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Let the Ethanol Flow
New plants that produce the fuel are part of a boom, but signs also point to a possible glut in the near future
Welcome to the ethanol boom, the closest America's farmers may get to an investment bubble. Since the pro-ethanol State of the Union address in January, shares of Fresno-based Pacific Ethanol (PEIX) have doubled, to 37. Green Plains Renewable Energy (GPRE) has risen 40%, to 46, since it began trading in March.
But ethanol is far from the sure moneymaker its boosters say it is. In fact, some of the very forces behind the boom might undermine ethanol's prospects as an investment over the next few years.
SURPLUS AHEAD? The fuel, renewable and more environmentally friendly than gasoline, is already being used as a gas additive, replacing another additive that was found to pollute groundwater. The result: a squeeze on supplies that has doubled ethanol's wholesale price, to $2.75 a gallon, about what gasoline costs at wholesale. With corn prices low and gas prices high, ethanol's profit margin per gallon is at a record of more than $1. "You don't need Willie Nelson organizing concerts for these farmers," jokes Tom Kloza, an analyst for the Oil Price Information Service.
Last year's energy bill requires gas marketers to sell at least 4 billion gallons of ethanol-blended fuel this year, rising to 7.5 billion gallons by 2012. That sparked a surge of investment. In April, Goldman Sachs (GS) took a $26.8 million stake in Canadian outfit Iogen. Archer Daniels Midland (ADM), meanwhile, tapped Patricia Woertz, a career oil woman, as its new CEO. Two U.S. companies recently filed for initial public offerings to finance more plants, while Spanish energy company Abengoa and Connecticut private-equity firm J.H. Whitney raised almost $300 million to do so.
But all the new money might create an ethanol glut. On Apr. 11, California projected that U.S. capacity required by 2009 would be online in under a year. Since that projection, at least four more companies have announced plans to build plants. That's because a typical 50-million-gallon-a-year plant costs just $75 million or so to build, with banks willing to lend up to 70% of the cost, says Tom Murray, co-head of loan and debt capital markets at German bank WestLB. A new gasoline refinery costs $1 billion or more.
GROWING PAINS. Investors in ethanol plants will find themselves at the mercy of two commodity cycles: corn and gas. According to simulations run by the University of Missouri's Food & Agriculture Policy Research Institute, corn prices over the next six years are likely to rise and ethanol prices to fall, resulting in a 25% or more drop in producers' profits. "The industry has outstripped our expectations and grown a lot faster than we thought," says institute program director Patrick Westhoff.
What of the promise of ethanol replacing gas? Don't count on it. General Motors (GM) and Ford Motor (F) have made a push this year to promote vehicles that can run on gas or E85, a fuel that's 85% ethanol and 15% gasoline. But E85 gets worse mileage than gas, a problem if ethanol is costlier. And right now there are only about 600 E85 pumps nationwide.
Ethanol's fans say the fuel is a blessing in this time of high gas prices and global warming. But energy is a cyclical business. Prospecting in the cornfield might prove as risky as prospecting in an oil field.
Quelle: BusinessWeek's
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