VeraSun Energy Corporation (NYSE: VSE) announced on October 2 that it was suspending construction of a 110 million-gallon-per-year ethanol biorefinery due to current market conditions. The company expects that construction will be resumed in 2008 if market conditions improve. The company had only completed site grading and preparation work on he effected plant.
"We believe it's important to be mindful of the current market conditions and manage our business accordingly," said Danny Herron, VeraSun Chief Financial Officer and Senior Vice President. "Given the abrupt change in market conditions that have seen ethanol prices drop nearly 50 cents per gallon in the last 60 days, it is prudent for us to adjust our current pace of expansion. Due to Reynold's early stage of development, we believe it is wise to suspend investment until the market provides an acceptable return."
"We have a large business that we are growing rapidly with four facilities continuing under construction," said Don Endres, VeraSun Chairman and CEO. "We remain confident in the outlook for our industry and believe that with ethanol currently priced at a dollar less than gasoline, it provides a great value as a high-octane, clean-burning renewable fuel that will drive additional blending throughout the nation."
Priced at a dollar less than gasoline, blending ethanol with gasoline now reduces the price of gasoline, but does not provide as great a profit margin for producers as it previously did. This is evidence that market forces are at work and the out of control expansion of corn ethanol producers will be moderated. Although I support the development of the ethanol market, it is time that subsidies on corn ethanol be reduced so that cost reduction improvements to biorefineries will be implemented. See the previous post on Poet to see what cost reduction practices are being planned by one producer.
Update: Loan guarantees for improvements to reduce cost would be OK for corn ethanol. Full subsidies for cellulosic ethanol would be OK until processes are more developed and costs are under control.