investingfromtheright

I am retired and take educated guesses on all things financial.

June 19, 2008

June 19, 2008: Ethanol, No Field Of Dreams

If you haven't sold you ethanol securities yet, too bad for you. There have been plenty of warnings about ethanol stocks and the choice of ethanol as a fuel of subsidy and political hucksterism. Now, ethanol producer profit margins are being crushed by soaring corn and natural gas prices. It's enough to make your average greenie weep. It's enough to make your average investor weep as well, except for the shorts.

New ethanol plant cancellations continue. VeraSun on Monday announced the delay to the start up of two nearly completed plants. Twenty-four other ethanol plants have also been delayed or cancelled in the past few months around the United States that were supposed to produce 2,195mgy's of fuel annually. Further plant delays and outright cancellations are anticipated because of the aforementioned low margins.


Four ethanol companies trading publicly have been put on many analysts' hit list:
Aventine Renewable Energy (AVR)
ConAgra Foods (CAG) for reasons including, but not limited to, ethanol
Pacific Ethanol (PEIX)
VeraSun Energy (VSE)

Some argue that a rebound in ethanol is inevitable. I cannot quarrel with that train of thought. There is a season for practically every investment sector. However, there are at least three risks that may knock ethanol out of the box regarding a price recovery relative to gasoline:

If ethanol economics improve, the rapid return of partially constructed or mothballed plants would likely make the recovery a brief event.

The political situation for corn ethanol is uncertain in post-November's landscape. Corn ethanol has become a controversial topic this past year once the negative unintended consequences of grain for fuel became known. The current meteoric rise in corn prices due to the flood crisis in the mid-west may put pressure on the incoming President and Congress to take action. There is a good chance that the Renewable Fuels Standard (ethanol mandate) will be altered - in the battle of food vs. fuel, food wins.

The price of corn is well beyond the ability of ethanol companies to control (or even forecast).Casting the blame on Global Warming is getting a well-deserved cool reception at present. "Acts of God" such as the flooding are always possible. Feedstock is vital to our country and other countries that import our meat, grain and grain by-products for human consumption.There are hundreds of years of coal and, by reasonable estimates, a three generation supply of crude oil and six generation supply of natural gas that can be relatively easy to extract (given the political will to do so). Much of it is in North America and other friendly confines. Food riots,inflation, lowered standards of living and life choices imposed by environmental elitists on us mere mortals are not options that will prevail.

Still, there is the chance that the spike in corn prices will reverse next year. Credit Suisse Analysts have pointed out that after the severe floods suffered in the corn belt during 1993, crop yields grew dramatically the following year vs. 1991-2.
For the ethanol crowd, this kernel of hope may stalk naysayers and produce positive results in 2009 and beyond.

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