Financial analysts are predicting dire times for the ethanol boom now that higher corn prices and lower gas prices are putting the squeeze on industry profits.
A Reuters UK article quotes from a Credit Suisse report that predicts a lower completion rate for planned ethanol plant projects.
“Back in July 2006, a new plant would have commanded returns in the 35-40 percent range using $2.50/bushel corn and $2.50 per gallon ethanol,” Credit Suisse said.
“More recent prices of $2 per gallon ethanol and $3.50/bushel corn generate implied returns of only 5-13 percent,” the report added.
Reuters also quotes a Goldman Sachs report, “Continued high levels of corn prices and low margins would make it more profitable for an integrated producer to actually sell the corn into the corn market rather than to turn it into ethanol at a lower profit.”
The Wall Street Journal reports that publicly-traded ethanol companies will be among those most impacted by lower oil prices.
As oil’s price falls, alternative-energy sources become less attractive because they usually are more expensive to produce than traditional sources. Ethanol producers could be hurt as rising corn prices send their cost of production higher, and as crude and gasoline prices fall.
Ethanol prices have been dropping sharply in the past few weeks. Dow Jones reports that national rack ethanol prices as of Monday averaged around $2.179, according to ethanolmarkets.com, compared to an average price of $2.4366 as of Jan. 10.
Shares of some ethanol producers such as Vera Sun, Aventine and Archer Daniels Midland fell earlier this month but, “the stock prices have rebounded in hopes for positive comments about renewable fuels in President Bush’s State of the Union address Tuesday.”
The Dow Jones article adds that even with the tighter margins ethanol producers can hold out for now.
Dan Basse, president of AgResource, said in a research note that “most ethanol plants contract their product sales for two to four months at a time, so corn prices will have to reach levels that produce at least a 10% margin loss“ before curtailing production.
Another analyst says “the ethanol plants least likely to have problems with the corn price hike and energy price dip are the farmer-owned co-operatives.”