Ethanol producers' shares rise after capacity idled - Forbes.com

NEW YORK -

Shares of large ethanol producers rose Wednesday after one company raised the amount of newly built capacity it will keep idle to 330 million gallons per year.

VeraSun Energy Corp. increased to three the number of its recently completed ethanol plants that it has decided to not start.

Last week, the company announced a delay in starting two 110 million-gallon per year ethanol plants, one in Welcome, Minn., and the other in Hartley, Iowa. The third 110 million-gallon-per-year plant now slated for a delayed startup is in Hankinson, N.D.

The delays are widely seen as the result of record high prices for corn, a key feedstock for the plants, and weak ethanol prices.

Corn for December delivery settled Tuesday at $7.475 a bushel on the Chicago Board of Trade. The contract hit an all-time trading high of $7.915 a bushel on June 16.

Corn prices have surged more than 80 percent in the past year amid sharp increases in global demand to feed people and livestock and make ethanol in the U.S., which has hurt profit margins in the ethanol industry.

Barring a retreat in corn prices, margin relief will have to come from higher ethanol prices, something that may happen if VeraSun's actions are harbingers of tighter supply - or at least a slowdown in the growth of supply.

Deutsche Bank-North America analyst Christina McGlone, writing in a client note, said that "if corn prices relative to ethanol prices force too much capacity to go off-line, at that point, gasoline refiners/blenders will have to bid up the price of ethanol to entice additional production."

Oppenheimer & Co. analyst Joseph A. Gomes said in an interview that the share price increase of ethanol producers may stem from news that VeraSun and other corn ethanol producers are not beginning to run new plants. Assuming demand for ethanol remains stable, that could help raise ethanol's price, thus increasing margins.

In late morning trading, shares of VeraSun rose 13 cents, or 3.1 percent, to $4.09; Pacific Ethanol Inc. rose 9 cents, or 4.9 percent, to $1.94; and Aventine Renewable Energy Holdings Inc. rose 18 cents, or 4.4 percent, to $4.28.

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