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Analyzing Socially Responsible Stocks and the Future of Alternative Fuels
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Corn Falls Limit-Down

Today's biggest stories surrounding the sector:

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May corn fell 20 cents today to $5.39 1/4 per bushel due to oil's steep decline. Oil slid $4.53 to $105.88 per barrel as the sale of Bear Stearns added fear to the current credit crisis. Ethanol's crush spread, however, fell also as April ethanol dropped 10.2 cents to $2.36 per gallon.

Ethanol Stocks Continue to Fall Fast

Today's biggest stories surrounding the sector:

-Ethanol stocks plummeted today due to yesterdays news of corn shooting up 14 cents and Bush finally showing concern over corn-ethanol. VeraSun(9.03%) and Aventine(12.02%) hit new 52-week lows while Pacific Ethanol(10.90%) neared its own of $4.20 a share. Assisting the downfall was a report published today by the Wall Street Transcript which set a bleak outlook for ethanol this year. In the report, Pavel Molchanov of Raymond James & Associates stated "a typical ethanol producer will be at best breaking even this year and possibly losing money on the bottom line" due to what has been a persistent margin squeeze. March corn managed to stay unchanged today.

Ethanol's Crush Spread Plunges/Bush Praises Ethanol Yet Shows Concern

Today's biggest stories surrounding the sector:

- The combination of March corn climbing 14 cents and March ethanol falling 4.6 cents caused ethanol's crush spread to drop 27 cents today to $1.02. Corn prices shot up as a result of oil's $5 run.

- Investors will be pleased to hear that President Bush renewed his support for ethanol today at the Washington International Renewable Energy Conference. Below is what he had to say:

"The vast majority of [our] ethanol is coming from corn, and that's good. That's good if you're a corn-grower. And it's good if you're worried about national security...Corn ethanol holds a lot of promise, but there's a lot of challenges. If you're a hog-raiser in the United States, you're beginning to worry about the cost of corn to feed your animals. I'm beginning to hear complaints from our cattlemen about the high price of corn. The high price of corn is beginning to affect the price of food...I look forward to the day when people in the parts of our country that have got a lot of forests are able to convert wood chips into fuel...The job of the federal government is to expedite [this] arrival."

Wow! Bush is finally expressing concern over corn-ethanol. That took him a while.

Ethanol Stocks Dive/Cellulosic Ethanol is Behind Schedule

Today's biggest stories surrounding the sector:

-News of corn reaching an all-time high caused pure-play ethanol stocks to tumble today. VeraSun was the biggest loser as it dropped $1.18(13.21%) to a 52-week low of $7.75 a share. On the CBOT, March corn retreated 12.4 cents to $5.43 per bushel (on profit-taking) while March ethanol dropped only .001 cent to $2.400 per gallon.

-Guy Caruso, the head of the EIA, stated today that "quantities of cellulosic ethanol prior to 2022 will be insufficient" to meet the 36 billion gallon requirement as there has yet to be an efficient way of production. Cellulosic ethanol is responsible for contributing nearly half of the mandate. Caruso estimates that only 32.5 billion gallons will be reached by the target date. Good news, though, is that the USDA and DOE announced today that they will invest up to $18.4 million in several projects aimed at improving the process. It is important that we get such funding as Ethanol will not last if we cannot produce it cellulosically.

Corn Continues Bullish Push

Today's biggest stories surrounding the sector:

- Corn continued its push into uncharted territory today as March corn on the CBOT settled 9.4 cents higher to $5.55 per bushel. The rise was due to spillover support from soybeans, crude oil, silver and gold. The cost for corn has recently become a much greater problem for ethanol producers as VeraSun - at its Aurora plant - bought its corn today for a frightening $5.33 per bushel. Ethanol futures, however, managed to overshadow the record-setting gain by climbing 4.1 cents to $2.401 per gallon (Remember: 1 gallon of ethanol = 2.8 bushels of corn).

