Believe it or not, there is an ethanol glut. The clean(er) energy push might make that seem hard to believe, but there’s more of the stuff than is being used.
Like most gluts, there’s good news and bad news. Good news: if you’re a buyer, the price decreased from a high of about $3.90 a gallon in the spring to about $1.60 in October. Bad news: if you’re an ethanol-producing company or an investor in the stock of one of those companies, your earnings are decreasing and you’ve likely seen some steep stock price declines over the past few months, respectively.
Companies Putting Plant Construction Plans on Hold
- BioFuel Energy Corp. (Nasdaq:BIOF) – On October 15, it halted plans for a third ethanol facility.
- VeraSun Energy Corp. (NYSE: VSE) – On October 1, it halted plans for construction of a 110 million-gallon-per-year biorefinery. (VeraSun is one of the US’s largest ethanol producers.)
- In Iowa, the US’s top corn producer — There have been only two new plant construction starts in ‘07 — that’s the lowest number by October since at least 1999.
Ethical & Efficiency Issues
As many know, corn-based ethanol is increasingly being attacked and even called unethical since it’s said to take corn away from the food supply as well as drive up the price of corn because of the increased demand. Whether or not you agree, it should be noted that increased demand for corn by ethanol producers has not been the sole reason for the price increase (transportation costs have soared, for instance).
Additionally, corn-based ethanol is being derided because it’s said to be about energy-neutral (or a tad energy-positive or energy-negative, depending upon the source), meaning that for each unit it takes of energy invested in producing the biofuel (growing, harvesting, processing, etc), only about one unit is obtained. Not an efficient use of resources.
What’s an Investor To Do?
First, for some background, let’s check out the stock performance of the two companies mentioned above. (Note: Most ethanol companies are private-held; there are only a limited number of publicly-traded ones.)
- VeraSun — stock has not been “verysunny”
Stock closed at $13.05 on Friday, Nov 2. It’s down 24% for the past 1-year period, while the S&P 500 is up almost 11%. A 35% spread – ouch!
- BioFuel Energy — IPO has (& could stand for) Investors PO’d
Stock closed at $5.21 on Nov. 2. The stock started trading on June 20 at $10.32 a share. Anyone investing in this IPO (initial public offering) about 4-1/2 months ago has lost almost 50% of their money. “Aw shh….shucks!” is probably not strong enough language for some of these investors.
Personally, I wouldn’t invest in any strictly or mainly corn-based ethanol plays now. That said, political pressure on both sides of the aisle is on to “help the American farmer” by pushing corn-based ethanol, so — depending upon changes in incentives and regulations, such as CAFE (corporate average fuel economy) — investing in ethanol might make sense down the road. I don’t think it will, but who knows where traveling down the green brick road of the future will lead.
Some “contrarians” might say that investing in the stock of these companies now after they’ve taken a hit is the way to go. Not for me. Why sit on “dead money” while there are currently (key) more promising companies and stocks — specifically solar and (to a lesser extent) wind, IMO?
Additionally, many big institutional investors are turning away from ethanol now. Trading volume is key in investing. A company can be wonderful and churn out stunning earnings (though that’s not the case with ethanol companies), but if there is little demand for that company’s stock, it’s difficult to impossible for its price to rise or at least sustain a rise.
Corn is good to power your body, and even your vehicle, but currently likely not your wallet.
This article is not a recommendation to purchase or sell any securities.
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