http://www.washingtonpost.com/wp-dyn/content/article/2007/01/24/AR2007012401869_2.html?referrer=emailarticle
Ethanol Industry Gets a Boost From Bush
By Steven Mufson
Washington Post Staff Writer
Thursday, January 25, 2007; Page D01
At the State of the Union address Tuesday night, Don Endres relished the
strange applause rituals, the pomp and ceremony, and even the dinner in
the Capitol beforehand at which he rubbed elbows with leading lawmakers.
But most of all, Endres, the chief executive of the nation's
second-largest ethanol maker, relished President Bush's message: that
the government should sharply raise the mandate for ethanol use in motor
fuels, setting a floor for alternative and renewable fuel use in 2017
that is equal to seven times the current ethanol output.
Soaring gasoline and oil prices are encouraging many to seek out
alternative fuel sources. One such means is ethanol, a clean-burning,
high-octane fuel produced from crops such as corn. On April 25, 2006
President Bush announced a four-part plan to confront rising energy prices.
That is good news for Endres's company, VeraSun Energy, which will
nearly triple its capacity by the end of 2008, to 670 million gallons a
year from 230 million. VeraSun's shares soared this week. Even after
profit-taking by investors yesterday, VeraSun closed at $17.49 a share,
up 5 percent since Friday's close.
Endres owns 41.7 percent of the company, which went public in June and
has a market capitalization of $1.35 billion. He raised seed money by
building and selling companies in the debit card, electronic equipment
and Internet payment businesses. Only Archer Daniels Midland, with more
than 1 billion gallons a year of ethanol capacity and half again as much
on the way, is bigger than VeraSun.
Not everyone thinks Bush's speech is good news. Oil refiners complain
about mandates telling them how to blend fuels. Critics of Bush's
proposal say it will be impossible to hit the proposed requirement of 35
billion gallons a year by 2017 because the main renewable fuel used now,
ethanol made from corn, is already driving up corn prices and will use
much or all of the U.S. corn harvest. And technology for producing
"cellulosic" ethanol from other feedstocks, such as switch grass, has
not been proved on a commercial scale yet.
Ethanol boosters are not counting on available technology, however. They
are counting on new advances for making ethanol and continued government
subsidies. A tax credit to refiners amounts to 51 cents per gallon of
ethanol; without that credit, ethanol makers such as VeraSun, which
earned about $1 a gallon in the second and third quarters last year,
would have to slash prices to make their product economical.
"My grandfather grew 40 bushels of corn per acre," said Endres, who grew
up on that farm in Watertown, S.D. "My father grew 80 bushels per acre.
My brothers are getting 160 bushels an acre. Every generation, we double
corn production per acre."
Endres says that in addition, more farmland could be devoted to growing
corn, including a quarter of the land now used to grow soybeans.
Critics see this as ethanol in the sky, but the VeraSun chief executive
also preaches another gospel: that technological advances will make
ethanol manufacturing more efficient. "The industry is still in its
infancy," Endres said, adding that refineries now get 20 to 30 percent
more ethanol from the same amount of feedstock than five years ago.
The prospect of technological advances was promoted yesterday by Bush.
After touring a DuPont research facility in Wilmington, Del., where
scientists are developing methods for mass-producing ethanol made from
cornstalks, switch grass and wood chips, Bush said he was confident that
the technology was in place to meet his goals.
"I came wondering whether or not cellulosic ethanol was one of these
things down the road that may be happening, may not, could end up being
science or science fiction," Bush said. "It's going to be science."
DuPont plans to open its first pilot plant to manufacture cellulosic
ethanol by next year, and officials say they are confident that the fuel
could hit the market two years after that, said Stephanie Jacobson, a
public affairs official with DuPont.
Earlier in the day, Bush signed an executive order to reduce the federal
government's use of gasoline, increase its use of alternative fuels and
buy more flex-fuel vehicles.
Despite criticism from economists and oil refiners, Endres says
government support for the ethanol industry is justified because of the
need to reduce oil imports. "Why do we subsidize oil with double
depreciation and royalty relief?" he said. Subsidies, he said, are a
"proven practice, especially when dealing with matters that are
strategic to the country."
With Bush's commitment to a new mandate for alternative motor fuels,
companies like VeraSun are counting on continuing strong demand for corn
ethanol. Endres says the industry will have to grow at the current
breakneck pace for the next decade to meet Bush's goal.
"We think that once some of the laws are formulated it gets rid of some
of the oversupply risk," said Jacques Rousseau, an energy analyst at
Friedman, Billings, Ramsey Group. "That was one of the things that had
spooked some investors."
Investor enthusiasm for ethanol stocks is cooler than it was last
summer, when VeraSun hit a high of $30.75 a share. As oil prices went
down from peak levels and as corn prices skyrocketed to $4 a bushel,
ethanol companies got squeezed. In November, Rousseau raised his
estimate of 2007 corn prices and slashed his estimates of VeraSun
earnings, though he still recommends the stock. "If we're going to need
this much ethanol, we're going to need a lot of corn," he said.
Rousseau, who also follows major oil companies, noted that for all the
hullabaloo about ethanol, "the whole ethanol industry is the size of one
big oil refinery: It's still very small in the grand scheme of things."
But he said that if oil prices drop and corn prices continue to rise,
then some distilleries might get left on the drawing board.
"We built our business on $35 to $40 oil," Endres said. Crude oil
yesterday closed at $55.37 a barrel. Endres said that even if oil prices
sink, "we're convinced that we'll weather the storm."
Staff writer Michael Fletcher in Wilmington, Del., contributed to this
report.
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