May 22, 2008

  

Battered ethanol industry strikes back

 

 

The ethanol industry, blamed for a rise in food prices and skeptical investors who see profits plummeting for the fledgling industry, is working hard to win back believers.

 

Fears that mounting criticism would turn the tide of opinion against ethanol and cut off critical subsidies from Congress have driven the industry to launch campaigns in the past few weeks defending ethanol production.

 

The campaigns focused on studies that raise doubts about the degree to which ethanol is affecting global food prices with advertisements in newspapers and on radio in Washington and parts of the Midwest.

 

The industry also argues that drivers buying gasoline blended with a small amount of ethanol are paying less than what it would have been without ethanol.

 

One of the strongest backing the campaign got could have come from USDA chief economist Joe Glauber, who stated in a press release that ethanol only accounted for a very small part in the increase of food prices.

 

The campaigns were in response to growing disillusionment among the public and investors on ethanol.

 

"Consumers are starting to get restless and Washington is starting to listen," said Morningstar analyst Ann Gilpin, who follows Decatur, Ill.-based Archer Daniels Midland, the country's second-largest ethanol producer.

 

The industry would be badly hit if Congress were to rescind the federal mandate that calls for annual increases in the amount of biofuels added to the fuel supply -- 9 billion gallons by the end of this year and 36 billion gallons by 2022.

Ethanol companies are already under pressure since ethanol prices fell and corn prices rose sharply. Even VeraSun Energy Corp., the country's top ethanol producer, is beginning to feel the heat.

 

However, the US is unlikely to see any changes to the mandate this year because  10 states -- mostly in the Midwest -- accounts for over 80 percent of the country's ethanol and almost 50 percent of the country's electoral votes, according to analyst Kevin Book of Friedman, Billings, Ramsey & Co.

 

Furthermore, there is now more serious support for ethanol than there was two or three years.

 

But dangers loom- political support is showing the first signs of cracking - Congress and President Bush were already showing doubts about ethanol. The new Farm Bill includes a provision that shaves a tax credit for refiners that blend ethanol into their gasoline from 51 cents to 45 cents.

 

Investor disappointment also is weighing on ethanol companies, particularly those that are smaller and privately held. Most investment into ethanol companies was made when profits were at record levels. However, such profits levels are unlikely to be seen again, analysts said.

 

Shares of VeraSun for example, have fallen more than 15 percent since April 1. After VeraSun announced a first-quarter profit last week that fell short of investor expectations, some analysts raised worries about the pressures facing the industry.

 

Even so, there were companies that defied expectations and turned in modest profits, such as Pacific Ethanol, whose stocks zoomed up recently after it reported better than expected earnings against a widely expected loss.

 

ADM, the second largest ethanol producer, is apparently not shying away from the fuel additive.

 

Although the company does not release profits or losses from its ethanol operations, the division responsible for its fuel additive operations accounted for about 20 percent of the company's earnings last year. In the most recent quarter, when profit in that division fell by almost a third, companywide profit increased 42 percent on the strength of ADM's other businesses.

 

At the time ADM called the volatility in the quarter "unprecedented" as corn prices hit record levels. ADM CEO Patricia Woertz earlier said retreating from biofuels would be a mistake.

 

Corn prices, which have eased lately, may help the industry get back on its feet.  Steady demand for ethanol is also another factor keeping hopes alive.

 

Most of the argument against ethanol would become moot if crop production improves globally.

 

ADM Executive Vice President John Rice told analysts at a conference in New York last week that a large corn crop globally would certainly take some heat off the food versus fuel debate.