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DAVID KRUSE

By Staff | May 22, 2009

I invested in eight ethanol companies, diversifying my investment in start ups because something was not going to go right and you don’t want your eggs all in the basket that gets smashed.

To date, VeraSun is a total loss, leaving seven others in one state of distress or another.

Ethanol companies send out financial operating reports to investors and they are nasty, depicting grim financial conditions. I hope that they are not holding anything back, as if they are, the industry is in catastrophic financial condition.

What I would describe as the strongest company who has already paid back investors, is struggling under contracted natural gas, losing enough money to bother lenders who tightened credit. Another borrowed capital from investors through high interest rate notes. I doubt it was enough.

Another missed a debt payment, stopped expansion and is renegotiating its debt. Another just got its grain dealers license jerked by the state. Hard to crush corn for ethanol if you can’t buy corn. They are reportedly still operating with corn purchased through other licensed grain dealers. Another went into operation with a bridge loan with long term financing still unresolved.

The other two are seemingly doing business as usual, but I suspect their financial results are as challenged and the more we knew the less we’d like it.

In total, the ethanol industry, at least the first round of investment in it, is at a tipping point. In fact, it may have already tipped over and it’s hanging on by its finger nails. The idea of a late planting season damaging 2009 corn production, raising corn prices, has to shake the ethanol industry to the core. Gasoline prices have not gone up enough to make this work.

Ethanol values are still below January highs. Some ethanol plants still have high priced corn locked in so the spot corn market doesn’t matter. Those plants would be helped by higher ethanol.

Nobody is making any money using corn. Livestock producers and ethanol crushers are operating at losses. 50 cents up in corn will only exacerbate the financial stress in those industries. Some additional demand destruction will result. The corn market is only one of many challenges being faced by the ethanol industry, probably the simplest and most benign of many threats confronting it.

The Obama administration has an incoherent ethanol policy, akin to having one foot on the brake, one on the accelerator and their eyes on the sun roof. The administration claims to support ethanol, but when you dissect it down, what that means is not something the corn-based ethanol industry can have a lot of confidence, or hope, in. Yes, there is a 15 million-gallon ethanol mandate, but will there be any plants besides Valero’s and ADM’s left in business to fill it?

The ethanol industry may go in and out of bankruptcy court first. If industry production capacity is negatively impacted and the mandate causes a surge in ethanol prices above gasoline prices, so that ethanol raises the price of motor fuel at pump, that would turn the consumer against ethanol and put the nail in the coffin.

How mandated usage could turn something good into something potentially bad was unforeseeable before.

The Obama administration and “greenies” favor cellulosic ethanol. C-ethanol is pie in the sky. It still is just a theory. With the corn-based ethanol industry in the pits, investors feeling burned, and support from the government for corn-based ethanol having waned, who would finance the C-ethanol industry?

No investor is going to believe the government. The government is fickle, changing positions with each new view of science, like the National Enquirer.

Government is trying to have it both ways, embracing second generation ethanol, while ostracizing corn-based ethanol, and it’s not going to be a successful policy. The government’s official statement supporting ethanol is carefully crafted wordage that essentially gains them the latitude to lock corn-based ethanol up in the cellar like some embarrassing relative, while they show pictures of what the idealic C-ethanol industry will look like from their imagination.

The only portion of the corn-based ethanol industry that will thrive for some time is the part owned by the vultures like Valero picking the skeletons of companies that failed who can buy them for 30 to 60 cents on the dollar.

The EPA followed California in hanging an indirect land use charge on corn-based ethanol. They are charging corn-based ethanol for lost rain forest in the Amazon. The charge is bogus, but if allowed to stand, will threaten the long-term viability of the U.S. biofuel industry – yes, biodiesel along with ethanol.

The connection is extremely weak and would be a surprise to those clearing land in Brazil.

The financial operating reports of the ethanol companies that I’m invested in show the stress. The industry is closer today to destruction than survival. When the President of the U.S. comes to Iowa on Earth Day and can’t say anything good about ethanol, then his administration is truly considered to be hanging that industry out to dry. They just didn’t say that publicly.

They are never going to build a C-ethanol industry on top of a failed corn-based ethanol industry. The foundation will not support it. They have a lot of decisions to make and I’m not seeing the good judgment the Obama people pride themselves in, on ethanol.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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