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Ethanol Industry Gets a Boost From Bush
A worker at VeraSun loads grain as part of the process to produce ethanol.
(By Eric Landwehr -- Associated Press)
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Despite criticism from economists and oil refiners, Endres says government support for the ethanol industry is justified because of the need to reduce oil imports. "Why do we subsidize oil with double depreciation and royalty relief?" he said. Subsidies, he said, are a "proven practice, especially when dealing with matters that are strategic to the country."
With Bush's commitment to a new mandate for alternative motor fuels, companies like VeraSun are counting on continuing strong demand for corn ethanol. Endres says the industry will have to grow at the current breakneck pace for the next decade to meet Bush's goal.
"We think that once some of the laws are formulated it gets rid of some of the oversupply risk," said Jacques Rousseau, an energy analyst at Friedman, Billings, Ramsey Group. "That was one of the things that had spooked some investors."
Investor enthusiasm for ethanol stocks is cooler than it was last summer, when VeraSun hit a high of $30.75 a share. As oil prices went down from peak levels and as corn prices skyrocketed to $4 a bushel, ethanol companies got squeezed. In November, Rousseau raised his estimate of 2007 corn prices and slashed his estimates of VeraSun earnings, though he still recommends the stock. "If we're going to need this much ethanol, we're going to need a lot of corn," he said.
Rousseau, who also follows major oil companies, noted that for all the hullabaloo about ethanol, "the whole ethanol industry is the size of one big oil refinery: It's still very small in the grand scheme of things." But he said that if oil prices drop and corn prices continue to rise, then some distilleries might get left on the drawing board.
"We built our business on $35 to $40 oil," Endres said. Crude oil yesterday closed at $55.37 a barrel. Endres said that even if oil prices sink, "we're convinced that we'll weather the storm."
Staff writer Michael Fletcher in Wilmington, Del., contributed to this report.
