Good Days for Ethanol, Bad for Biodiesel

The corn ethanol industry, while still wounded, is enjoying profit margins not seen since 2006. The $4.17-a-bushel price of corn, ethanol’s main feedstock and biggest cost, remains far below its 2008 highs of nearly $8. Government subsidies are intact.

There are fewer players – after several high profile bankruptcies – competing to produce government-mandated quantities to blend into the fuel supply. Higher crude-oil prices also translate into a higher selling price for ethanol, since it is a gasoline substitute. Valero Energy Corp. turned a small profit from its corn ethanol business in the third quarter.

By contrast, rainy weather has decimated sugar crops in Brazil and helped sugar prices more than double to about 28 cents a pound, a 29 year high, from 12 cents a year ago.

New Energy Finance, which tracks investments in alternative energy, says Brazilian ethanol makers are struggling both with high costs and a revaluation of the local currency that has made their output less competitive. Exports to the U.S. didn’t look good before, because of protectionist policies favoring Big Corn, but they look terrible now. New Energy says 10 Brazilian ethanol producers have filed for bankruptcy since the onset of the financial crisis. Companies are combining, handing equity stakes to lenders, and hunting for scarce investors.

Biodiesel is on thin ice, too. This much-smaller industry has had trouble attracting—and keeping–government support, unlike ethanol. And it is competing in a dramatically depressed market for traditional petroleum-based diesel that hasn’t recovered nearly as much as gasoline. Most biodiesel refineries have stopped production.

The National Biodiesel Board warned in a study last month that the industry could face thousands of layoffs if a federal biodiesel tax credit was allowed to lapse as scheduled Dec. 31, 2009. Conventional wisdom a few months ago was that the credit would be renewed. Then, Congress got caught up with health care…and the credit lapsed.

Michael Frohlich, NBB’s federal communications director, calls it “a pretty significant blow to biodiesel makers. Basically, the industry is treading water,” he says. He said the industry still expects a retroactive tax extension to be passed. But it could take until March, perhaps longer. “At that point you’ll already have seen a healthy amount of layoffs,” he predicts.

Maybe the prospects for corn-based ethanol aren’t as high as an elephant’s eye, but at least they ain’t lying fallow on the ground.

source: blogs.wsj