Ethanol Turmoil a Serious Threat to Some Companies

CornBy David Mercer 

Not long ago, the fledgling ethanol industry was the darling of investors, farmers, the federal government and a lot of Americans who liked the idea of turning corn into fuel.

But suddenly, it doesn’t have nearly as many friends.

Rising worldwide food prices and shortages have spurred calls in Congress to roll back the federal requirement that increases the amount of ethanol and other biofuels blended with the nation’s gasoline supply. Critics say so much corn is being used for ethanol that there’s less available for people and animals to eat, raising prices of everything from tortillas to meat.

What’s more, investors who bought into the industry in good times aren’t seeing the returns they’d hoped for as once-record profits began to fall.

“Consumers are starting to get restless and Washington is starting to listen,” said Morningstar analyst Ann Gilpin, who follows Decatur, Ill.-based Archer Daniels Midland, the country’s second-largest ethanol producer.

The ethanol market would be severely limited if Congress rolled back the federal mandate that calls annual increases in the amount of biofuels added to the fuel supply — 9 billion gallons by the end of this year, increasing to 36 billion gallons by 2022.

That would most hurt companies that rely exclusively or primarily on ethanol, which include a mix of small, often locally owned distillers — already under pressure since ethanol prices fell and corn prices rose sharply — as well as larger publicly traded firms like VeraSun Energy Corp., the country’s top ethanol producer.

“If you sell one product and the only reason there’s a market for it is because the government makes a law requiring consumption — if that law goes away, obviously you’re in trouble,” Gilpin said.

The odds of Congress changing that mandate this year are slim because the 10 states — mostly in the Midwest — that produce over 80 percent of all American ethanol have between them almost half of the 270 electoral votes needed to win a presidential election, said analyst Kevin Book of Friedman, Billings, Ramsey & Co.

After the election, though, sentiment could change.

Read the rest of this story at Business Week.

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