Friday, May 13, 2011

Ethanol Shakeout Coming (ADM; PEIX)

This is a week old but definitely relevant.
From Barron's Investors Soapbox:

A quarter of the country's production could shut down.

Boenning & Scattergood
Steadily growing over the past decade, the ethanol industry now consumes about 40% of the U.S. corn crop and is significantly responsible for an approximate doubling in the price of maize in recent years, as yields have improved at a slower rate than growth in demand for the gasoline additive.

Now, Mother Nature has made a mess of the Midwest: a La Nina weather system has dumped near-steady rain on the center of the U.S. since early April, delaying field work.

As of Wednesday, only 13% of the U.S. corn crop was planted, versus a 10-year average of 40% by this time. Also, a portion of the corn planted is standing in water and rotting and will have to be replanted.
Further, more rain is scheduled to fall this week in the eastern portion of the Corn Belt.

Even before this weather pattern emerged, corn inventories were low. Now the U.S. Department of Agriculture is estimating a carryout of only 5% for the crop-year ending this summer. It is not inconceivable that corn prices between now and fall could spike up to $9.00-$10.00 per bushel.

However, we believe this corn-price spike could be followed by a correction triggered by "demand destruction" as a result of a downsizing of ethanol demand. This correction is not likely to come from Washington, in our view, as some 20-odd states raise corn and are represented by 40-some senators in the capitol, who may not head off, but could certainly stall, anti-ethanol legislation.

Rather, the ethanol industry is coming under economic pressures that will reduce capacity in coming months and years. Assuming nothing's hedged on either side, refiners today pay as much for corn as they receive for their ethanol -- there's only a small amount of distillers' grain revenue to pay for natural gas, wages, water and other operating expenses, not to mention interest costs.

On its conference call this week, Archer Daniels Midland (ticker: ADM) indicated that many "ethanol producers are going bankrupt." (Ironically, Archer Daniels Midland just started up production of America's two largest ethanol facilities, one of which is coal powered)....MORE 
Since the article came out corn has dropped and PETX reported a break-even quarter, bumping the stock from the 35 cent range to a high of 52 cents before trading off to the current 45 cents.
ADM trailed off from the $34 range to the current $32.43.