Investors lukewarm over ethanol boom

Investors lukewarm over ethanol boom

The ethanol industry appears poised for a big year in 2007, as companies scramble to take advantage of continuing government subsidies and a growing political desire to reduce the country’s dependence on foreign oil.

But Wall Street investors who went pedal-to-the-metal during ethanol’s midyear frenzy in initial public offerings of stock seem to be easing off the accelerator upon warnings of volatile commodity prices and a potential oversupply down the road.
VeraSun Energy Corp. and Aventine Renewable Energy Holdings Inc., the country’s second- and fourth-largest ethanol producers, respectively, went public in June amid perfect market conditions. Corn was cheap, gasoline wasn’t and refiners were clamoring for more ethanol as a cleaner-burning alternative to the additive MTBE. But autumn brought falling gas prices, and ethanol companies saw their stock prices drop by more than 40 percent. The deteriorating market conditions also prompted the country’s third-largest ethanol producer, Iowa-based Hawkeye Holdings Inc., to postpone its planned IPO. “The biggest factor right now is the increased price of corn,” said Spencer Kelly, an ethanol analyst for the Oil Price Information Service in Rockville, Md. “It doesn’t look to be coming down anytime soon right now, and it’s been strong even though the crop has been pretty good.” Brian Jennings, executive vice president of the American Coalition for Ethanol, called 2006 a “watershed year” for the industry. Production reached a record 427.8 million gallons in August, according to the Renewable Fuels Association, and more capacity is set to come online. The nation’s 108 ethanol plants can produce nearly 5.2 billion gallons of the corn-based fuel per year, and another 55 plants under construction and seven under expansion are getting ready to boost annual capacity to 9.5 billion gallons. Five new ethanol plants are under construction in Indiana. There’s some concern among analysts about whether there are enough energy-conscious drivers and ethanol-ready gas stations to use up all those gallons, Kelly said. “We have had situations in the past where extra ethanol came online before the markets were there and ethanol prices actually dipped below gasoline,” he said. The ethanol industry’s rapid growth has led to a growing debate over whether the use of corn as a fuel source is putting a strain on food markets. Lester Brown, founder of the Earth Policy Institute, a Washington-based think tank, said the escalating demand for ethanol is driving up corn prices, and that will have wide reaching effects. When ranchers have to pay more to feed their livestock, consumers pay more for milk, meat, eggs and cheese. Jennings called the food-versus-fuel debate “a fabricated concern.” Very little of the field corn raised in the U.S. — or about 7 or 8 percent — goes directly from the field into human food supply, Jennings said. More than half goes to livestock feed, about 20 percent goes to ethanol plants and the rest goes to exports and other uses, he said. Brown said he expects switchgrass to eventually become the centerpiece of the ethanol industry, as it offers a better alternative to current corn-based alternative fuels.

“When it’s a perennial crop, once you’ve planted it you can harvest it for 20 years,” he said. “You don’t have to keep plowing and planting again each year as you do with most of the grains.”

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