A growing number of American ethanol producers, one of the two main bio-fuels production channels, are threatened with bankruptcy. Last October already, Gateway Ethanol as well as other small producers shut down operations. On October 31, it was VeraSun Energy Corp’s turn, the main United States ethanol producer (14 distilleries) listed on the Stock Exchange, to ask for protection under chapter 11. And the other two large listed ethanol producers only seem to be able to preserve their margins through drastic cost controls and postponement of investments initially planned in the first half of 2009. Three reasons are at the origin of the profitability shortage of the ethanol sector: an excess of ethanol production, sky-rocketing corn prices, the key resource used for ethanol production, and the recent drop in the price of oil, which doesn’t encourage ethanol consumption.
Hence, it seems that ethanol producers, just like food product manufacturers, are subject to the same laws: a hyper-volatility of raw materials which increases manufacturer uncertainty regarding the quantities which will finally be produced and sold. Additionally, ethanol consumption is totally dependent from the oil price level. Production of bio-fuels is therefore not, as has been asserted many times, the unique remedy to price hyper-volatility and farmer revenues. Complementary action therefore needs to be conducted upstream through adequate regulatory agricultural policies. |