Once pitched as the potential saviour of America’s energy squeeze - ethanol is having a bad time of late.
In the latest sign the fuel may not be the answer to US dependence on foreign oil, VeraSun Energy - one of America’s largest ethanol producers - has filed for Chapter 11 bankruptcy.
According to the WSJ, VeraSun made bad bets on the corn market over the summer as grain prices reached record highs, which resulted in significant losses for the company.
The ethanol sell-off has much to do with the corresponding fall in gasoline prices, currently trading at a negative spread to oil prices. This means it’s largely unprofitable for refineries to produce. And with gasoline plunging ever deeper into the so-called negative crack, the economics are getting worse by the week says Olivier Jacob of Petromatrix.
US-produced ethanol has had other problems too. For one, the fuel needs to be hauled by truck or rail separately because its organic nature corrodes existing gasoline pipeline networks. This made it a troublesome fuel to deal with.
Secondly, the associated squeeze in corn prices, is no longer there supporting ethanol prices. The latest figures from the US Department of Agriculture (USDA) showed corn demand from ethanol actually fell by 100m bushels to 4 bn bushels, while demand for corn is also suffering because of the general US slowdown.
Ethanol Futures
Corn Futures
With all the negative sentiment surrounding ethanol, it’s no surprise to see Bloomberg reporting on Monday that Goldman Sachs has dropped coverage of ethanol makers completely. According to the news agency analysts Arjun Marti (of oil super-spike fame) and Amil Mody cited the bankruptcy of VeraSun as one of the reasons for the move:
“We continue to believe the outlook for ethanol producers is challenged,'’ the analysts said in the note. “We believe this weak margin environment, coupled with the financial difficulties of producers, will keep downward pressure on ethanol shares.'’
With the fundamentals looking so weak, the role of government subsidies is now increasingly likely to come into question. US presidential candidate John McCain has already made it known he is not a fan of the aid, which amounts to some $3.5 bn a year.
Barack Obama, who can thank a surprise win in Iowa - home to America’s ethanol industry - for kickstarting his campaign, sees things rather differently.
Related Links
Ethanol hangover - Lex
VeraSun files for protection - FT.com
Investors suffer as US ethanol boom dries up - FT.com
