US ethanol makers hit by cash crunch, corn prices


Shares of US ethanol makers took a beating on Wednesday as they wrestle with unpredictable corn prices and dwindling cash piles at a time when capital markets look unlikely to provide easy financing.

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, and its shares tumbled 22% to $3.94 in afternoon trade. 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% to $1.48 on Wednesday.

The financial squeeze comes despite the sector’s rampant growth. Annual US ethanol capacity has grown 60% 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.” Raising money will only prove harder due to financial market turmoil stemming from the bankruptcy of Wall Street firm Lehman Brothers and the $85 billion federal rescue of insurer American International Group.


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.” If all the new plants and plant expansions industry-wide come on line, annual US capacity will grow to 13.8 billion gallons, while a law last year mandated blending 36 billion gallons of biofuels a year into gasoline by 2022.

In a filing to the US Securities and Exchange Commission, Aventine said existing sources of liquidity looked sufficient to complete its planned expansions. 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. CEO Ronald Miller told Reuters this month he expected ethanol margins to be soft, but not negative, through the end of the year. Among smaller rivals, shares of Denver-based BioFuel Energy Corp were down 31% on Wednesday, while shares of Sacramento, California-based Pacific Ethanol Inc were down 13%.

VeraSun said in its filing it expected a Q3 net loss of $63 million to $103 million, far higher than the $2.4 million loss analysts had forecast, according to Reuters Estimates. “VeraSun is exposed to industry-related concerns including persistently high feedstock and corn costs and the potential for over capacity along with negative sentiment associated with the food versus fuel debate,” Broadpoint’s Oster said. VeraSun said contracts into which it had entered required it to buy corn at above-market prices, and it expected an average third-quarter corn cost of $6.75 to $7 per bushel.

Molchanov pointed to BioFuel Energy, which also got caught on the wrong side of a trade and said last month it did not have the liquidity to meet $26 million in hedging losses. “VeraSun is not quite in as difficult a situation,” he said. “There’s no immediate liquidity crisis, but clearly the money that got lost isn’t coming back.” (Reuters)

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