xcel
10-26-2006, 06:13 AM
The things that affect ethanol's bottom line - oil prices and corn prices - are now going in the wrong direction. (http://www.forbesautos.com/news/headlines/2006/october/fdc102406-ethanol.html)
Jonathan Fahey - Forbes.com - Oct. 24, 2006
http://www.cleanmpg.com/photos/data/501/E85_Pump1.jpg
Ethanol has headwinds all its own.
Everything has been going right for ethanol, the corn-mash moonshine that began getting the country truly giddy earlier this year. But now that giddiness is gone.
Back in the giddy days, high gasoline prices had drivers complaining. Ethanol endorsements were coming from the White House, Silicon Valley and, as always, from those in the corn-growing heartland in between. A protracted war in the Middle East had rekindled the on-again, off-again talk of reducing dependence on foreign oil. We even had corn surpluses. Anybody and anything associated with ethanol was attracting attention and capital.
Well, the war is still here, and the politicians still like ethanol. But the things that affect ethanol's bottom line - oil prices and corn prices - are now going in the wrong direction.
Corn prices are rising rapidly, from $2.20 a bushel this summer to over $3 a bushel lately on fears that this year's crop will be weak. And oil prices have fallen from $76 a barrel to $56.
This whole little boomlet in ethanol is mirrored by the share prices of Pacific Ethanol, an ethanol distributor and producer based in Fresno, Calif., and one of the few pure-play ethanol companies. Throughout 2005, the shares hovered around $10. Then came the hype. President George W. Bush mentioned ethanol in his state of the union address. Cascade Investment, Bill Gates' fund, invested $84 million in Pacific Ethanol. And oil prices surged. Between January of this year and May, Pacific Ethanol shares quadrupled, from $10 to $40.
Now, with corn prices rising and oil prices falling, Pacific Ethanol stock has fallen back to $16. "There was a bit of overexcitement, and now that oil prices have moderated, a bit of overcorrection," said Neil Koehler, chief executive of Pacific Ethanol. "The market is still trying to figure out how to value this industry."
Ethanol, even with subsidies of 54 cents a gallon, has long had a tough go of it because oil was so cheap for so long. In comparison with gasoline prices, ethanol was far too expensive to attract buyers without federal and state incentive programs. But several realities converged to make ethanol attractive and deliver big profits to ethanol producers and marketers like Pacific Ethanol and the worldwide ethanol king, Archer Daniels Midland.
First, a gasoline additive called MTBE (methyl tertiary-butyl ether), mandated by many states to reduce emissions, was quickly banned when it was discovered the chemical very easily leaches into groundwater. Ethanol is a tidy replacement for MTBE, so states steered blenders to it.
At the same time, oil prices surged, making ethanol not quite so expensive in comparison. And politicians began pushing it to appear as if they had an answer to high gasoline prices and dependence on foreign oil. They mandated that the country must use 7.5 billion gallons of renewable fuels by the year 2012, up from an estimated five billion gallons this year. They are even contemplating a higher target: 15 billion gallons. And the big U.S. automakers - General Motors, Ford and DaimlerChrysler - began building flex-fuel vehicles that can run on gasoline or an E85 ethanol blend.
The sudden ethanol demand, albeit for regulatory and technical reasons, allowed ethanol makers to sell out their production at high prices and fund a construction boom in ethanol refineries. An estimated three billion gallons of capacity will be ready by 2008, a 40 percent increase over today's capacity.
But now profits are in danger of what Pacific Ethanol's Koehler calls a "double squeeze": higher oil prices and higher corn prices. Koehler says ethanol makes economic sense (only with subsidies, of course) if oil is $35 or above and corn prices are $3.50 or below. If one of these gets out of whack - or both - ethanol makes no sense. Oil is nowhere close to $35, but corn prices are rising, in part due to the new demand for corn by ethanol makers.
Dan Basse, an analyst at Chicago-based AgResource, says that as ethanol demand grows, refiners will have to battle with livestock owners for corn, driving up prices. "We're going to have a food fight," he says.
