Fortunately, most of the factors that led to margin improvement are still in place. Corn prices have fallen 16% since hitting a record high last August, and the large anticipated harvest this year should keep them stable. Ethanol inventories are lower than they’ve been in 18 months, hitting a 20-day level that should ensure the supply/demand balance remains relatively tight. There’s still a gap between ethanol production and the amount predicated by government mandate, and the drop in corn price keeps Brazilian imports uneconomical. All this bodes well for margins.
But will that collapse with production increases?
May 3 supply inventory levels showed ethanol stocks at around 17 million barrels, the lowest since December 2011 and much lower heading into the summer driving season than at any time in recent years. This is largely because the recent poor environment led to “production rationalization,” resulting in the lowest output seen since the Energy Information Administration began tracking data.
The industry will need to maintain some discipline so inventories don’t return to levels that again depress margins. Valero Energy Corporation (NYSE:VLO) has already restarted the three plants it shut down, and Great Plains is increasing capacity from 92% to 95%. Archer Daniels Midland Company (NYSE:ADM) linked increased production to potential margin hits later this year, but small upticks will probably not have a significant impact if the other positives remain factors.
So, what’s it all mean?
The signs definitely point to continued short-term improvement, at least for these big players. Archer Daniels Midland Company (NYSE:ADM) will benefit as improvement in its ethanol segment offsets declining performance in the company’s sweeteners and starches divisions. Valero Energy Corporation (NYSE:VLO) should see stronger revenues and profits as it amps production while margins remain healthy. Green Plains Renewable Energy Inc. (NASDAQ:GPRE)’ first-quarter revenue beat indicates good ethanol growth as well as gains in its multi-year diversification strategy. Pacific Ethanol Inc (NASDAQ:PEIX) has already expressed optimism for the second quarter and remains confident in both consumer interest in ethanol and its own decision to locate near the large West Coast customer base instead of in the Corn Belt like most of its competition.
But this is ethanol, so investors are still well advised to take it all in with a grain of salt.
The article Year-to-Date Results Rekindle Ethanol Optimism originally appeared on Fool.com and is written by Howard Rothman.
Howard Rothman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Howard is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited
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