BIOFUELS COMPANIES – UP & DOWN WITH OIL, CORN PRICES

NewEnergyNews is no fan of corn ethanol. In fact, NewEnergyNews is no fan of AGROfuels of any kind. In fact, NewEnergyNews has its doubts about any kind of biofuels produced from anything that grows in the ground.

That said, the contradictory cases of Biofuel Energy Corp. and VeraSun Energy are instructive.

Both make and sell corn ethanol. Yet Biofuel Energy is on the verge of going belly up and VeraSun Energy is growing like a weed.

What’s the difference? Biofuel Energy lost its shirt speculating in the oil and gas futures markets. It was hoping to offset the rising price of corn.

Pavel Molchanov, analyst, Raymond James & Assoc.: "All of these companies have some hedges. The problem is, [as] with any contract, they can gain in value or they can drop in value…"

VeraSun Energy is keeping itself in a stronger capital position. It is selling byproducts of the ethanol-making process, is benefiting from a drop in corn prices associated with falling fuel prices and is unloading excess corn, even at falling prices. The sale of excess corn allowed VeraSun to raise its price-per-gallon.

From the AP: “Oppenheimer & Co. analyst Joseph Gomes Jr. said in a research note that VeraSun's results were helped by higher average prices for its distillers grains - an ethanol byproduct used as a livestock feed - and lower-than-expected corn costs.”

Natural gas futures: down 38% since July 3.

Corn futures: down 34% since June 27.

It is possible better management and the same kinds of plays that VeraSun made could have prevented Biofuel Energy’s fall. It appears the failing ethanol company instead relied on speculation in oil and gas, on the supposed inevitability of rising petroleum prices, to hedge against rising costs. It lost its bets and is out of money.

All this begs the question: Why is the current turmoil in Nigeria and Georgia not driving petroleum product prices up faster? Experts say it is because so much consumption has been eliminated in the U.S. and the rest of the developed world in response to high gas pump prices in the spring.

NewEnergyNews has 2 questions: (1) What is the impact on oil consumption of China’s enormous cutback in activity for the Olympics? (2) Did the bulk of speculators in oil futures markets desert when controversy emerged in the spring?

The answer to question (1) will come in late August or September. If the uncommented on China cutback is significant, demand will come back and prices will rise. What will the “experts” who are not saying anything about it now say about it then?

The answer to question (2) will be murkier. If the “bettors” deserted the market last month, it would have sent a diminished demand signal, driving prices down precipitously. Prices certainly went down - just ask the folks at Biofuel Energy (if they’re not too busy with bankruptcy and liquidation).

Since Congress refused to pass legislation regulating speculation, the “players” could come roaring back into the market in the fall as prices start to rise. The experts, of course, will attribute it to the Russo-Georgia conflict, return-to-school travel, fall heating requirements, and so on. They might even be forced to consider the China Olympics factor.

But if the speculators come back, anticipating all that added demand, they will again drive prices way higher than supply-demand factors alone would. More Congressional hearings? A good campaign issue?

Maybe Biofuel Energy ought to hold on another quarter. Those oil futures hedges could pay off after all.

On the other hand, the changed circumstances will drive the price of corn up again and likely leave Biofuel Energy – not to mention the half of the world that does not drive flex-fuel cars and is hungry – in a similar liquidity bind.

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Ethanol producer Biofuel Energy in trouble over losses
August 12, 2008 (Bloomberg News via Minneapolis Star-Tribune)
and
VeraSun Energy shares surge on 2Q profit
Dirk Lammers, August 12, 2008 (AP via Forbes)

WHO
Biofuel Energy Corp.; VeraSun Energy; Cargill Inc.

WHAT
Biofuel Energy Corp is an ethanol manufacturing company teetering on the verge of bankruptcy despite enormous government-mandated demand. VeraSun Energy is an ethanol manufacturing company setting records for quarterly profits.

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WHEN
- 2Q 2008: Biofuel Energy shares dropped 63%.
- 2Q 2008: VeraSun Energy profits increase 58%.
- Biofuel Energy began production in June.

WHERE
- Biofuel Energy Corp. is based in Denver. The company has plants in Fairmont, Minn., and Wood River, Neb.
- VeraSun Energy is based in Brookings, South Dakota

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WHY
- Biofuel Energy’s financial crisis, $46 million in combined corn, ethanol and natural-gas hedge and mark-to-market losses, is the result of a lack of adequate liquidity andmay require “restructuring.”
- Biofuel Energy requires liquidity losses incurred from investments they were using to hedge against the rising cost of corn.
- Biofuel Energy’s plants have a combined 230 million gallon capacity.
- Cargill holds some of the commitments for delivery of ethanol from Biofuels and is asking for a payoff.
- VeraSun’s profits came increased production, the increased price of ethanol and $26.5 million in revenues from the sale of excess corn.

QUOTES
Ron Oster, analyst, Broadpoint Capital: "It doesn't look very good [for Biofuel Energy]; they could be headed for bankruptcy…"