VeraSun Energy- follow the crush spread
Despite all of the hype concerning whether corn ethanol is a “good” or “bad” renewable fuel, VeraSun (VSE: 4.21 -0.25 -5.61%) is at this point really just a commodity company. It can sell all of the ethanol it produces, it profits are defined by the commodity price of its raw material; corn, and the commodity price of it’s product; ethanol.
An easy way to keep an eye on the potential profitability of VeraSun and other ethanol producers is to take an occasional look at the ethanol crush spread. The crush spread is the difference between the value of the ethanol (2.8 gallons worth) that can be extracted from a bushel of corn and the cost of the bushel of corn.
From a spread of only 44¢ gross profit on a bushel of corn in early November, the spread climbed to $2.15 by Jan 2. Since then the spread has fallen back to $1.19. VSE stock price peaked at $17.75 on Dec 21 and has fallen since. The fall has been especially steep since the first of the year, although the overall market sentiment has not helped.
I will be watching the ethanol spread through the winter and spring to gauge the future profitability of VeraSun. Corn prices tend to peak in the spring and be lowest around harvest time. I am bullish on ethanol and specifically VSE for several reasons.
- Maintaining a profitable crush spread at these historically high corn prices is a positive sign. Corn will not stay this high as acreage and yield per acre increase.
- Ethanol production will get more efficient. A few years ago the standard was 2.4 gallons per bushel, now it is 2.8, a 16% improvement. Within the year VeraSun will also be extracting corn oil for biodiesel from the same corn for additional revenue.
- The recent narrowing of the crush spread has significantly slowed the building of new ethanol refineries. As demand for ethanol continues to grow, this should push supply/demand back in the favor of the stronger ethanol producers.
- “Everyone” is counting on cellulosic ethanol to replace replace as the number one renewable fuel in the U.S. However, cellulosic ethanol in meaningful quantities is up to a decade away, and corn stalks will be a major source of bio-waste for cellulose. So, if the current producer stay up on their technology, they will generate ethanol from all parts of the corn plant.
A couple of notes on corn farming:
- I grew up in Iowa and Minnesota and I am all for farmers getting good prices for their crops. There are 400,000 farms in America growing corn, most of which are family businesses.
- The cost of the corn in a box of corn flakes is about 5¢ at $4.00 per bushel corn. Rising corn prices are not a major cause factor on rising food prices. What is the profit margin for Kellogg’s on a box of corn flakes?
Note: I currently do not have a position in VSE.
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