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Ethanol Industry Feeling Pressure Of Corn Cost

Posted on: Thursday, 18 September 2008, 14:05 CDT

Uncertain corn prices and a slowing market caused shares of US ethanol makers to plummet in afternoon trading on Wednesday.

Aventine Renewable Energy Holdings Inc said on Wednesday it could seek to issue new debt and shares or delay construction of some plants to shore up its cash position.

That came a day after industry leader VeraSun Energy Corp warned of a larger-than-expected quarterly loss, hurt by costly contracts for the corn from which its ethanol is made, and its stock plunged 72 percent to $1.48 on Wednesday.

Ethanol as an industry remains strong - annual U.S. ethanol capacity has grown 60 percent since last year to 10.96 billion gallons as producers expect federal mandates and pricey oil to open up markets for the alternative motor fuel.

"It's not ethanol as an industry that's in danger here," said Pavel Molchanov, analyst at Raymond James and Associates. "The news from VeraSun just underscores how hedging can help companies manage risk but it can also cause damage.

"It can help but it can hurt."

VeraSun, based in Brookings, South Dakota, is issuing 20 million shares as its stock trades at new lows, which Molchanov noted was "not something most companies would want to do."

Ron Oster, an analyst with Broadpoint Capital in St. Louis, said VeraSun had many spending commitments to cover.

"With several plants under construction, capital expenditures are expected to ramp up in 2008 and net debt levels are expected to increase," Oster wrote in a research note on Wednesday. "The company is in an extremely delicate financial position due to its significant hedging loss."

Aventine expects its present sources of liquidity to be sufficient to complete its planned expansions, it wrote to the US Securities and Exchange Commission.

But the Pekin, Illinois-based company would not likely be able to access the last $50 million of a $131.3 million credit agreement if its cash needs increased due to a surge in corn prices, a drop in ethanol prices, or other cost increases.

Aventine said it would consider delaying expansions in Aurora, Nebraska, and Mt. Vernon, Indiana, having previously said it would invest $190 million in those sites, eating up most of its $246 million in capital.

Among smaller rivals, shares of Denver-based BioFuel Energy Corp were down 31 percent on Wednesday, while shares of Sacramento, California-based Pacific Ethanol Inc were down 13 percent.

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On the Net:

• Aventine Renewable Energy Holdings Inc
• VeraSun Energy Corp

Source: redOrbit Staff & Wire Reports

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