.bodytext {float: left; } .floatimg-left-hort { float:left; margin-top:10px; margin-right: 10px; width:300px; clear:left;} .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 10px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 10px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 10px; } .floatimgright-sidebar { float:left; margin-top:10px; margin-right:10px; margin-bottom:10px; width: 300px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Almost as fast as the ethanol industry grew to its height, stock prices suggest that it’s tumbling down.

Stocks of five publicly traded companies with plants in Iowa have fallen dramatically. BioFuel Energy Corp. has fallen to $5.47 per share, compared with its offering price of $10.20 on June 20, and Xethanol Corp. has fallen to a mere 40 cents from $2.29 on January 3. Now the industry is waiting for government mandates or incentives to help bail it out.

“I think there’s a lot of uncertainty right now,” said Scott Poor, corporate counsel and director of investor relations for Green Plains Renewable Energy Inc. in Omaha, “but that could change in a week, because a lot of this industry has to do with the energy bill,” which is being debated in Congress right now.

Beginning last January and especially in May, ethanol stocks have taken a downturn, as falling ethanol prices and record corn prices have squeezed profit margins and questions have arisen about the environmental impact and infrastructure development of the industry, said Iowa State University economist David Swenson.

“The industry is counting on government action to mandate a higher level of usage of corn-based ethanol to prop up this industry,” Swenson said. “This industry requires government action to maintain it, so that really raises important questions. The economic fundamentals of this industry are very, very tenuous.”

The downturn has caused ethanol companies to look at consolidation and other strategies to improve efficiency and increase capital and production capacity to compete in an overbuilt market.

On Nov. 29, VeraSun Energy Corp. and US BioEnergy Corp. announced they would merge, with the combined company having an annual ethanol production capacity of more than 1.6 billion gallons by the end of 2008 – almost Iowa’s entire current production capacity. The announcement helped boost their stocks, with VeraSun’s shares rising to the $14 range from a low point of $9.60 in mid-November, and US BioEnergy’s shares rising to above $10 from around $6.50 in mid-October and November.

Green Plains Renewable announced a private placement of its common stock, increasing its shares outstanding from a little more than 6 million to 7.2 million, which Poor said would give the company enough working capital to purchase more corn when prices are favorable. It also is in the process of acquiring Great Lakes Cooperative in Northwest Iowa, which will give it 14.7 million bushels of grain storage, along with agronomy, feed and other agricultural businesses. Poor believes the company is in a good position for more acquisitions in the future, too.

“We want to be a low-cost producer, and the way to do that is by saving money on corn,” Poor said, “and vertical integration helps shave off per-bushel prices.”

Last week, Green Plains’ stock price was hovering around $10 per share, compared with a closing price of $25 on Jan. 3.

“Less-efficient firms are more vulnerable than more efficient, and firms that paid their debt off prior to the recent months or year are in a much better operating position than perhaps firms that are standing with debt,” Swenson said. “You’ve got lots of pressure for these firms to try to combine and maximize their efficiency, through distribution networks, organization. They’ve got a lot of really powerful incentives right now to sort of be the next one standing – not the last one standing – and to be in a position when and if – the big question is if – this industry finds its footing.”

The energy bill is a key to changing the direction of the tide.

Under the current proposal, refiners would be required to use more ethanol, possibly double what is required now. The bill has been stalled due to several disagreements between political parties on issues, such as oil industry taxes and a renewable electricity mandate. But Poor said the issues for the most part are unrelated to new ethanol mandates, which makes it likely that the government will eventually impose higher mandates. When it does, Poor said, “I think we’ll see a bit of a rally at least among publicly traded companies.”

Swenson believes the industry could face resistance to mandates in the future. “Even the state of Iowa will not mandate blending,” he said, “so if you can’t mandate blending in a state that produces the most ethanol, what kind of resistance do you think there will be in some Sun Belt states, especially hot-weather states that are uncomfortable with ethanol because it contributes to air quality issues?”

Red flag

Robert Lane, an energy analyst who concentrates on midstream energy and biofuel companies such as VeraSun and vice president of equity research for SMH Capital Inc. in Houston, said a downturn in ethanol stocks has less to do with the companies’ management than with commodity prices. “They are very, very sensitive to prices of ethanol, corn and natural gas,” he said, along with other commodities.

