Squeezed Ethanol Makers Looking Elsewhere for Profitability: Archer Daniels Midland Company (ADM), Valero Energy Corporation (VLO)

Page 1 of 2

If you were watching ethanol company stocks over the last five years, you’re probably suffering from a serious case of whiplash. They boomed with the fuel’s fortunes in 2008, crashed like everything else in 2009, recovered impressively in 2010, and then fell in both 2011 and 2012. So far this year most are up between 20% and 40%, but few investors believe these gains will prove sustainable.

VALERO ENERGY CORP NEW (NYSE:VLO)

Producers in this $40 billion industry don’t, either. So most of the biggest have begun downsizing their reliance on ethanol as fuel — and turning to other related products that, they hope, will offer better margins and longer-term viability.

Margin squeeze at record levels

The economics of ethanol production have always been dicey. This is largely because the industry is at the mercy of many factors outside its control. Volatile corn and energy prices pressure margins. Fickle acceptance of ethanol levels in gasoline by consumers and oil refiners keep demand from significantly expanding. Waning government support threatens to undermine the demand that does exist.

In years past, ethanol makers took the offensive by opening new plants and boosting production. This countered at least some of the margin issue, as a growing capacity was needed to meet the slowly increasing amounts of ethanol the government required annually in the nation’s auto fuel supply. Last year, plants in 28 states produced more than 13 billion gallons.

The biggest players feasted on this growth. Archer Daniels Midland Company (NYSE:ADM), a large, diversified agricultural company, focused on ethanol and quickly became the largest producer in the industry with an annual capacity of 1.72 billion gallons. The privately held POET parlayed some innovative ideas into production levels only slightly lower. Valero Energy Corporation (NYSE:VLO) bought 10 state-of-the-art ethanol plants and instantly became the country’s third-largest producer. Green Plains Renewable Energy Inc. (NASDAQ:GPRE), a vertically-integrated producer based in Nebraska, built itself into the largest of the public ethanol pure-plays. Pacific Ethanol Inc (NASDAQ:PEIX) grew by opening plants near customers on the West Coast rather than corn suppliers in the Midwest — although this differentiation has subsequently resulted in more problems than benefits.

To anyone paying attention, though, it’s obvious that the game has changed for everyone. Analysts expected U.S. ethanol demand to rise to 15 billion gallons in the next few years, but resistance from consumers, automakers and oil companies to putting more than 10% ethanol blends into passenger cars puts that target in serious jeopardy. Producers dramatically reversed course and cut production last year as the Midwest drought took a big toll on corn supply, at one point idling 36 of the 211 ethanol plants in the U.S. and eliminating 15% of the nation’s installed capacity.

But even this wasn’t enough to slow margin erosion, which has reached crisis levels with ethanol producers now losing money on every gallon sold since January 2011 and their losses hitting new records almost every month.

Top players forging new strategies

But the leaders are not standing still. Top producer ADM, for example, has aggressively reduced capacity in recent months and one of the plants that it idled, in Wallhalla, N.D., may be closed for good. In its recent earnings report, ADM officials said they believe ethanol margins have hit bottom and will recover as 2013 wears on — but they also said the company will be increasing its oilseed processing operations to make up for the profits lost in ethanol.

Number-three Valero Energy Corporation (NYSE:VLO) cut production as well, and can rely even more than ADM on diversification through its petroleum operations.

POET and Green Plains also idled multiple plants last year. But with their narrow focus putting them more at risk than ADM and Valero, these two are trying to pull themselves out of the ethanol slump by remaking some of their plants into refineries that can produce something other than the fuel.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!