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Ethanol cup overflows

Supply glut leads investors to step back from new plant construction

Joanne Kelley, Rocky Mountain News

Published October 30, 2007 at midnight

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A Denver-based energy company has delayed plans to build more ethanol production facilities amid an industrywide supply glut.

BioFuel Energy Corp., which went public in June, is building two Midwestern ethanol plants. But it has decided to hold off for now on plans to construct others, including one in Alta, Iowa.

"Ultimately, I'm confident we'll build those plants," said David Kornder, chief financial officer. "It's going to be a viable business."

The public company announced this month that it would buy back shares of its stock, which Kornder described as undervalued. The company's stock has dropped in recent months, and ethanol prices have declined 29 percent this year on the Chicago Board of Trade. BioFuel Energy stock closed at $5.27 a share, about half of its inital public offering price of $10.50 in mid-June.

The repurchase program involves shares worth about $7.5 million - money that had been earmarked for the additional ethanol plants. The company is progressing with its construction of facilities in Fairmont, Minn., and Wood River, Neb.

Investors eager to capitalize on ethanol, a fuel made from corn, have contributed to a frenzy of construction activity. But refining and blending capacity has yet to keep pace.

A proposed Panda Ethanol plant in Yuma has not been able to close financing. It is planned to be built adjacent to already-operating Yuma Ethanol Plant.

Dallas-based Panda Ethanol said it had plans to produce 105 million gallons a year at the $120 million plant.

While Standard Ethanol Madrid, a subsidiary of Mid America Bio Energy and Commodities, began production Monday at its plant in Nebraska, other ethanol companies have shelved projects. VeraSun Energy Corp., the third-largest U.S. producer by capacity, is among those that have halted construction on new plants.

Still, a long-term investor said he remains bullish on the prospects for ethanol. "The perception about what the opportunity is (for ethanol) got beyond what the reality is," said Jack Cassidy, of CoBank, a big ethanol investor in Greenwood Village. "The industry is going to go through some rationalization."

Cassidy described a rush to build as many production facilities as possible, with some in the wrong location and others relying on unproven technology.

"We've seen a lot of plants," he said. "The best of these plants will do very well."

He maintained that agricultural businesses typically deliver low margins and follow cyclical patterns.

By the numbers

121 ethanol plants exist nationwide.

84 plants are in the works.

92.9 million acres of corn were planted this year, the most since World War II and 19 percent more than last year.

7 billion gallons of ethanol are projected to be produced this year, up from 6.3 billion gallons in 2006.

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