Ethanol thoughts
The best performing stock in my 20 Stock Portfolio this quarter has been VeraSun Energy (VSE: 0.00 N/A N/A). It is somewhat hard to believe with all the negative commentary about ethanol production, especially from corn, from environmental types and financial types how nicely the stock has performed. Since October 1 the stock is up almost 35%, though the ride has been very bumpy. This 3 month chart should give you an idea of the volatility:
As I watch the stock and do some research on the ethanol industry a few facts and thoughts give me positive indications about grain ethanol as a renewable fuel and VeraSun in particular.
- I have started keeping an eye on the CBOT ethanol crush spread. It is quoted at Ethanol Market.com where you can get daily ethanol and grain prices. The crush spread as quoted there is nearby ethanol, multiplied by 2.80, minus nearby corn. Think of it as the gross profit of converting a bushel of corn into ethanol. The spread fell as low as $.44 in mid October and has climbed to the $1.50 to $1.65 range for the last few weeks. This statistic is an easy to keep an eye on the financial outlook of ethanol production.
- The energy bill recently passed by the U.S. Senate calls for 36 billion gallons of renewable fuel by 2022. 21 billion are supposed to be biomass, leaving 15 billion to corn and other grains. From my reading it is doubtful whether other sources of ethanol feed stock can come anywhere near the 21 billion number in the next 1.5 decades. Corn based ethanol is here to stay.
- All phases of ethanol production are becoming more efficient. Distillers now get 2.8 gallons from a bushel, up from 2.3 a few years ago. Farmers get 200-250 bushels of corn per acre, vs. 140 used in the efficiency studies. New corn hybrids will increase production per bushel.
- As a final thought on this topic, political policy towards corn ethanol will be positive as long as those who want to be President have to start in the Iowa caucuses. Corn is the main crop in Iowa and the people their well understand the economics and politics around one of their most important economic factors.
I think VeraSun Energy has positioned itself to take advantage of the factors outlined above. The recent merger with U.S. Biofuels has made the company by far the largest and most efficient pure play ethanol producer.
Note: A recent study has indicated ethanol/gasoline blends of E20 to E30 may actually increase fuel economy of cars on the road today. I wrote about it here.
I currently do not have a position in VSE.
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