Is the ethanol industry tanking?
TEXT OF STORY
Kai Ryssdal: This next items’s going to resonate a little bit, seeing as how oil closed below $64 today. It wasn’t so long ago that ethanol was being touted as a possible solution to the energy crisis. And the government still does require states to add it to gasoline. But today, Goldman Sachs told clients that its analysts aren’t going to cover the industry anymore. That comes on the heels of the largest publicly traded ethanol company in the country filing for bankruptcy. Of the handful of stand-alone ethanol companies that there are, shares of some of them are trading for as little as $1 a share.
From the Marketplace Sustainability Desk, Sarah Gardner reports now on why ethanol’s in a pinch.
Sarah Gardner: Goldman analysts didn’t return our calls by deadline but told clients today they believe the outlook for ethanol companies is “challenged.” The worst is VeraSun, the company that filed for bankruptcy on Friday. VeraSun produces about 7 percent of all U.S. ethanol made from corn. The company bet wrong on corn prices this summer. Ag economist Chad Hart at Iowa State University
Chad Hart: They thought corn prices were going even higher, so they booked a lot of corn at that high price ahead of time. So they’re still paying the prices we saw this summer, even though corn prices have dropped.
Prices dropped on better than expected harvests and falling energy costs. And falling oil prices have forced ethanol producers to cut their prices, as well. The credit crunch isn’t helping either. Dan Basse, president of the research firm AgResource, says only the strongest will survive.
Dan Basse: You’re going to find consolidation in the industry, more capital still coming in, but it’s going to be the older capital — the ADMs of the world, the Cargills and others that are going to be picking up these firms that are too small and poorly capitalized. The firms will continue, it’s just with another name on the front door.
Analysts say don’t count corn ethanol out. Despite controversy over its eco-benefits, the federal ethanol mandate still exists and requires an increasing amount of the biofuel be produced in coming years. Republican John McCain has opposed that mandate, but Democrat Barack Obama has told farmers he’s all for it.
I’m Sarah Gardner for Marketplace.
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