Ethanol Industry Contracts as the Yonder 40 Gains

mead nebMergers and a bankruptcy last week in the ethanol business reveal an industry that is consolidating. Will there be room for rural communities and local investors to profit from biofuels?

mead neb ethanolEthanol was loaded from the E3 BioFuels plant in Mead, Nebraska, in May. Now the facility is entering bankruptcy.
Photo: Kelley Campaign

Forget the results for the Yonder 40 stock index — which did modestly well last week. The big news in rural business over the past week, to us at least, was the rapid-fire consolidation in the alternative fuels business.

VeraSun Energy Corp. agreed late last week to purchase the smaller U.S. BioEnergy Corp. in an all-stock deal that could make the combined companies the largest producer of ethanol in the United States by the end of next year. Archer-Daniels-Midland Co. produces the most ethanol now and expects to gin out 1.34 billion gallons by the end of next year. The larger VeraSun, however, would be producing over 1.6 billion gallons by the time 2008 finishes.

The deal is worth $700 million. VeraSun is located in Brookings, South Dakota. U.S. BioEnergy is headquartered in Inver Grove Heights, Minnesota.

The deal is widely seen as the most prominent example of consolidation in what had been a rapidly expanding industry. But with a recent glut in ethanol production, per gallon profits have dropped dramatically. There have been new objections from environmentalists about ethanol production, and food and cattle groups have opposed ethanol incentives, saying the fuel is driving up food and feed prices.

“Consolidation is seen as a way for producers to become more efficient and more competitive in a crowded, volatile and cutthroat market where profit margins are low and more production capacity is scheduled to come online,” reported the Wall Street Journal.

“Our first focus is to integrate two companies,” said the chief executive of VeraSun, Don Endres, adding, “Clearly”¦the industry — as all industries do — will consolidate over time.”

“Over time” appears to be starting today. Besides the VeraSun/U.S. BioEnergy merger, the E3 BioFuels LLC ethanol plant in Mead, Nebraska, closed last week as it sought to reorganize under the protection of bankruptcy law, according to the Omaha World-Herald. The plant opened in June, but it had mechanical problems from the beginning. An explosion in a boiler kept the plant from reaching capacity.

The Mead plant used an innovative “closed loop” technology: manure from a nearby feedlot was used to create methane, which fueled the plant.

Another ethanol plant planned for Rock Port, Missouri, has also stopped construction. The Rock Port plant was locally owned — a signal of how hard it may be for rural communities and small investors to participate in the prosperity generated by renewable fuels produced from farm-raised feed stocks.

Meanwhile, the Arkansas Democrat Gazette reported over the weekend that the “fledgling U. S. biodiesel industry is struggling to cope with soaring soybean-oil prices, a glut of production capacity and a poorly developed distribution system.” Rising soybean prices have driven up the costs of production, and Arkansas plants are running well below capacity.

Yonder 40

Okay, back to the Yonder 40, the stock index of rural America. The Yonder was up last week, but then so were all the other indexes. The Yonder, up 1.7 percent for the week, lagged the Dow (up 3 percent), the S&P 500 (up 2.8 percent) and the NASDAQ (up 2.5 percent). Here is a rundown of the news from companies that do a good portion of their business in rural America:

“¢ Cato Corp, the rural retailer, dropped a quarter of its value this past week. The company announced last Thursday that third-quarter earnings fell 51% to $2.9 million, or 9 cents a share, from $5.9 million, or 18 cents a share, in the year-ago period.

“¢ Cabela’s, the revered sporting goods retail and catalogue outfit, has been getting dinged by hunters in the West for its new real estate division. As Bill Schneider explains in, Cabela’s Trophy Properties “opened an office in Montana and started listing what the Montana Wildlife Federation (MWF), the state’s largest group of hunters and anglers, calls “˜traditional public hunting properties.'” Hunters in the West told Cabela’s they didn’t appreciate the company’s complicity in land deals that were turning formerly public hunting lands private. For details, go to NewWest and read Schneider’s story.

“¢ In a bizarre trademark lawsuit, a panel of three federal judges said Hormel couldn’t keep a software company from using the word “spam.” Hormel makes Spam, of course, the canned mystery meat. Spam Arrest LLC provided spam email blocking services. The judges ruled Spam Arrest was “different in connotation and commercial impression” from Hormel’s use of the word — and doesn’t taste any good fried either.

“¢ Smithfield Foods was hurt by lower hog prices and reported a 61% drop in fiscal second-quarter net income.

Below is a complete listing of the Yonder 40’s results for the week ending November 30, 2007:

Companies Ticker Price November 30 Price Change for Week Percent Change for Week
Alico Inc. ALCO 44.39 $0.18 0.4%
Andersons Inc. ANDE 42.42 $0.42 1.0%
Burlington Northern Santa Fe Corp. BNI 83.52 $1.07 1.3%
Berkshire Hathaway BRKB 4,690.00 $215.00 4.8%
Bassett Furniture BSET 8.9 -$0.79 -8.2%
Peabody Energy Corp. BTU 55.64 $3.03 5.8%
Cabela’s Inc. CAB 16.54 $0.19 1.2%
ConAgra Foods Inc. CAG 25.02 $1.20 5.0%
Cato Corp. Cl A CTR 15.06 -$4.79 -24.1%
Citizens Communications CZN 12.98 $0.34 2.7%
Deere & Co. DE 171.8 $15.16 9.7%
Dean Foods Co. DF 24.94 $0.23 0.9%
DIRECTV Group DTV 24.87 $0.70 2.9%
Family Dollar Stores Inc. FDO 23.55 $0.73 3.2%
Fleetwood Enterprises Inc. FLE 5.47 -$0.58 -9.6%
FairPoint Communications FRP 14.92 -$1.10 -6.9%
Gaylord Entertainment Co. GET 42.06 $1.63 4.0%
Hormel Foods HRL 39.75 $1.96 5.2%
International Speedway Corp. ISCA 42.61 -$0.39 -0.9%
Lee Enterprises LEE 14 -$0.72 -4.9%
Mohawk Industries Inc. MHK 80.44 $1.44 1.8%
Monsanto Co. MON 99.37 $8.96 9.9%
Mine Safety Appliances Co. MSA 49.01 $1.82 3.9%
Southwest Bancorp OKSB 17.95 $0.97 5.7%
Plum Creek Timber REIT PCL 46.37 $3.23 7.5%
Penn Virginia Corp. PVA 41.62 -$4.06 -8.9%
Ralcorp Holdings RAH 61.39 -$1.58 -2.5%
Regions Financial Corp. RF 26.43 $2.21 9.1%
Sturm Ruger & Co. RGR 9.25 -$0.12 -1.3%
Smithfield Foods SFD 30.05 $2.21 7.9%
Skywest Inc. SKYW 26.31 $1.51 6.1%
Southern Co. SO 37.62 -$0.42 -1.1%
Stage Stores Inc. SSI 16.92 -$0.39 -2.3%
Tractor Supply Co. TSCO 41.02 $1.32 3.3%
Tyson Foods TSN 14.91 $0.08 0.5%
UST Inc. UST 57.9 $2.75 5.0%
Waddell & Reed Financial Inc. WDR 34.18 $2.12 6.6%
Walter Industries WLT 34.69 $1.37 4.1%
Wal-Mart Stores WMT 47.9 $2.17 4.7%
Cimarex Energy XEC 38.63 -$0.45 -1.2%