After two years of stellar profits, the U.S. ethanol industry is seeing margins crumble as more plants come online and further declines in profitability could be on the horizon. As the sector matures, it is faced with corn prices that have hit 10-year highs and ethanol prices that have tumbled from above $4/gal. a year ago to below $2/gal. at the Chicago Board of Trade.
The remarkable shift in the bottom line for ethanol plants has triggered some downgrades and market rumors in the stocks for several companies heavily vested in the ethanol industry.
In late May, Banc of America Securities said an oversupply of ethanol would lead to a 70% decline in margins by 2009, and downgraded four ethanol producers’ stocks.The brokerage shifted from “neutral” to “sell” its recommendation for three of them, including VeraSun Energy Corp., leading to speculation the company was vulnerable to a takeover bid. The price of VeraSun stock has tumbled to about $13 per share from more than $21 per share in early April and a high of $30 last June.
Editor’s note: Richard Brock, The Corn And Soybean Digest's Marketing Editor, is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report.
To see more market perspectives, visit Brock's Web site at www.brockreport.com
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