Bankers differ on ethanol profitability

Two banks offer mixed opinions on the viability of investments in the corn-based fuel.

By Steve Hargreaves, staff writer

NEW YORK ( -- Two big investment banks sent mixed signals about the profitability of ethanol Wednesday, with one citing potential for solid demand growth and easing corn prices, but the other less convinced.

Daniel More, a managing director at Morgan Stanley said the corn-based fuel is currently blended with gasoline. On average, gasoline contains 5 percent ethanol.

More said despite challenges facing the industry, the ethanol content in gasoline could be raised to 10 percent, and even as high as 15 to 20 percent in some states.

"We think there will be plenty of demand for the product," said More, speaking at a finance conference hosted in New York by the American Council on Renewable Energy.

More also said additional acres of corn will be planted in the coming years, and that each acre will yield more corn, which could push corn prices down from their current highs of over $4 a bushel to around $3.

"Farmers know what they are doing," he said.

As far as cellulosic ethanol - a nascent technology that makes ethanol from any plant matter, not just food crops - More said there was no reason current corn-based producers couldn't utilize existing infrastructure and get in on the cellulosic game.

Ethanol producers have been feeling pinched recently, as high corn prices, along with increased steel costs for building refineries, have led to a big increases in production costs over the last year. In addition, a host of new companies have caused a flood of ethanol on the market, depressing its price. As a result, revenue and share prices of major ethanol firms have taken a big hit, in some cases falling by half.

This climate has made some industry watchers more pessimistic about the future profitability of ethanol. "Today we're in hangover mode, and a lot more sober about our investment," said R. Andrew de Pass, a managing director at Citi Alternative Investments.

De Pass said some models showed corn prices actually increasing over the next year to $4.50 a bushel due to huge ethanol demand. But despite the rising price of corn he sees ethanol prices remaining low.

Plus, De Pass highlighted an additional risk to the industry, the easing of government imposed tariffs on ethanol imports. "Frankly, over time the tariff against Brazilian ethanol will be dropped."

Brazil is a huge producer of sugarcane-based ethanol, which yields more energy than corn-based ethanol. In a bid to protect domestic farmers, there is currently a tax for the product to enter the U.S. market. If the U.S. tariff on Brazilian ethanol is lifted, the move could spur further imports from Brazil and threaten prices.

Speaking at a renewable energy finance conference in New York, Energy Secretary Samuel Bodman also gave ethanol what appeared to be a less than ringing endorsement.

During a Q&A, ACORE president Michael Eckhart said the oil companies believe ethanol will remain a fuel additive, as opposed to a fuel in its own right.

When asked if he agreed with that assessment, Bodman said simply "I would be surprised if we didn't find [the oil companies] taking a more active role in this field," and added that they weren't of one mind on the issue.

During his speech, Bodman praised the private sector for advancing renewable energy, and said government's role should be to let the private sector usually take the lead.

But he said government should sometimes take the initiative, and pointed to the president's call for a 20 percent reduction in gasoline use in the next 10 years and federal conservation measures as an example.

He also said the government should provide stable tax and regulatory policies, and invest in some research and development.

To that end, he announced a new $30 million grant program for universities to develop advanced solar cells, a $27 million grant plus matching private money for small business to take solar cells from the prototype stage to the commercial stage, and a $2.5 million grant for cities to build solar infrastructure.

The large ethanol-fuel market will affect the outlooks of such petroleum giants as BP (down $0.91 to $68.80, Charts), Chevron (down $2.44 to $80.85, Charts, Fortune 500), ConocoPhillips (down $2.06 to $78.17, Charts, Fortune 500), and Exxon Mobil (down $2.98 to $82.86, Charts, Fortune 500).  Top of page