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Bumper Corn Crop Will Fuel Pacific Ethanol

Posted: Aug 14, 2008 10:21 AM by Eric Fox

Tickers in this Article: XNL, ADM, VSE, PEIX

Ethanol producer and marketer Pacific Ethanol (Nasdaq:PEIX) announced weak results for the second quarter of 2008, but future earnings should improve as the prices of corn and natural gas, two key inputs to producing ethanol, drop over the next few quarters.

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Q2 Low Lights
Pacific Ethanol reported revenue of $ $198.0 million, an increase of $84.2 million, or 74% over the same quarter last year. This higher revenue did not fall to the bottom line, as the company reported an $8.3 million, or a loss of 23 cents per share.

Pacific Ethanol's sales volume increased to 66.8 million gallons, up 55% from the same period in 2007. The company had record revenue, production and shipments of ethanol, but the rise in corn prices wiped out gross margins in the quarter as average corn prices increased 67% over the second quarter of 2007. The company even had negative EBITDA in the quarter of slightly under $1 million. (To learn more, be sure to read A Clear Look At EBITDA.)

Corn Costs going Down
Things look to get better for Pacific Ethanol, as the prices of corn and natural gas, two key inputs to producing ethanol, fall in price over the next few quarters.

The latest government crop report released on August 12 forecasts corn production at 12.3 billion bushels, down 6% from last year but 17%above 2006. The yield per acre is expected to average 155.0 bushels per acre, up 3.9 bushels from last year. If realized, this yield would be the second highest on record, just behind the yield realized in 2004. Production would be the second highest on record, behind last year when producers harvested the most acres of corn since 1933. This large harvest will lead to even lower prices per bushel for corn. Prices have already fallen by 35% since the end of June, and are at $5.29 per bushel. (To learn how to analyze crop reports, read Harvesting Crop Production Reports.)

Natural Gas Falling Too
The price of natural gas has also fallen sharply the last few months, from a peak of just over $13.00 per MMBTU to $ 8.33. This is due in part, to a large increase in production coming from the lower 48 states, where after several years of no growth in production, there have been large year-over-year increases in production. The latest report from the Energy Information Administration shows a 9% increase in production in the first quarter of 2008 over the same quarter last year. (Before jumping into this sector, learn how these companies make money in our Oil And Gas Industry Primer.)

This will be good news also for other ethanol producers like Archer Daniels (NYSE:ADM), Xethanol Corporation (NYSE:XNL) and Verasun (NYSE:VSE).

Bottom Line
Although Pacific Ethanol reported weak quarterly results last week, its costs should improve for the rest of the year as corn and natural gas prices, two key cost inputs, continue to decline in price, leading to stronger gross margins.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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