It’s got to be a bitter pill to swallow, seeing net sales jumped from $87.9 million in the fourth quarter 2009 to $134.2 million in the fourth quarter 2010 yet seeing the gross profit dip from $1.4 million to $1.0 million but that’s exactly what shareholders of Pacific Ethanol, Inc. (NASDAQ: PEIX) have been handed and with a number of external factors putting added pressure on the low-carbon renewable fuels marketer and producer the future is certainly looking unsettling. On Friday shares dipped down to a six-month low of 0.51 and they hung around that level all day, eventually closing the week at 0.52, significantly lower than their 50-day moving average of 0.70 and their 200-day moving average of 0.73.
All of this bad news has been coming despite the company’s best efforts to put themselves in a stronger position. Things looked positive when the US Clean Air Act was passed and the EPA approved regulations that extended the use of 15 percent ethanol in gasoline to vehicles produced during 2001-2006, having already approved the blends use for vehicles produced in 2007 or later. This pushed estimates for US ethanol needs to approximately 15 billion gallons per year by 2015 and around 36 billion gallons per year by 2022, both seemingly favorable figures for PEIX.
Unfortunately PEIX has little control over natural disasters and food prices, two issues that have dramatically affected the production of ethanol and resulted in company shares tumbling from 1.14 back in mid January to their current level.
As it stands it PEIX appears to be in a no win situation as corn prices continue to cause problems for production and more specifically profit. When they released their fourth quarter 2010 figures they announced that the total volume of ethanol gasoline sold had increased by 50 percent compared to the same period a year earlier and that for all of 2010 there was a 57 percent jump compared to 2009 yet despite these dramatic increases their gross profit level slumped thanks in large part to corn prices climbing higher than ethanol prices.
This scenario isn’t exactly what PEIX had in mind when they resumed production at the Magic Valley facility in January 2010 or when they resumed production at the 60 million gallon Stockton facility in the most recent fourth quarter. While they have their eye on an annual rate of 200 million gallons at all four Pacific Ethanol Plants, something they now hold a 20 percent ownership interest in, the financial condition will have to improve to make this endeavor profitable for shareholders.
Chances of that financial climate changing anytime soon remain slim. Just how unprofitable is ethanol production at the moment? Net sales for PEIX is 2010 was $328.3 million compared to $316.6 million for 2009 this despite selling nearly 99 million more gallons of ethanol in the most recent year.
While ethanol was being trumpeted as a legitimate alternative energy source and a way to lessen U.S. dependence on foreign oil the reality now appears to be setting in. World food demand continues to increase and with a particularly harsh winter experienced in the U.S. as well as Europe along with droughts in China the production levels of corn have been hammered. This has pushed the price of corn to higher levels and essentially squeezed PEIX’s margins.
It doesn’t really matter that the federal government wants to increase production of a higher blend of ethanol fuel or see the installation of more flex-fuel pumps for E-85 at gas stations. The fact that President Obama wants to reduce the nation’s dependence on foreign oil by one-third by 2025 doesn’t mean that ethanol is the answer, and it won’t be the answer if the cost of corn continues to exceed the cost of ethanol.
For all the favorable policies and initiatives that have been put in place, all the agreements with automobile manufacturers and service stations, nothing is more important to the ethanol industry than the cost of corn and unfortunately for ethanol producers they aren’t the only ones who want the product, corn happens to be a popular food item as well and because of its high demand and low supply the price will likely remain at a level that does little for the margins of ethanol producers.
Even with government help it’s a tough call for investors to bank on ethanol as the alternative fuel source of choice. With 2012 being an election year the policies of one president can quickly disappear under a new leader and with ethanol already having a number of critics any policy that supports its production could come to an end as other alternatives are explored.
PEIX was the darling of the alternative energy world back in 2006 when shares were moving around the $44 mark but things have changed dramatically and while shareholders may just want to see the $1 days return that could still be some time from now.