A year ago, VeraSun paid an average of $1.87 per bushel for the corn it uses to produce its fuel. In the latest quarter, though, that price more than doubled to $4.05 a bushel. Ouch. Perhaps the company could have done a better job with its hedging program, but all the same, it's hard for any business to remain profitable when its primary raw material increases in cost by 116%.
There may be a light at the end of this tunnel. The U.S. Department of Agriculture expects farmers to plant 15% more corn this year, and many industry analysts are confident that this additional supply of corn will ease the price pressure on the crop.
I don't follow corn commodities closely enough to render a judgment on this prediction, but it does appear that VeraSun has a few other factors now working in its favor. Higher gasoline prices will likely improve the economic rationale for blending ethanol into gasoline, which should keep the public's awareness and interest in ethanol as an energy alternative fairly high. VeraSun's other production facilities should also begin increasing capacity over the next year, giving the company plenty of room to boost its revenue. Of course, if corn prices continue to hurt VeraSun, that greater output might only result in larger losses.
If the company can properly hedge its corn expenses, it should be able to turn the corner -- pun intended -- and return to profitability in the second quarter. If so, today's sizable price drop might seem in hindsight like a good buying opportunity.
Interested in other clean-tech Foolishness? Check out the following:
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