Corn Skyrockets/Verenium Wins Grant

Today's biggest stories surrounding the sector:

- March Corn shot up 18 1/4 cents today to $5.43 1/4 per bushel. The rise was due to a record setting rally by both gold($975 per ounce) and oil($102.59 per barrel) as the U.S. dollar fell to a record low against the Euro. Ethanol on the CBOT managed to rise 3.9 cents to $2.359 per gallon. After today's trading, ethanol's crush spread has fallen to $1.17.

Date
CBOT ethanol price
CBOT corn price
Crush spread
February 28th
 $2.36
 $5.43
 $1.17
January 2nd
 $2.42
 $4.62
 $2.15
December 18th
 $2.13
 $4.32
 $1.66
December 15th
 $2.08  $4.38
 $1.44
November 19th
 $1.81 $3.94  $1.12
October 16th
 $1.61 $3.74 $.77
September 1st
 $1.54  $3.69  $.62

-Verenium Corporation (VRNM) was awarded today one of the four grants available by the U.S. Department of Energy to "develop improved enzyme systems to convert cellulosic material into sugars suitable for the production of ethanol." Verenium will receive a nice slice of the $33.8 million available. Earlier in the year, Pacific Ethanol received a similar grant of up to $24.3 million to build a small-scale demonstration plant that will make ethanol out of wood chips.

Taxing Big Oil/Ethanol Fires/Cargill Suspending Operations

Here are today's biggest stories surrounding the sector:

-The House approved an $18 billion tax package today that would repeal a tax break for the country's five largest oil companies. The money, which would be collected over 10 years, would be used to provide tax breaks for alternative energy sources such as wind, solar, and cellulosic ethanol. President Bush, though, is expected to veto the bill if it passes Congress. This is odd considering Bush was the one who stated two years ago - when oil was at $55 a barrel - that oil companies no longer need government subsidies. With oil currently hovering around $100 a barrel and oil companies reporting record profits, why is Bush threatening to veto? Republicans are worried the new tax "would inhibit investments in domestic oil and gas exploration and production." Oh, Please!

-Another problem has been added to ethanol's list: Ethanol fires are harder to put out than gasoline ones as water cannot be used and a special type of firefighting foam is required. This is a foam that many fire departments in the country don't have and is 30% more expensive than the conventional foam used for gasoline fires.

- Cargill announced today that it will suspend construction on its 100 million-gallon-per-year ethanol plant in Kansas due to high corn prices.

Ethanol-Pipelines Soon to Come?

A significant problem with ethanol is that it corrodes current pipelines due to its solubility in water. This makes it difficult to transport the fuel long distances as this is a hurdle the industry desperately needs to overcome. Good news, though, is that Magellan Midstream Partners - a company that pipes gasoline - is planning on constructing a $3 billion ethanol pipeline. "The line would bring ethanol from production facilities in Iowa, Illinois, Minnesota and South Dakota to terminals in Pittsburgh, Philadelphia and the New York harbor." If done, this would greatly benefit the net energy of ethanol as the current use of trucks and trains for transportation are inefficient - both economically and environmentally. Coincidentally, Brazil's Petrobras today announced that it plans on building the world's first ethanol-only pipeline. Petrobras says the "pipeline will carry ethanol that is mainly destined for exports to countries such as Japan."

The Price VeraSun Pays For Its Corn

Below are the daily prices VeraSun (VSE) paid for its fourth-quarter corn and beyond. The average price from October 1st to December 31st for VeraSun's three plants - Aurora (120), Fort Dodge (110), and Charles City (110) - was $3.58 per bushel. The Linden (110) and Albion (110) plants are not accounted for as their daily corn bids are not available. In the new year, VeraSun's average corn bid has horrifically risen to $4.60 per bushel. In its previous quarters, VeraSun has paid an average of $3.32 (third), $3.62 (second), and $4.05 (first).


