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July 15, 2009 – Comments (0) | RELATED TICKERS: GPRE

Lower Corn Prices Help Green Plains Re-Open Plant

By Todd Neeley
DTN Staff Reporter - http://www.dtnethanol.com/index.cfm?show=10&mid=81&pid=1
OMAHA (DTN) -- Omaha-based Green Plains Renewable Energy plans to open the Ord, Neb., ethanol plant it bought from AgStar Financial Services in the VeraSun bankruptcy auction last March this week, some eight months after the plant closed.

The Green Plains announcement comes at a time when profits have returned to the ethanol industry after an extended period of losses, as tracked by DTN's hypothetical 50-million-gallon plant, Neeley Biofuels Inc.

In a news release, Green Plains President and CEO Todd Becker said the improving market for ethanol has made it possible to restart the plant.

Green Plains operates six ethanol plants in Iowa, Indiana, Nebraska and Tennessee with a combined expected production capacity of about 480 million gallons of ethanol per year.

Neeley Biofuels appears to be closely tracking profit realities in the industry.

The hypothetical plant in southeast South Dakota started to crawl out of its profit-margin hole June 18, when it reached the break-even point in net profitability. The return to break-even came about as a result of a drop in the corn futures price.

Reaching break-even was a milestone for the plant, as it had not broken even since Feb. 3.

As of Monday, Neeley Biofuels posted 16 straight days of net profits, which is by far its longest streak of profitability since December 2008 when the plant recorded net profits on every day from Dec. 1 to Dec. 9.

DTN Analyst Rick Kment, who tracks Neeley Biofuels' performance on a daily basis, said the plant's longest stretch of profitability dates back to the first day DTN started tracking the numbers.

On Dec. 20, 2006, Neeley Biofuels was recording a net profit of about 55 cents per gallon. The plant remained above break-even through Sept. 13, 2007, when it recorded a net profit of just .4 cents per gallon of ethanol produced.

Neeley Biofuels hit its peak profitability level on Jan. 4, 2007, when it turned a net profit of nearly 69 cents per gallon.

In the July 2, 2009, update for the hypothetical plant, the price paid for corn fell dramatically from about $3.60 June 15 to just $3.04 on July 1 -- sparking Neeley Biofuels' recent recovery.

The corn price is determined by taking the Chicago Board of Trade futures price minus the basis, which is the difference between the local cash price and the futures price.

At the time, DTN Senior Analyst Darin Newsom said chances are good that corn prices could continue to fall in the next month or two.

"Initial support could be found near $3.30 in late August," he said. "However, if volatility remains high and this support fails to hold, the nearby contract could slide back to $3, possibly $2.90."

Newsom said corn price volatility could come from any number of factors, including how weather affects the current crop or from noncommercial long liquidation of corn contracts from commodity funds, hedge funds and index funds.

DTN established the hypothetical plant in DTN's ProphetX Ethanol Edition as one way to track ethanol profits. Using ProphetX, we are able to see how the changing market affects a plant's net-profit margin per gallon of ethanol sold -- the difference between total costs and revenues.

To compute net margins -- what's left in profits after all costs are deducted -- we used industry-average figures from Iowa State University economist David Swenson. These included annual labor and management costs of about $2.9 million, transportation costs of $10 million, debt-servicing costs of $7.8 million and depreciation costs of $8 million and maintenance costs of $800,000.

Though Neeley Biofuels is paying nearly $16 million in debt-service and depreciation costs on its plant -- or about 32 cents per gallon of ethanol produced -- many real plants are not in debt.

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