Ethanol used to trade at a premium to other blended gasoline with a 51-cent-per-gallon blenders’ incentive that made it worthwhile for blenders to pay slightly more for the corn-based fuel. Now, with a huge glut in the market, ethanol prices have dropped below the price for other fuels.

Iowa currently has 29 ethanol refineries in production, with a combined annual production capacity of 2 billion gallons, according to the Iowa Renewable Fuels Association. With 18 refineries under construction or expanding, another 1.4 billion gallons will be added to the state’s annual production capacity. Nationwide, 134 plants are in production and 77 are under construction, which will provide a combined capacity of nearly 13.5 billion gallons.

“A lot of analysts had talked about that going into last spring; as more and more plants came on line and tried to ramp up full production, no matter what, there’s a limited rate of the nation’s physical ability and overall consumer willingness to absorb ethanol,” Swenson said. “So they very rapidly overproduced resulting in an outright glut … and that’s depressed prices tremendously.”

Corn prices have also skyrocketed to more than $3 per bushel for the first time in a decade and could remain between $3 and $4 per bushel in the near future, as ethanol companies compete with other corn users, such as feed and food producers.

Tight profit margins affected many ethanol companies’ profits. In VeraSun’s third-quarter financial report, the company said it increased total revenues by increasing the amount of ethanol it sold by nearly 70 percent. Yet, it said, the average price of ethanol sold in the quarter was $1.96 per gallon versus $2.36 per gallon in the year-ago period, contributing to a decrease in gross profits.

The ethanol companies that have more diverse operations have fared better, Swenson said, such as Archer-Daniels-Midland Co., which also makes food and animal nutrition ingredients. ADM stock last week was trading near its 52-week high of $39.65.

Domino effect

The difficulty of distributing ethanol also has been a major factor in the industry’s profitability. Producers are struggling to get more and more ethanol to the market without enough rail cars or the large pipeline network that efficiently moves crude oil and natural gas.

“I think the logical thought was that a lot of infrastructure would be developed, and they weren’t expecting everyone and their dog to come into the market with an ethanol plant,” Lane said.

The result of falling stocks has been that “it’s slowed down investment a bunch,” Swenson said, which can stall construction of new and expanded plants and hurt the construction companies, architects and other businesses that were profiting from the boom in the industry.

Swenson said Gilmore City was touting a new ethanol plant as its community revival, but still no construction has taken place.

Low stock prices mean “it’s difficult for them to go out and raise capital in the market, because they’re selling stock at such a dear price, and second, that in turn means they’re not able to meet expansion plans quite as well as they wanted to,” Lane said. “Some who are already building spent so much money on construction and need to keep building.”

Many companies have huge amounts of debt, banking on the industry taking off and making a profit. U.S. BioEnergy, for example, reported total debt of $347.1 million in the third quarter.

E3 BioFuels LLC an-nounced this month that it would file for bankruptcy protection, temporarily closing down its Genesis plant in Mead, Neb., after an explosion in one of its boilers prevented it from reaching full capacity. The company had developed a closed-loop system, becoming the first commercial ethanol plant not to run on fossil fuels, but instead using manure and corn cellulose to generate biogas. It had been operating since April.

Lane said buying undervalued ethanol companies could be cheaper than building at this point. Though he is still analyzing the impact of the VeraSun and U.S. BioFuels merger, he said, “this is certainly something we have been predicting, that there were going to be these types of transactions – that definitely there had to be some consolidation.”

Larger, more efficient companies seem to be coming out on top so far, and farmer-owned cooperatives, which tend to have less advanced technology and are more limited in their ability to compete in the industry, could be prime targets. In January, farmers owned 39 percent of the U.S. refining capacity, according to the Renewable Fuels Association, and in less than a year, that figure has dropped to 28 percent.

Still, Swenson said, it’s hard to get a clear picture of the ethanol industry, with only a handful of publicly traded companies and many at various stages of development. However, investors could be turning to the next generation of biofuels, which Lane predicts could still be three to five years away.

Companies such as VeraSun, which is working on a way to extract and sell the oil from distillers grain, a byproduct of ethanol production, and Poet LLC, which is working on how to make ethanol from cellulose, could be ahead of the curve.

“Interest is shifting away from corn-based ethanol investment to some other dimension of biofuel technology,” Swenson said, “which also makes one wonder. There’s no commercially viable scale production alternative yet.”