×
×
homepage logo

DAVID KRUSE

By Staff | Jan 28, 2010

Of publicly held ethanol companies, Green Plains Renewable Energy appears to have made what has been a severe cut. VeraSun, Pacific Ethanol and others have bit the dust, leaving GPRE as the winner of this survivor’s episode of who is left solvent in the ethanol industry.

Even well-run, once-profitable ethanol startups have made strategic mistakes that have caused them to have to recapitalize.

Under such extremely challenging circumstances, making mistakes was virtually unavoidable. I’m cutting them some slack. If their performance is judged by degree of difficulty encountered, most struggling ethanol companies are not suffering because of inept management.

The line to be walked to remain financially solvent in the ethanol industry has been extremely thin. Some managers knew how to brew ethanol, but were clearly not up to the challenge of managing the extreme adverse margin conditions thrown at the industry.

It took a diverse, well-rounded management team to avoid being knocked out of this survivor’s series. Despite the enormous amount of funds entrusted to it from Wall Street.

VeraSun management wasn’t close to performing in the major league. An initial quarterly loss showed they were mismanaging the risk of the corn market. I assumed it was a wakeup call and they could respond to it. They fixed it alright by compounding their error. They obviously didn’t have a clue how to manage ethanol production risk.

The ethanol industry shakeout was a huge test of management skills. In my opinion, GPRE management has scored extremely high marks. First of all, I should reveal, that I am a shareholder. I didn’t, however, respond to their IPO. I got my stock through my own, and family, equity in the Great Lakes Co-op which was acquired by GRPE in a cash and stock swap.

We got our deferred patronage out of the cooperative in cash plus a substantive stock distribution. It was a good deal for co-op members.

I’m going to admit that I passed on the GPRE initial prospectus and I’ll be honest as to why. The first plant to be built, in Shenandoah, was being organized by what looked to me like a couple of high fliers from Nevada looking to cash in on the investment interest in ethanol startups, giving themselves an inordinate amount of cheap stock as reward if successful.

Most other ethanol startups weren’t so generous to the founders so with so many other opportunities, I passed on GPRE. It now looks like they earned their stock by hiring good risk managers. To give the stock price history of GPRE, the initial prospectus in March 2005 offered GPRE shares for $10.

The company later initiated a public stock offering. The stock traded as high as 63.50, closing at 33.78 the month of its initial public share offering, March 2006. You can’t fly like an eagle when with a bunch of turkeys. GPRE stock fell to a low of 1.12 per share in March 2009 when all ethanol stocks were taking a severe beating.

I believe every other new public ethanol startup had, or was about, to file for bankruptcy protection. The stock transfers from the Co-op acquisition were valued by the market as high as $17. Accountants claim the book value was near $9. The stock traded over $16 recently, so has had a remarkable recovery from 2009 lows.

What set GPRE apart from the other public-traded companies that failed was its management. They knew how to manage capital and risk. The turning point was when they bought two of what had been VeraSun ethanol plants in Nebraska from Ag Star which had acquired them as their creditor.

Ag Star wasn’t going to sell failed ethanol plants to another company that was likely to fail, so the confidence of the lender transferred through the transaction.

GPRE now operates six plants – a 480 million gallon capacity in four states. It also owns 51 percent of Blend Star, which operates 8 blending terminals in six states.

GPRE has put in a lot of blending pumps so has moved up the distribution chain to retail biofuel. They have 3rd-party ethanol producer affiliates for another 360 million gallons of ethanol each year, including Lincolnway, another of the ethanol companies I’ve invested in. The blender credit goes to blenders so they are directly receiving the subsidy.

I think this model adds value to the company. They have put blender’s pumps out in small towns which I think was a smart move. They own and operate the former Great Lakes Co-op System, which consists of grain acquisition, grain storage, agronomy, feed and fuel, further integrating farmer share holders in a grain production, biofuel production and distribution system.

It was an interesting experiment to see what was a common Midwest co-op operate as a privately owned company.

The GPRE business model has proven itself by having survived the tumultuous period of ethanol industry financial stress that broke so many others.

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.

Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page