Ethanol Doesn't Get Usual Attention in State of the Union Address

In his 2005 State of the Union Address, President Bush stated that there is "strong funding for...ethanol." In his 2006 Address, he revealed his plan to make ethanol "practical and competitive within six years" after he famously stated "America is addicted to oil." It was this announcement that established ethanol as an alternative energy powerhouse as ethanol stocks immediately bubbled to new highs. In his 2007 Address, Bush announced that "we must continue investing in new methods of producing ethanol, using everything from wood chips to grasses, to agricultural wastes" in hope of "reducing gasoline usage in the United States by 20 percent in the next 10 years." This year, however, President Bush didn't specifically acknowledge ethanol in his State of the Union Address; the first time since 2004. In his shorter-than-usual monologue on the environment, he simply reiterated what we had already heard in his previous addresses. Overall, his speech lacked any major change in our energy policy. Ethanol investors should not expect a big boost from Bush's address.

The President did manage, however, to propose a $2 billion fund that would be disbursed over the next three years to help developing nations purchase alternative energy technologies. This is a small amount, however, considering China alone is investing over $100 billion a year on alternatives such as coal-fired electricity.

Ethanol Stocks Up Big Before State of the Union Address

Ethanol stocks were fueled today by speculation that George Bush will once again emphasize the fuel in his State of the Union Address. Pacific Ethanol, currently up 6.03% in after hours,  led the sector with a gain of 5.22% to $5.64 a share. Let's see what the President has to say...

Oil's True Energy Balance

Following Dr. Pimentel’s detailed calculations in finding the ERoEI of ethanol, I would like to suggest a similarly rigorous analysis of the ERoEI of oil. As oil becomes scarcer, both the direct cost of extraction and the indirect cost of defending and securing the geographical areas that are oil abundant increases.  Here I will argue that the current calculation of oil’s ERoEI grossly overestimates its true net energy balance.  

Dr. Pimentel estimates the current ERoEI of corn-ethanol as 0.8.  In comparison, current calculations of the ERoEI of oil reveal an impressive ratio of 3:1.  Of course, this number is miniscule in comparison to the 1940’s when only 1 barrel of oil was required to extract 50 – 100 barrels of oil.   The reason for the gradual decrease in oil’s ERoEI has been the increasing amount of energy needed to be used to extract an increasingly scarce natural resource.  However these calculations only take into account the technology and manpower directly required to discover, mine, process, and transport oil.   They do not take into account the costs incurred in securing and defending access to oil fields that are becoming more and more highly contested.  

Though this is controversial, today much of the US’s foreign policy initiative is directed towards securing our oil interests in the Middle East. The government expenses on just the Iraq war have exceeded over 400 billion dollars. In addition, Linda Bilmes of Harvard University, states that if the war continues for another 5 years the total cost will amount to 1.4 trillion dollars. Though it is debatable how much of this money is directly used to secure oil interests, should we include this entire amount in the calculations of the ERoEI of oil? Should we include the 82 billion dollars spent on the first gulf war defending the oil fields in Kuwait?   In addition, China is emerging as a major oil consumer and military superpower.  Could the future bring us a major direct or indirect conflict with China over oil?  Should we take the costs of such a conflict into account when discussing energy alternatives?

Dr. Pimentel has provided us with a very in depth analysis of the energy balance associated with the production and transport of ethanol.   Estimation of the true cost of oil may benefit from a similarly in depth analysis that takes into account the political and military costs of our addiction.   

Rough Week for Ethanol Stocks

Ethanol stocks took a beating this past week as corn soared and ethanol stalled. The top losers were Pacific Ethanol and VeraSun as shares of the two companies collapsed 22% and 20%, respectively. Corn finished strong on Friday, settling 20 cents higher to $4.95 per bushel on lower-than-expected crop production, quarterly stocks, and ending stocks data. As for ethanol, prices have dropped 21 cents since hitting $2.42 per gallon on January 2nd. As a result, ethanol's crush spread has dropped significantly to $1.18.

