Ethanol investments cool; some still bullish on corn-based fuel

By: JAMES MacPHERSON - Associated Press | Saturday, December 8, 2007 7:35 PM PST ∞

SPIRITWOOD, N.D. - Harold Newman shuttered his financially foundering ethanol plant in October and then broke ground on one 10 times the size.

"It sounds crazy - but it appears to be the opportune time to do both," he said.

Just a few months ago, Newman said, those who had invested in ethanol "made nothing but money." But the boom has burst, profits have faded and ethanol isn't the moneymaker it was. Many potential investors are now looking elsewhere.

Newman, 74, of Jamestown, in central North Dakota, made his fortune in the highway sign and billboard business, and to some extent, ethanol. He has weathered the erratic ethanol industry for a quarter-century and remains "absolutely bullish" on the corn-based fuel additive. Others are more skeptical.

"The ethanol industry is getting hit on both ends: Corn prices have gone way up and ethanol sale prices have gone down," said Stephen Ham, an ethanol analyst at Standard & Poor's in New York. "Clearly, the margins aren't what they were a year ago. And being Wall Street types, you look at profitability."

Ham has ranked top ethanol producing companies - Pacific Ethanol Inc., Aventine Renewable Energy Holdings Inc. and VeraSun Energy Corp. - at "Neutral," noting they have slid 62.6 percent, 54.3 percent and 37.1 percent, respectively year-to-date, while the S&P 500 index is up 3.1 percent.

The energy bill signed by President Bush in 2005 requires that 4 percent of gasoline sold or dispensed to U.S. motorists in 2007 be renewable fuel, such as ethanol and biodiesel.

Private investment waning

Before that, more than half the ethanol plants in the U.S. were local-owned cooperatives. Only about 35 percent are today, overtaken by private equity funds and Wall Street types, said Geoff Cooper, a spokesman for the National Corn Growers Association in Chesterfield, Mo.

"Venture capital and Wall Street money came in this industry in 2005, and a lot of those plants broke ground funded by deep-pocket investors," Cooper said.

Construction of new ethanol plants has slowed as high corn prices - driven by increased demand for ethanol as part of federal mandates for renewable fuels - have meant higher operating costs while the wholesale price of ethanol has dropped.

Newman said corn was fetching $3.60 a bushel in North Dakota Dec. 4, up from $2.28 a bushel in December 2005 while ethanol was at $1.98 a gallon, down from $2.53 a gallon in 2005.

Operators of E3 Biofuel, a Mead, Neb., plant, cited high corn costs and low ethanol prices among the factors in their decision to file for bankruptcy protection last week. The plant aimed at producing 25 million gallons of ethanol a year.

"A lot of the investors descended on the Corn Belt when the margins were very good - a lot of those folks have jumped ship, back into the things they were in before ethanol," Cooper said. "The industry's true colors are coming out - we're seeing who is committed and who was the fly-by-nights."

The U.S. has 131 ethanol refineries, 10 of which are expanding, and 72 more are being built according to the Renewable Fuels Association.

Changing demand coming

People are going to use ethanol, and U.S. motorists may not have a choice someday, Newman said.

"We still have over 60 percent of our fuel brought in from foreign interests," he said. "I don't think we can continue in that vein."

A 51-cent-per-gallon federal subsidy for the fuel is drawing increased criticism in Washington but ethanol proponents say it's a good investment to make ethanol a viable alternative.

"That's a savings to consumers," said Lamberty. "It's a pretty rare subsidy that winds up back in taxpayers' pockets."

Coaxed by high prices, Paul Hofer planted corn for the first time ever last spring on the generations-old Hofer farm in northeastern North Dakota.

Hofer said it didn't take much arm-twisting because corn has been fetching previously unheard of prices in North Dakota.

"I jumped on the bandwagon and planted corn because of price - that was the determining factor," said Hofer, who farms near Larimore, in eastern North Dakota.

"It's great to see all these plants going up and taking corn from farmers," he said. "But if investors aren't making any money, they'll shut them down."

Cooper, of the corn growers' association, believes a commitment from farmers and rural communities is a key to survival. Locally owned plants are better because the community has a stake in the business, he said.

"The guys whose backs on which this industry was built are in it for the long haul," he said.