Pacific Ethanol (NASDAQ:PEIX), the leading West Coast ethanol player, must have made backer Bill Gates proud this quarter. You can feast your eyes on all the basic numbers right here, but I'll add a few more industry-specific metrics before getting to the bigger picture on Pacific Ethanol and its corny competitors.
One key component of an ethanol producer's profitability is the "commodity spread" (also known as the commodity margin). This spread equals the difference between the amount paid for corn, and the price at which ethanol is sold. Pacific Ethanol earned a spread of $1.10 per gallon, which was lower sequentially, due to higher corn costs. This also compares unfavorably to the 16% higher spread over at Aventine Renewable Energy (NYSE:AVR).
There's no grand conclusion to be made from this data point; I just wanted to put the metric on your radar. If you don't have objective measures like the commodity spread at your disposal, you're left with whatever numbers look good at the top of a press release. In the case of Pacific Ethanol, that would be the triple-digit gain in ethanol gallons sold. Not to dismiss production volume -- it's very much a key to success, and the reason why Pacific Ethanol swung to an operating profit versus last year's loss.
Volume is also a major consideration when looking at the future of the ethanol market. Recent legislation in California and Oregon has essentially set a floor for demand in Pacific Ethanol's key markets. Most important, the resultant incremental demand will be well in excess of Pacific's growth plan.
I have to admit to being skeptical of the market's uptake of all this ethanol. On its conference call, Tesoro (NYSE:TSO) predicted an ethanol shake-out, due to unfavorable blending economics. Now I hear Pacific Ethanol talking about how favorable the economics are for a refiner to move from the 5.7% minimum to a 10% ethanol blend in its gasoline. If the dollars and cents of "gasohol" are in fact better than I've been led to believe, then I may have to start shifting my opinion about Pacific Ethanol, Archer Daniels Midland (NYSE:ADM), and VeraSun Energy (NYSE:VSE) out of neutral.
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Fool contributor Toby Shute doesn't own shares in any company mentioned. The Motley Fool's disclosure policy doesn't get shaken out.
