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Who would have thought that ethanol producers would suck as investments...oh yeah the smart CAPS players did



March 11, 2008 – Comments (2) | RELATED TICKERS: VSE

The WSJ published an article this afternoon titled "Ethanol Boom Is Running Out of Gas."  I figured that I'd take the time to pat myself and the other smart players here on CAPS who collectively rated the ethanol producers one star investments on the back.  Here's a link to the pitch that I wrote for Verasun and Pacific Ethanol on 11/16/07:

"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,


Here's a link to the WSJ piece:


Short VSE & PIEX in CAPS, but unfortunately not in real life where I rarely short individual companies

2 Comments – Post Your Own

#1) On March 11, 2008 at 7:30 PM, F4Phanatic (51.94) wrote:

What happens if there's a major crop failure affecting the corn farmers, such as a major drought. The price of corn will go up even more, but, there won't be enough corn for ethanol production. I know the ethanol guys will really get screwed.

The other question is: Will we get screwed as well? As far as higher prices at the supermarket there's no doubt we will. Will prices at the pump go up? Uhmmm? Probably?

Phool on,


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#2) On March 11, 2008 at 11:51 PM, wm052 (32.60) wrote:

Food prices have already risen - the FED doesn;t include food and fuel in the core CPI so they're kidding themselves about real inflation. The price of eggs and milk have gone up at retail around 30% in 2 years (Chicago area). Check out the commodities pages of Barron's or IBD and you see that corn and wheat have skyrocketed.

So what's this have to do with the practicality and economics of using food crops for ethanol? everything since it makes ethanol even harder to compete with oil as the input costs keep rising. Brazil uses natively grown sugar cane which hasn't had the same producer price rise as corn.

Smart money avoided the ethanol producers with good reason. As its use increases, the input costs (corn) will continue to rise as demand for corn rises vs. food consumption.  

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