Date
CBOT ethanol price
CBOT corn price
Crush spread
January 11th     
 $2.21
 $4.95
 $1.18
January 2nd
 $2.42
 $4.62
 $2.15
December 18th
 $2.13
 $4.32
 $1.66
December 15th
 $2.08  $4.38
 $1.44
December 10th
 $1.88 $4.17  $1.09
November 19th
 $1.81 $3.94  $1.12
October 16th
 $1.61 $3.74 $.77
September 1st
 $1.54  $3.69  $.62

Corn Hits 12-Year High

Corn futures rose to a 12-year high today as March corn settled 7 cents higher to $4.62 1/2 per bushel. The rise was due to a strong rally in soybean and crude oil futures. March soybean futures jumped 34.5 cents to $12.48 3/4 per bushel. Crude oil futures, meanwhile, surpassed the $100 mark for the first time due to escalating violence in Nigeria. The CEO of Olam International believes corn prices will average $5.30-$5.50 a bushel in the new year. Fortunately, ethanol futures have yet to cool down. Ethanol on the CBOT rose for the 19th time in 20 trading days today to settle at $2.42 per gallon (up 5.2 cents). As a result, ethanol's profitability continues to rise despite corns run as ethanol's crush spread is now at $2.152.

Date
CBOT ethanol price
CBOT corn price
Crush spread
January 2nd
 $2.42
 $4.62
 $2.15
December 18th
 $2.13
 $4.32
 $1.66
December 15th
 $2.08  $4.38
 $1.44
December 10th
 $1.88 $4.17  $1.09
November 19th
 $1.81 $3.94  $1.12
October 16th
 $1.61 $3.74 $.77
September 1st
 $1.54  $3.69  $.62

Investors Enjoying Ethanol's Recent Success

With all the ethanol frenzy surrounding the energy bill, ethanol stocks have greatly benefited. Pacific Ethanol shares have shot up 27.98% to $7.73 since the Senate passed its version of the bill last Thursday. Shares of Aventine and VeraSun have risen 12.93% and 8.5%, respectively. To add fuel to the fire, the White House has said that President Bush will sign the bill Wednesday. Commodity Futures have also swung towards ethanol's favor. March corn on the CBOT fell 6.75 cents today to settle at $4.32 per bushel. Meanwhile, January ethanol on the CBOT gained 2.4 cents to $2.13 per gallon as this is the ninth day in a row ethanol prices have gone up. As a result, ethanol's crush spread has hit $1.6552 which hasn't been this high for several months:

Date
CBOT ethanol price
CBOT corn price
Crush spread
December 18th
 $2.13
 $4.32
 $1.66
December 15th
 $2.08  $4.38
 $1.44
December 10th
 $1.88 $4.17  $1.09
November 19th
 $1.81 $3.94  $1.12
October 16th
 $1.61 $3.74 $.77
September 1st
 $1.54  $3.69  $.62

Corn, which is trading at a very high price right now, is expected to trade lower in the coming days due to profit taking. With ethanol's recent success and favorable environment, it continues to be an appealing short term play. Since November 20th, Pacific Ethanol has jumped 73%, VeraSun 58% and Aventine 49%.

Ethanol Profitability Rising

January ethanol on the CBOT managed to rise ~ 20 cents this week to settle at $2.08 per gallon. This is a huge relief for ethanol producers considering that March corn made a run of its own, rising ~ 21 cents to $4.38 per bushel. As a result, the gross profit of converting a bushel of corn into ethanol, otherwise known as ethanol's crush spread, reached $1.44. Ethanol's crush spread hasn't been this high for several months.

Corn Prices Highest Since June

March corn on the CBOT gained 6.2 cents today to settle at $4.24 per bushel; reaching its highest level since June 19th. The increase was due to a larger-than-expected decline in 2007-08 U.S. corn ending stocks. The USDA reported ending stocks at 1.797 billion bushels, compared to the average analyst estimate of 1.879 billion bushels and the month ago figure of 1.897 billion. Ethanol producers are paying the price:

Plant Name (Company)
Yesterday's Corn Bid  Today's Corn Bid
 Aurora Plant (Verasun)
 $3.87 $3.93
 Fort Dodge Plant (Verasun)
 $3.91 $3.97
 Charles City Plant (Verasun)
 $3.91 $3.97
 Iowa Falls Plant (Hawkeye)
 $3.99 $4.04
 Fairbanks Plant (Hawkeye)
 $3.88 $3.94
 Iroquois Plant (Iroquois Bio-Energy)
 $3.98 $4.04
 Redfield Plant (Redfield Energy)
 $3.86 $3.91
 Glacial Plant (Glacial Lakes Energy)
 $3.85 $3.91

Pacific Ethanol announced yesterday that it has suspended construction of its Imperial Valley ethanol plant in part due to rising corn prices.

