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By Robert Rapier on Jan 10, 2009 with 5 responses

More Ethanol Plants Going Down

I won’t say I told you so, but I will make a prediction here:

VeraSun Suspends Production at Three Distilleries

Jan. 9 (Bloomberg) — VeraSun Energy Corp., the second- largest U.S. ethanol producer, has idled three distilleries as demand falls and prices fail to cover the cost of production.

Producers have been struggling to make profits amid fluctuations in corn prices. Pacific Ethanol Inc. today said it will suspend output at its plant in Madera, California. On Jan. 7, Aventine Renewable Holdings Inc. said it halted construction of its refinery in Aurora, Nebraska, for up to 180 days.

Vinod Khosla hasn’t been immune:

Last month, AltraBiofuels Inc., which counts venture capitalist Vinod Khosla among its investors, shut production at its plants in Cloverdale, Indiana, and Coshocton, Ohio.

Aventine’s shares have plunged 99 percent since June 2006, when the company held its initial public offering. Biofuel Energy Corp., whose biggest owners are hedge funds run by David Einhorn and Daniel Loeb, has lost 96 percent since its stock began trading in June 2007.

99 percent! Holy cow. I did think this was amusing:

“Back then everyone thought this was such a great thing,” Gomes said. “Most of the publicly traded guys went into substantial debt to build these plants and capitalize on the rush. Right now you just have too much supply.”

Everyone thought that? Au contraire. Here is an essay I wrote in June of 2006 warning about the dangers to investors in the ethanol industry:

Ethanol Investing Counterpoint

That was in response to a gushing article the previous week advising everyone to stash away their life savings in this great new venture. Some of my comments in response – “many claims regarding ethanol are overblown”, “the underlying fundamentals (specifically of Pacific Ethanol) make it a very risky investment”, “ethanol companies are in the same boat (as dot-coms before their crash)”, “It is simply too easy to get into this business”, and “I don’t think the underlying fundamentals warrant the valuations placed on grain ethanol producers.” So I don’t think everyone thought this was such a great thing.

OK, I said I wouldn’t say I told you so. But here is my prediction. We have a mandated demand for ethanol, which means there will continue to be an ethanol industry. The government will not pull the mandate, because of the danger to Midwestern economies. So the producers that will remain standing in the long haul are those that are integrated. The company/coop that both raises corn and produces ethanol will outlast the others. When corn prices skyrocket, they will put non-integrated producers out of business. But the integrated guys will make money on corn in this situation.

It is analogous to the integrated oil companies. Pure refiners stopped making money when oil prices shot up way over $100 a barrel. Some were even pushed into bankruptcy. But the integrated guys, even though they saw refining margins disappear, made up for it on the oil prices.

It will be the same for the ethanol companies. The farmer’s coop that owns an ethanol plant has a better chance of surviving than the Pacific Ethanols of the world.

On a similar note, I just spotted this story:

Albuquerque Police Abandon Use of E-85

The City of Albuquerque is quietly abandoning part of its push for a greener Albuquerque after finding that E-85 powered vehicles are not all they are cracked up to be.

The city found they cost more to run and to keep running.

Enchanted with the idea of going green, the city bought a couple hundred police cars.

The problem is all the green the city is spending to keep those cars running green.

Albuquerque police Chief Ray Schultz said, “We are looking at a couple different things with the E-85. One is the cost. The fuel efficiency, and some problems with fuel pumps.”

It is going to be interesting to see what happens if the mandate by the government is greater than the demand from consumers – which is where I think we are headed. This will in fact keep ethanol prices low even if gasoline prices start to recover.

  1. By BilB on April 18, 2010 at 4:10 am

    Robert, I think that your attitude to biofuels is vindictive and unimaginably biased. While you are revelling in the difficulties faced by an industry trying to do something good you are gleefully not registering that most American banks have gone broke and or been bailed out by the taxpayer, your car maunufacturers should all be on the scrap heap, and there are many millions of mortgage holders in default. Not to mention that the greedy and glutonous US investment industry has sucked down most economies in the world. Ah, but what it is to be able to gloat. Are you able to talk about biofuel industries that are succeeding, even in these extraordinary times? Do you have the ability to identify them, or does your divining only focus on failure?

  2. By Robert Rapier on April 18, 2010 at 6:29 am

    Bill, you couldn’t be more wrong about what you just wrote. You clearly have no clue of my position, so it might be a good idea to try to understand it before you start making accusations of gloating.

    For the record, I want to see a strong biofuels industry in the U.S. I just disagree with a lot of the direction our energy policy has taken.


  3. By BilB on April 18, 2010 at 1:49 pm

    Fair enough, Robert. My comment here though is that I have trouble remembering any time when you have spoken at length, or at all, about biofuel successes. And there are success. At one stage I went to some effort to inform you of the Australian cane ethanol performance, but I don’t recall you exploring that line. Have you done a piece on the Edmonton biofuel from waste facility? Now I may be quite wrong here and be being unfair, as it is some time since I followed your scripting. Have you done a piece analysing the good end of the biofuels industry?

  4. By Robert Rapier on April 18, 2010 at 2:07 pm

    Bill, I have written numerous pro-biofuel articles. I have written positive articles about some of the things POET is working on, sugarcane ethanol (because of the use of bagasse as fuel), LS9, Solazyme, etc. If you look at my earliest pro-sugarcane articles, I can assure you they are earlier than anything you pointed out to me on Australian sugarcane.

    Regarding an Edmonton biofuel process, I have some connections into one that I will never write about. It may be the one you are talking about. That’s all I will say. Some of the things I think are most promising are things I have chosen to work on, but I don’t write about the things I am working on.


  5. By BilB on April 18, 2010 at 8:28 pm
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