Buying and selling in the commodities marketplace is perhaps one of the most stressful and financially dangerous aspects of the stock market. One moment may find everything going well, while the next may find the bottom line in the hopper. The commodity pits are not for the faint of heart. Ultimately, most trades work out in the long run, although getting to the end of the long run can be a bumpy ride. For those with a very strong tolerance for risk/reward, a market that depends on the commodities exchange can be exceedingly profitable.
Biofuel Energy Corp., an ethanol fuel producer, works to produce vehicle-grade fuels and resultant byproducts primarily from corn feedstock. In recent months, the company has brought two 115 million gallon-per-year ethanol fuel production plants online in Nebraska and Minnesota.
The commodity corn markets have been giving the company fits over the last several weeks. Commodity corn prices have been near record high prices, leading most that convert corn to hedge their corn costs with fixed price commodity corn contracts. Recent days, however, have found commodity corn prices dropping at a rapid rate – due to high fall yield forecasts and dropping oil prices – causing margin calls as prices pass fixed rate contracts. Unfortunately, Biofuel Energy found itself on the wrong side of this drop and now faces margin calls – through it primary partner Cargill – which it cannot meet.
This occurrence could not have happened at a worse time as the company has recently brought its two ethanol plants online and requires its corn feedstock supply to remain constant as it works toward nameplate capacity. Regardless of the food supply/political issues facing ethanol in general, most analysts have been buoyed by the company’s forthright response to the issue and feel the company will work through its issues for a positive long term result – a response one might not have generally expected but nonetheless received after a Thursday conference call.
The company’s current financial issues notwithstanding, the future of ethanol production with a corn feedstock is a solid partner in the search for sustainable energy sources. Its overall place in the puzzle is yet to be decided, although unbeknownst to most drivers, ethanol is currently being used as a vehicle-grade fuel supplement under Federal law. Generally speaking, this makes the company’s customer base fairly stable regardless of current market conditions.
Most are likely to agree that the current commodities market is a true anomaly where the history of commodity pricing is concerned in the US. Biofuel Energy simply got caught on the short end of the stick, metaphorically speaking. Over time, the company will work through its financial issues by working out a payment plan with Cargill and realign its lending facilities to become the leading producer of ethanol in the US. The overriding need remains, financial issues ultimately pass; especially when the end-product is considered a necessity.
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