Ethanol players running out of gas
Ethanol was touted as one solution to U.S. concerns about its reliance on imported oil, but that was before soaring global food prices and major flooding in the U.S. corn belt. Ethanol was also supposed to provide an attractive and environmentally friendly sector to invest in.
It hasn't apparently measured up on either score, at least not to date. A case in point on the investment side is the 52-week low of $4.16 (U.S.) set yesterday by VeraSun Energy Corp. In December, the shares set a high of $17.75. Those same shares were changing hands at $30 apiece just after VeraSun went public in June, 2006.
BioFuel Energy Corp., another pure-play ethanol supplier, is also hurting. Its shares dipped to $2.91 last Thursday, quite a drop from the $10.50 when the initial public offering was done at a year ago and the high of $11.97 last July.
And shares of Archer Daniels Midland Co., which processes oilseeds, oats and barley along with corn, are close to, but still above their 52-week low of $31.28 established last August. At $33.12, however, they are far off the high of $48.95 which dates back to April 22.
The stocks, particularly the pure plays, have been hit by what might be seen as a perfect storm. The rains have made what was already a bad situation, with sharply rising food prices, worse and in the process, pushed ethanol margins at small and mid-sized producers into negative territory.
David Driscoll, who follows the sector for Citigroup Global Markets Inc., says that each 10-cent a bushel increase in the price of corn reduces ethanol production margins by 2 to 3 cents a gallon. And he noted in a report last Thursday he had learned of at least five small to mid-sized ethanol plants that have shut down because of the poor margins.
"This appears to be just the tip of the iceberg as we believe as much as two to five billion gallons of ethanol could go offline in the next few months due to high corn prices and poor ethanol production margins," he said.
Mr. Driscoll raises the possibility that Washington may intervene in the ethanol markets to curtail production in the near term and relieve the pressure on the corn market.
In a separate report, he cited a May 2 letter sent to the U.S. Environmental Protection Agency signed by Senator John McCain and 23 other senators urging the agency to waive some or all of the Renewable Fuels Standard. The standard specifies minimum biofuels consumption levels for the U.S.
"In our opinion, just the spectre of possible political intervention will likely cause the market to question the magnitude of future biofuel growth, adding further pressure on valuations across the ethanol industry," Mr. Driscoll added.
As a result, he has downgraded VeraSun and BioFuel to "sell" from "buy," while lowering Archer Daniels Midland to "hold" from "buy." The hold on Archer reflects the fact that it has other businesses "which could possibly mitigate problems in ethanol," he said. He also reduced his target price for VeraSun to $3 from $12.50, and for BioFuel to $2.75 from $11. He adjusted the target for Archer to $42 from $51.
It hasn't apparently measured up on either score, at least not to date. A case in point on the investment side is the 52-week low of $4.16 (U.S.) set yesterday by VeraSun Energy Corp. In December, the shares set a high of $17.75. Those same shares were changing hands at $30 apiece just after VeraSun went public in June, 2006.
BioFuel Energy Corp., another pure-play ethanol supplier, is also hurting. Its shares dipped to $2.91 last Thursday, quite a drop from the $10.50 when the initial public offering was done at a year ago and the high of $11.97 last July.
And shares of Archer Daniels Midland Co., which processes oilseeds, oats and barley along with corn, are close to, but still above their 52-week low of $31.28 established last August. At $33.12, however, they are far off the high of $48.95 which dates back to April 22.
The stocks, particularly the pure plays, have been hit by what might be seen as a perfect storm. The rains have made what was already a bad situation, with sharply rising food prices, worse and in the process, pushed ethanol margins at small and mid-sized producers into negative territory.
David Driscoll, who follows the sector for Citigroup Global Markets Inc., says that each 10-cent a bushel increase in the price of corn reduces ethanol production margins by 2 to 3 cents a gallon. And he noted in a report last Thursday he had learned of at least five small to mid-sized ethanol plants that have shut down because of the poor margins.
"This appears to be just the tip of the iceberg as we believe as much as two to five billion gallons of ethanol could go offline in the next few months due to high corn prices and poor ethanol production margins," he said.
Mr. Driscoll raises the possibility that Washington may intervene in the ethanol markets to curtail production in the near term and relieve the pressure on the corn market.
In a separate report, he cited a May 2 letter sent to the U.S. Environmental Protection Agency signed by Senator John McCain and 23 other senators urging the agency to waive some or all of the Renewable Fuels Standard. The standard specifies minimum biofuels consumption levels for the U.S.
"In our opinion, just the spectre of possible political intervention will likely cause the market to question the magnitude of future biofuel growth, adding further pressure on valuations across the ethanol industry," Mr. Driscoll added.
As a result, he has downgraded VeraSun and BioFuel to "sell" from "buy," while lowering Archer Daniels Midland to "hold" from "buy." The hold on Archer reflects the fact that it has other businesses "which could possibly mitigate problems in ethanol," he said. He also reduced his target price for VeraSun to $3 from $12.50, and for BioFuel to $2.75 from $11. He adjusted the target for Archer to $42 from $51.