Today's Ethanol Recap

The EPA raised today its renewable fuels standard for 2008 to meet a federal mandate that - at least - 5.4 billion gallons of ethanol be blended into our (U.S) gasoline. This years standard was approximately 4.7 billion gallons as the EPA hopes to reach 7.5 billion gallons by 2012. Rick Kment, a DTN biofuels analyst, believes, though, that this move is unlikely to have much effect as gasoline blenders are already using more than the 5.4 billion gallons mandated. The U.S. currently has 134 operating ethanol plants with a combined capacity of 7.2 billion gallons.

December Ethanol on the CBOT increased once again to settle at $1.968 a gallon. CBOT Ethanol has jumped approximately 40 cents since hitting its all-time low back in October. Investors should keep an eye out for ethanol stocks as conditions have become moderatly favorable. Morgan Stanley's analyst, Dave Wilson, recently issued a short-term buying opportunity with share prices so low.

In other news, Aventine's CEO, Ronald H. Miller, bought 10,000 shares of his own company's stock at $8.54.

What to look forward to:

The U.S. House of Representatives could vote on a wide-ranging energy bill next week that would triple the use of ethanol. There is speculation that legislation will require 20.5 billion gallons of ethanol by 2015, with 5.5 billion gallons of that coming from cellulosic ethanol. The bill is also speculated to set short-term targets of 9.5 billion gallons by 2008 and 11.6 billion gallons by 2009. Back in June, the Senate passed a proposal to require 36 billion gallons of ethanol use by 2022. Democrats will also attempt to hit the oil industry with $15 billion in taxes and require utilities to get 15 percent of their electricity from wind, solar and other renewable sources.

John Deere Posts Impressive Fourth Quarter Earnings

At least some investors are making money off of ethanol! John Deere, the world's leading manufacturer of farm equipment, posted impressive fourth quarter earnings due to a jump in ethanol demand. Net income climbed to $422.1 million, or $1.88 a share, on sales of $5.45 billion which beat analyst expectations of $1.54 a share. Business in Brazil caused overseas sales to jump 32 percent as Brazilian farmers bought more machines for sugarcane production. John Deere stock shot up $7.06 (%4.87) to $152.06 a share after the news.

Corn Settles Higher on Rising Oil

December corn jumped 4.6 cents to $3.79 per bushel Friday on higher oil prices. December crude settled up $1.67 to $95.10 per barrel. Weekly corn export sales were 1.364 million metric tons which met analyst expectations. Monday, the USDA is scheduled to release its weekly export inspections report at 11 a.m. (Eastern) and its weekly crop progress report at 4 p.m.

Plant Name (Company)
Yesterday's Corn Bid  Today's Corn Bid
 Aurora Plant (Verasun)
 $3.41 $3.46
 Fort Dodge Plant (Verasun)
 $3.59 $3.62
 Charles City Plant (Verasun)
 $3.55 $3.64
 Iowa Falls Plant (Hawkeye)
 $3.60 $3.64
 Fairbanks Plant (Hawkeye)
 $3.63 $3.68
 Iroquois Plant (Iroquois Bio-Energy)
 $3.61 $3.65
 Redfield Plant (Redfield Energy)
 $3.43 $3.47
 Glacial Plant (Glacial Lakes Energy)
 $3.43 $3.48

Since all the major pure-play ethanol producers have posted their third quarter results, let's see how they faired with corn costs.

Company  Third Quarter Corn Costs
Second Quarter Corn Costs
 Pacific Ethanol
 $4.54 per bushel
$4.23 per bushel
 VeraSun
 $3.32 per bushel
$3.62 per bushel
 US BioEnergy
 $3.15 per bushel$3.97 per bushel
 Aventine $3.79 per bushel$3.99 per bushel