TBO.com - TBO is Tampa Bay Online

Ethanol Struggles Threaten Some Companies' Futures

ADVERTISEMENT

By DAVID MERCER

The Associated Press

Published: May 22, 2008

CHAMPAIGN, Ill. - Not long ago, the fledgling ethanol industry was the darling of investors, farmers, the federal government and a lot of Americans who liked the idea of turning corn into fuel.

But suddenly, it doesn't have nearly as many friends.

Rising worldwide food prices and shortages have spurred calls in Congress to roll back the federal requirement that increases the amount of ethanol and other biofuels blended with the nation's gasoline supply.

Critics say so much corn is being used for ethanol that there is less available for people and animals to eat, raising prices of everything from tortillas to meat.

What's more, investors who bought into the industry in good times are not seeing the returns that they had hoped for as once-record profits began to fall.

"Consumers are starting to get restless and Washington is starting to listen," said Morningstar analyst Ann Gilpin, who follows Decatur, Ill.-based Archer Daniels Midland, the country's second-largest ethanol producer.

The ethanol market would be severely limited if Congress rolled back the federal mandate calling for annual increases in the amount of biofuels added to the fuel supply - 9 billion gallons by the end of this year, increasing to 36 billion gallons by 2022.

That would most hurt companies that rely exclusively or primarily on ethanol.

Those companies include a mix of small, often locally owned distillers - already under pressure since ethanol prices fell and corn prices rose sharply - as well as larger publicly traded firms like VeraSun Energy Corp., the country's top ethanol producer.

"If you sell one product and the only reason there's a market for it is because the government makes a law requiring consumption - if that law goes away, obviously you're in trouble," Gilpin said.

Support For Change Is Growing

The odds of Congress changing that mandate this year are slim because the 10 states - mostly in the Midwest - that produce more than 80 percent of all American ethanol have between them almost half of the 270 electoral votes needed to win a presidential election, said analyst Kevin Book of Friedman, Billings, Ramsey & Co.

After the election, though, sentiment could change.

"I think we're still a long ways from anything actually being done on it, but at the same time there is a lot more serious support than there was at this time two or three years ago," said Rick Kment, an ethanol-industry analyst for agricultural data company DTN.

Investor disappointment also is weighing on ethanol-only companies, Kment said.

Profits Of Past A Distant Memory

He said much of the public and private investment was made when profits were at record levels - $2 a gallon in some cases.

"It is very unlikely we will see that kind of profit again," Kment said.

Shares of Brookings, S.D.-based VeraSun have fallen more than 15 percent since April 1, and Pacific Ethanol, another major biofuels maker, has seen its stock drop about 30 percent in the same period.

After VeraSun announced a first-quarter profit last week that fell short of investor expectations, some analysts raised worries about the pressures facing the industry.

"We remain cautious on the entire sector as we expect sustained higher corn and natural gas prices with little relief in sight," Calyon Securities' George Kotzias wrote in a note to investors. He said he was reviewing his earlier estimates of VeraSun's expected performance, while at least one other analyst downgraded his expectations.

On the other hand, analysts say ethanol producers such as ADM that distill the fuel additive as just one of many businesses appear better prepared to weather whatever's coming their way.

ADM doesn't break out the profit it makes from ethanol, but the division that includes fuel additive operations accounted for about 20 percent of the company's earnings last year. In the most recent quarter, when profit in that division fell by almost a third, companywide profit increased 42 percent on the strength of ADM's other businesses.

"Today's quarter highlights the balance of ADM's model," Citigroup analyst David Driscoll wrote in a note to investors after ADM's results on April 29.

At the time ADM called the volatility in the quarter "unprecedented" as corn prices set a record above $6 a bushel. But chief executive Patricia Woertz said retreating from biofuels would be a mistake.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT