Corn Prices Strike the Ethanol Industry from Both Sides
By R. Brown, Web Exclusive Posted Oct. 29, 2008
The severe rise in corn prices dealt the ethanol industry serious setbacks. At the peak of the price ascent, corn prices had risen 67.0% above the previous year values; eroding margins for corn-ethanol producers and increasing tensions as food prices soared.
High commodity prices in combination with higher supply than demand for ethanol fuel crunched the bottom line of corn-ethanol producing companies. In the second quarter of 2008, Sacramento-based Pacific Ethanol (NASDAQ: PEIX) experienced stock value deterioration as investors bailed out upon news that Pacific realized a $8.3 million net loss, or 23 cents a share, compared to a $2.2 million profit, or 3 cents a share, the year before. After announcement of the net loss, Pacific saw its stocks value decline almost 15% to $2.02. Today, Pacific’s stock value is 92.53% lower than a year ago at 72 cents per share. Another staple ethanol producer, VeraSun Energy (NYSE: VSE) saw its stock decline a mind-blowing 73.0 % in a single trading session to $1.41 after lowering its third quarter net lost expectation to $63.0 to $103 million or 40 to 65 cents per share citing high feedstock prices for the demise of its bottom line. Analyst expected a net loss of 2 cent per share. At the time of this report, VeraSun closed at 72 cents per share, a 94.44% drop from its 52 week value.
In addition to tightening margins, the ethanol industry continues to bare the full brunt and blame for world-wide increase in food prices in the so-called food versus fuel debate. Though most in the ethanol industry realize that the premises articulated by proponents of the arguments against ethanol are for the most part myopic-failing to take into account, the USDA’s assessment of the cause of high food prices such as: bad weather, growing international demand for food, moratoriums on food exports by some countries, and rising energy prices, the general public seem to be buying such arguments. A friend of mine recently told me she had a negative sentiment of ethanol fuel.
The ethanol industry as a result is being bombarded from both sides; a dwindling profit margin and public blame, though unfairly, for high food prices. We have recently seen a decline in corn prices. We are yet to see if lowered prices will remain long enough to provide a buffer for the corn-ethanol industry. Only time will tell.
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