There have been widespread news reports suggesting the end of the rather short-lived ethanol boom. Ethanol was originally sold as a cure-all because it was renewable, good for farmers, great for midwestern cargo-rail, and brought jobs to rural interior communities.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_10_01_Ethanol.mp3
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The narrative now is one with more of a pessimistic slant. Corn is criticized as not being the most suitable source and any environmental gains are soaked up because ethanol is mainly transported by petroleum guzzling trucks and trains from where it is produced. As a practical matter ethanol, because it can collect impurities in pipelines, cannot be mixed with petroleum until its final destination. And filling stations have to pony up nearly $100K to retrofit their systems to handle the stuff.
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All of the bullish ethanol suggestions this blog made in June of this year met their pricing targets by mid to late July. Since then, the socks have been deflating in a spiral. So today, as the pessimism around this technology appears to be gaining steam, we will look at bear put debit spreads on the three companies we covered.
The companies are: Archers Daniels Midland, Pacific Ethanol, and MGP Ingredients. Archer Daniels Midland (ADM) currently controls about 25% of the ethanol production in the US. Around 25% of the company’s profits come from ethanol and the sale of ethanol byproducts. ADM is also spending billions of dollars ramping up its ethanol production capabilities and expanding into the European market. All of this could spell disaster if the bottom falls out.
Pacific Ethanol (PEIX) hopes to have five ethanol plants running in the Western US by the end of 2008. Pacific currently markets ethanol in California, Nevada, Arizona and Oregon. Its first plant, in Madera County, Calif., is currently under construction and will be completed by the end of the year.
MGP Ingredients (MGPI) develops and produces natural grain-based products in the United States. The company is also an ethanol producer.
Additional Quotes on Ethanol from Recent News:
Brian Bolster, a vice president in the investment-banking division at Goldman Sachs Group Inc., was quoted as saying; “It’s probably going to get worse before it gets better.”
Jack Cassidy, a vice president at a Colorado bank servicing farmers, commented, “What we saw in the last few years was a number of other lenders or potential investors who maybe got a little bit more enthused than we thought was warranted.”
Dallas-based Panda Ethanol is attempting to build an ethanol plant that runs on cow-manure. But, the Hereford, Texas plant has had to cut back on the window dressing as the company tries to control expenses due to what they describe as a “great deal of uncertainty in the marketplace.”
Potential Trades:
| Bear Put Debit Spreads – Ethanol | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Symbol | Last Price |
Sell Option |
Expire Info |
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Buy Option |
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Ask |
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| ADM | 33.17 (+0.09) | ADMVF | 07 OCT 30.0 (19) | $0.05 | ADMVG | 07 OCT 35.0 (19) | $2.05 | 150 | ($2.00) | $33.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ADM | 33.17 (+0.09) | ADMWF | 07 NOV 30.0 (47) | $0.30 | ADMWG | 07 NOV 35.0 (47) | $2.50 | 127.3 | ($2.20) | $32.80 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PEIX | 9.21 (-0.41) | PFQWU | 07 NOV 7.5 (47) | $0.15 | PFQWB | 07 NOV 10.0 (47) | $1.45 | 92.3 | ($1.30) | $8.70 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MGPI | 10.06 (-0.21) | MQKVB | 07 OCT 10.0 (19) | $0.35 | MQKVV | 07 OCT 12.5 (19) | $2.50 | 16.3 | ($2.15) | $10.35 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All of the following trades have 47 days until expiration.
Competitors:
Competitors for ADM include: Bunge Ltd. (BG), Corn Products International Inc. (CPO), Cargill, Incorporated (private), Andersons Inc. (ANDE), Aventine Renewable Energy Inc. (AVR), Buckeye Techs. Inc. (BKI), MGP Ingredients Inc. (MGPI), Pacific Ethanol Inc. (PEIX), Verenium Corp. (VRNM), VeraSun Energy Corp. (VSE), and Xethanol Corp. (XNL).
Competitors for PEIX include: Archer-Daniels-Midland Co. (ADM), Ag Processing Inc (private), and Melrose Resources plc (private).
Competitors for MGPI include: Archer-Daniels-Midland Co. (ADM), Grain Processing Corporation (private), and National Starch and Chemical Company (private).
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[tags] Cargill, Incorporated, Ag Processing Inc, Melrose Resources plc, Grain Processing Corporation, National Starch and Chemical Company, ADM, Archer-Daniels-Midland Co., ANDE, Andersons Inc., AVR, Aventine Renewable Energy Inc., BG, Bunge Ltd., BKI, Buckeye Techs. Inc., CPO, Corn Products International, MGPI, MGP Ingredients Inc., PEIX, Pacific Ethanol Inc., VRNM, Verenium Corp., VSE, VeraSun Energy Corp., XNL, Xethanol Corp., bear put debit spreads, covered call investment strategy, investment strategy, poweroptions [/tags]