corn prices, without killing demand, ethanol margins could widen.


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#2) On February 08, 2011 at 12:32 PM, smartmuffin (< 20) wrote:

Hell, I'd avoid them simply on moral grounds, the way some people avoid tobacco companies...

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#3) On February 08, 2011 at 2:02 PM, miteycasey (29.00) wrote:



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#4) On February 08, 2011 at 2:14 PM, jed71 (99.60) wrote:

Hey Deej, hope you are doing well. Once again, I find we are on the same side of this pick.

Another risk I see is the very large import tariff that is placed on imported ethanol. The higher oil prices move, the more pressure there will be on Congress to find ways to lower the cost of energy for the consumer. Removing a tariff would be one of the cheapest and easiest ways for Congress to accomplish this. There is also quite a bit of bipartisan support to adjust or remove what we pay in subsidies and tariffs. Brazil has much better efficiencies for their ethanol production and is able to produce at a lower cost per gallon. If the tariffs were removed, it would be highly detrimental for GPRE. This will further pressure domestic producer's margins, beyond what you have correctly noted above.

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#5) On February 08, 2011 at 3:45 PM, ChrisGraley (28.64) wrote:

LOL, another rec for #2

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#6) On February 10, 2011 at 11:04 AM, jed71 (99.60) wrote:

interesting article this morning on food prices / impact of ethanol: 


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#7) On February 11, 2011 at 7:32 PM, Lordrobot (90.45) wrote:

Ethanol from corn or sugar will never be competitive. Why? BTU deficit. Each gallon of ethanol produced from corn or sugar requires more BTUs of oil to produce it than it delivers. How much? 55,000 BTUs. Thus... IT IS NOT AND NEVER WILL BE COST EFFECTIVE!  PERIOD! 

Plus the added disadvantage is that the subsidized production of corn, loved by professional politicians of both parties, only removes food acreage from production and has nearly doubled the cost of corn. Corn is the chief animal feed so that in turn has increased the cost of meat production.

In total ethanol policy may in fact be the stupidest policy every enacted by the gov in history. It exemplifies the decline in science and math education in America where only 5 college graduates out of 100 can do a simple differential calculus problem. 

Ethanol is NOT a renewable energy source it is an OIL depleting source. 

But the real magic of ethanol is the fact that it requires constant heating or it absorbs atmospheric water. So it is lousy for your car.

Some ideas just get worse by the minute and ethanol is the clown prince of environmental insanity.  

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