Against the grain: Ethanol stocks sputter


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Times Staff Writer Edward Silver, who keeps a close eye on green investing trends, offers some observations on the action in food and ethanol stocks:

Our daily bread is getting pricey, and food riots in Haiti, the Philippines and other poor nations are putting a fine point on a painful dilemma. One casualty is the perception of corn ethanol and the wisdom of its backers, including those in Washington. For investors, the field has turned barren. Ethanol shares are dropping even as the price of oil climbs to staggering heights.


In the last five trading days, the Standard & Poor’s 500 stock index has been essentially flat. But pure plays in corn ethanol kept sinking from already dejected levels. Aventine Renewable Energy lost about 8% in the period, and Verasun Energy backtracked 5%. Both went public in 2006, a giddy time for ethanol boosters. Neither ever regained the high points of their first days of trading. Now, a share of Aventine can be had for $4.15, for a measly market cap of $174 million.

It’s a different story for agribusiness. With something almost resembling a food panic building, investors see plentiful demand ahead and strong margins. Archer Daniels Midland, a diversified giant, churns out the most ethanol, but traditional crops fuel its profitability. The stock has advanced about 4% in the last five days. Fertilizer biggie Potash Corp. spiked $13.85 a share Wednesday to a record $198.26, largely because customers in China agreed to double what they pay for Canadian fertilizer. Potash is ahead 12% in the last five sessions. Genetic engineer Monsanto Co., a force in farmland productivity, cultivated a 9% advance.

For ethanol, though, the facts on the ground are dismal. Biofuels compete with food crops for land, and the supply snarl-up has a lot do with corn surpassing the historic $6-a-bushel mark. The cost of the grain, combined with overheated building of refineries, has battered profit margins for the fuel. Around the globe, the biofuels rage is great for farmers’ pocketbooks but leaves other needs wanting. (Drought, particularly in Australia , is another factor in the food predicament.)

There’s more. Environmentalists complain that producing ethanol consumes almost as much energy as it creates, and the rush to convert land for farming spells doom for swaths of forest, thereby quickening climate change.

The White House still is pushing for the U.S. to brew 36 billion gallons of biofuels annually by 2022, a five-fold increase from last year. But investors no longer are excited about the stuff, and that malaise extends to the next generation of the recipe. It is hoped that cellulosic ethanol, derived from low-cost switchgrass and wood chips, will replace the corn-based formula, but it’s facing technical obstacles and doubts about its commercialization. Verenium Corp., a stock identified with the cellulose solution, closed at $3.31 today, just about where it started five days ago.