ETHANOL: Producers’ financial health going ‘from bad to worse’

By Allison Winter
October 24, 2008; Greenwire, E&E Publishing

U.S. ethanol companies are struggling financially, with their stock prices nosediving, cash reserves dwindling and bad bets on pricey corn contracts coming due as fuel prices decline.
"When you look at it from a firm-specific standpoint then a cash-market standpoint, the profitability could be even worse than what the cash market is implying," said Ian Horowitz, alternative energy analyst with Soleil Securities Group. "And the cash market is implying difficult times. It’s going from bad to worse."

He added, "It is a very difficult backdrop
[for ethanol companies], and at a difficult time, these guys at a firm-specific level have had some very big missteps with hedging programs."
Believing corn prices would continue to rise over the long term, VeraSun Energy in South Dakota and many other ethanol companies locked in corn contracts at high prices in early summer when commodity markets were booming. But prices have plunged. Corn is now selling for almost half its early-summer price, and companies are in precarious positions.
"The best situation for an ethanol plant is low corn and high gas prices, but when you have the opposite … that’s the worst possible situation," said Michael Schewel, a partner at law firm McGuireWoods who focuses on the development and financing of energy projects.
Publicly traded VeraSun has said it could have a quarterly loss of up to $103 million because of the beating the company is taking in the corn futures market. When a bid to raise more equity from investors failed, VeraSun hired investment bankers this month to seek strategic alternatives. Other ethanol plants in Kansas and Ohio have declared bankruptcy in the last week.
And stocks for VeraSun and other ethanol companies have fallen even further than the battered Dow Jones industrial average, which is down 26 percent this month. VeraSun shares are trading 90 percent lower this week than they did at their peak early this year. Investors in ethanol have lost billions across the board. Six of the largest publicly traded U.S. ethanol producers lost more than $8.7 billion in market value this month since their 2006 peak, according to a Financial Times analysis.
Part of that sector’s pounding is due to the overall decline in the stock market, analysts say. But toxic bets on corn are making the situation worse. Horowitz also said ethanol has been suffering from a "McCain effect," with investors nervous that the industry might tank if Republican presidential candidate John McCain, who opposes federal ethanol subsidies, wins the White House. His Democratic opponent, Barack Obama, who is leading McCain in major polls, does back ethanol subsidies.
"There is a combination both of the macro environment as well as the environment in the ethanol space, as well as firm-specific issues that are weighing these stocks down," Horowitz said.
The renewable-fuels industry says its current financial problems don’t signal its demise, even if it is the end of the exponential growth corn-ethanol saw two years ago. Industry boosters say continued federal support and investment are needed to weather the longer-term shocks of the energy-price roller coaster ride and smooth the transition to the next generation of biofuels.
"Show me somebody who has made money in the marketplace today — when we had the meltdown on Wall Street. It caught everybody in the wake," said Matt Hartwig of the Renewable Fuels Association. "We saw expansion in the industry that was impressive at the time but very difficult to sustain. We’re talking about 25 percent expansion every year, and that’s tough to do. What the industry is doing is stopping to take a breath and preparing itself for the next round of innovation and evolution."
USDA weighs loan guarantees
But some companies are finding it hard to get enough cash to help them reach the next stage. McGuireWoods’ Schewel has seen that for himself, with a ethanol loan he is working on that is going "very slowly."
The Agriculture Department is considering using its authority for providing rural loan guarantees to help ethanol plants. USDA spokesman Keith Williams said the agency could use an existing business-and-industry guaranteed loan program in its rural development office to back up plants.
The 34-year-old program has made 45 loans for ethanol plants and hundreds of loans for other businesses in the past, Williams said, and there have been no defaults in over 20 years. The program requires businesses to find private lenders, then provides USDA backing for 60 percent of a loan between $10 million and $25 million.
The mere mention of the USDA’s backing loans to ethanol producers angers groups that want the government to reduce its support for the industry.
"Now, the ‘ethanol commodity-price bubble’ has burst, and USDA wants to bail out firms losing money on this speculation," said Larry Hart of the American Conservative Union. "After decades of taxpayer subsidies for profitable ethanol producers, it is time for this industry to stand on its own."
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