To be sure, demand for ethanol won't dry up, because the government doesn't want it to disappear. But profits are threatened. Indeed, mighty ADM's shares have fallen - down 10 percent since the beginning of September - along with tiny Pacific Ethanol.
Jonathan Fahey - Forbes.com - Oct. 24, 2006
http://www.cleanmpg.com/photos/data/501/E85_Pump1.jpg
Ethanol has headwinds all its own.
Everything has been going right for ethanol, the corn-mash moonshine that began getting the country truly giddy earlier this year. But now that giddiness is gone.
Back in the giddy days, high gasoline prices had drivers complaining. Ethanol endorsements were coming from the White House, Silicon Valley and, as always, from those in the corn-growing heartland in between. A protracted war in the Middle East had rekindled the on-again, off-again talk of reducing dependence on foreign oil. We even had corn surpluses. Anybody and anything associated with ethanol was attracting attention and capital.
Well, the war is still here, and the politicians still like ethanol. But the things that affect ethanol's bottom line - oil prices and corn prices - are now going in the wrong direction.
Corn prices are rising rapidly, from $2.20 a bushel this summer to over $3 a bushel lately on fears that this year's crop will be weak. And oil prices have fallen from $76 a barrel to $56.
This whole little boomlet in ethanol is mirrored by the share prices of Pacific Ethanol, an ethanol distributor and producer based in Fresno, Calif., and one of the few pure-play ethanol companies. Throughout 2005, the shares hovered around $10. Then came the hype. President George W. Bush mentioned ethanol in his state of the union address. Cascade Investment, Bill Gates' fund, invested $84 million in Pacific Ethanol. And oil prices surged. Between January of this year and May, Pacific Ethanol shares quadrupled, from $10 to $40.
Now, with corn prices rising and oil prices falling, Pacific Ethanol stock has fallen back to $16. "There was a bit of overexcitement, and now that oil prices have moderated, a bit of overcorrection," said Neil Koehler, chief executive of Pacific Ethanol. "The market is still trying to figure out how to value this industry."
Ethanol, even with subsidies of 54 cents a gallon, has long had a tough go of it because oil was so cheap for so long. In comparison with gasoline prices, ethanol was far too expensive to attract buyers without federal and state incentive programs. But several realities converged to make ethanol attractive and deliver big profits to ethanol producers and marketers like Pacific Ethanol and the worldwide ethanol king, Archer Daniels Midland.
First, a gasoline additive called MTBE (methyl tertiary-butyl ether), mandated by many states to reduce emissions, was quickly banned when it was discovered the chemical very easily leaches into groundwater. Ethanol is a tidy replacement for MTBE, so states steered blenders to it.
At the same time, oil prices surged, making ethanol not quite so expensive in comparison. And politicians began pushing it to appear as if they had an answer to high gasoline prices and dependence on foreign oil. They mandated that the country must use 7.5 billion gallons of renewable fuels by the year 2012, up from an estimated five billion gallons this year. They are even contemplating a higher target: 15 billion gallons. And the big U.S. automakers - General Motors, Ford and DaimlerChrysler - began building flex-fuel vehicles that can run on gasoline or an E85 ethanol blend.
The sudden ethanol demand, albeit for regulatory and technical reasons, allowed ethanol makers to sell out their production at high prices and fund a construction boom in ethanol refineries. An estimated three billion gallons of capacity will be ready by 2008, a 40 percent increase over today's capacity.
But now profits are in danger of what Pacific Ethanol's Koehler calls a "double squeeze": higher oil prices and higher corn prices. Koehler says ethanol makes economic sense (only with subsidies, of course) if oil is $35 or above and corn prices are $3.50 or below. If one of these gets out of whack - or both - ethanol makes no sense. Oil is nowhere close to $35, but corn prices are rising, in part due to the new demand for corn by ethanol makers.
Dan Basse, an analyst at Chicago-based AgResource, says that as ethanol demand grows, refiners will have to battle with livestock owners for corn, driving up prices. "We're going to have a food fight," he says.
To be sure, demand for ethanol won't dry up, because the government doesn't want it to disappear. But profits are threatened. Indeed, mighty ADM's shares have fallen - down 10 percent since the beginning of September - along with tiny Pacific Ethanol.