Energy

Falling Corn Will Boost Ethanol Producers

Corn prices have fallen 25% since their early March highs and the weather the past two weeks has lead to a surge in planting with up to 40% increases in some areas.  The beneficiary? Ethanol producers.  Versun (VSE), who recently…

By Douglas A. McIntyre
Published May 10, 2007, 9:34am ET · 2 min read

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Corn prices have fallen 25% since their early March highs and the weather the past two weeks has lead to a surge in planting with up to 40% increases in some areas.  The beneficiary? Ethanol producers.  Versun (VSE), who recently experienced a 31% increase in revenue, reported a quarterly loss and said the culprit was increased corn prices that had them paying $4.05 a bushel in Q1 and a inexplicable $33 million "loss" contributed to hedging.  How do you lose money hedging against higher corn prices when corn prices go higher?? 
 
 
 
When you consider Aventine (AVR) reported a profit and said they paid $3.58 a bushel in Q1,  Verasun’s results seem to be an indication of poor management rather than rapidly deteriorating fundamentals in ethanol.  Considering estimates have ethanol being profitable to produce at corn prices up to over $4.80 a bushel, ethanol will remain profitable for the foreseeable future. Archer Daniel’s Midland (ADM) reported Q1 results recently and while they do not release their price paid for corn (I presume this is due to it being dramatically lower than their rivals and would put pressure on suppliers to provide these prices to others), they reported an increase in Q1 corn processing results.  Shares of Pacific Ethanol (PEIX) are trading up 12% after their earnings actually came in it a profit

Now that we have a record corn crop going into the ground at a rapidly increasing rate, corn prices look to plummet before the summer is finished. When you add the fact that new ethanol production capacity that was scheduled to come online has slowed due to the higher corn prices, anticipated demand will not materialize.  For ethanol producers who managed their businesses well during the price spike, this will mean a series of earnings estimate beating results will come rushing in.

 
 
With the current outlook poor for the sector, shares ought to spike on the unexpected good news.

 
 
Todd Sullivan
May 10, 2007

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Douglas A. McIntyre

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.

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