This was a brutal week for the ethanol industry.
The largest producer, VeraSun, is said to be near a bankruptcy filing, owing to some bad hedges on corn and what is being described as an "ill-timed" acquisition. The stock is trading at less than $1 per share. (P.S. -- VeraSun filed for bankruptcy late Friday).
Aventine released its earnings Friday, and while it made money, it was only a few cents per share, and was about half of what analysts predicted. In a conference call, Aventine officials said margins were "break-even." And in the market, the worst of both worlds is taking hold. The crush spread -- the value of taking corn and turning it into ethanol -- continues to be "terrible," as my colleague Robert Sharp described it. But what's even worse is that the price of ethanol now has moved solidly above gasoline.
While that may sound positive, it isn't. There are two markets for ethanol in the US. The first is largely set in stone: as an octane enhancer for reformulated gasoline. The second is optional blending of ethanol into conventional gasoline, and that's dependent upon the relationship of ethanol prices to gasoline. (Blending simply to meet the nation's Renewable Fuels Standard is not an issue as of now; what's being consumed is more than adequate for the 2008 standard of 9 billion gallons).
When ethanol is blended into conventional gasoline, it's being done so primarily because it's cheaper to buy the BTUs contained in ethanol than it is to produce gasoline. So the cheaper ethanol-based BTUs back out 10% (usually) of the gasoline content. As ethanol fell significantly below gasoline earlier this year, the trend toward ethanol blending into conventional gasoline picked up steam, with Florida in particular seen as a growing market.
Today's Platts assessment for Gulf Coast ethanol was $1.84-$1.85/gal. CBOB, the unfinished gasoline product that ethanol is blended into to make finished conventional gasoline, was assessed at $1.4284-$1.4309. At those numbers, with the 51 cts/gal blending tax break for ethanol, the decision about whether to blend ethanol into conventional gasoline is roughly a toss-up...if you're in Houston. But if there are higher transportation costs to blend it in areas further away from a key market center like Houston, the economics for blending ethanol get a lot worse.
The entire ethanol complex is looking long-term disastrous. The RFS requires increased blending of renewable fuels -- which are mostly ethanol -- every year through 2022, when 36 billion gallons of renewables must be consumed. (The standard for next year is 11.1 billion gallons). So more supply is being asked for while the industry is going through a double whammy on prices: corn prices relative to ethanol makes producing ethanol barely profitable, if at all; and ethanol prices relative to gasoline discourages optional blending.
Markets always tend to work to fix that, but markets don't work quite that smoothly when layered with government regulations. So you've got a renewable fuels mandate and what amounts to an ethanol consumption mandate, and the prices of the three legs of that supply equation -- corn, gasoline, ethanol -- just aren't working too well with each other. Plans for new plants are being delayed or put on the shelf, and while that may be good for the industry today, it won't help provide enough supply to get to the 36 billion gallons target for 2022.
It's not clear how this will work out, but for policy makers who have embraced ethanol, it is a very troubling sign.
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