Costly Corn Kills VeraSun's Ethanol Profits

Wall Street expected VeraSun to make money, but expensive corn is causing problems for the ethanol industry's economics

The high cost of corn is hurting ethanol makers, with VeraSun Energy (VSE) providing the latest dose of weak earnings news.

On May 8, VeraSun, the second-largest U.S. ethanol producer, reported a quarterly loss of $312,000, compared with a profit of $2.7 million, or 4 cents per share, in the same quarter of 2006. Revenue rose 31% to $144.5 million from $110.7 million, helped by higher ethanol prices and a ramp up of production.

Wall Street had expected VeraSun to earn 11 cents a share, with revenue pegged at $147 million, according to the mean analyst estimate gathered by Thomson Financial (TOC).

The results were a shock to investors, and sent share prices tumbling across the ethanol sector. VeraSun shares plunged nearly 15% to close at $16.72 on the New York Stock Exchange. Archer Daniels Midland (ADM), the No. 1 U.S. ethanol producer, dipped 2.3% to $35.37, a week after falling 5% following weaker-than-expected earnings that ADM also blamed on lofty corn prices.

Shares of U.S. Bioenergy Corp. (USBE), the No. 3 producer, fell 6.4% to $13.40 on the Nasdaq, nearing a 52-week low, while Pacific Ethanol Inc. (PEIX) dipped 2.3% to $13.97. Andersons Inc. (ANDE) declined 1.6% to $41; and Aventine Renewable Energy Holdings (AVR) dropped 3.2% to $18.44.

VeraSun said its corn costs jumped to $4.05 per bushel, up from $1.87 a bushel in the same period of last year. Such corn price surges have been driven almost entirely by the enormous demand from ethanol makers. While ethanol makers attempt to hedge their raw fuel costs by locking in bushel prices on contracts – much like airlines do with jet fuel – the steady rise of corn prices through much of 2006 is beginning to manifest itself in producers’ operating results.

Lurking behind the current gloomy profit news are doubts about the future of corn ethanol. A growing number of analysts, once bullish on the product, are warning that an oversupply may be coming as soon as this year. On Apr. 27, a Lehman Brothers (LEH) report projected that production will outstrip demand in the second half of 2007 (see BusinessWeek.com, 5/8/07, "Rising Fears of an Ethanol Bust").

The demand has prompted farmers to plant the largest crop in decades, 90.5 million acres, up from 78.6 million acres in 2006, according to the Agriculture Dept. (see BusinessWeek.com, 3/30/07, "Has Corn Hit Its Peak?").