Pacific Ethanol (NASDAQ:PEIX) reported third quarter numbers this morning and any resemblance to VeraSun and Aventine (NYSE:AVR) is purely familial. Pacific had revenue of $184 million, compared with analysts’ estimates of $219 million, and an EPS loss of $0.98, compared with estimates of $0.16. It’s hard to imagine how it could have been worse.

Like VeraSun and Aventine, Pacific is stuck in the deadly cycle of highfeedstock costs, low prices, and falling demand for gasoline.Each of these companies invested heavily in capacity, only to seedemand fall as consumers drove less in reaction to high gasolineprices. VeraSun is currently in Chapter 11, and its stock has beentaken off the NYSE. Aventine and Pacific are off 52-week highs by about80%.

The glow of corn ethanol was strong when the federal governmentmandated renewable-fuel standards, but what we’ve got here is anexample of the market hammering an industry regardless of federalbacking.

Politically, ethanol’s a winner. It benefits farmers, it reduces carbonemissions, and it replaces foreign oil. That’s why politicians loveit–there’s something for nearlyeverybody.

But the market treats corn ethanol just as it would any other product:does the demand mesh with the supply? The answer appears to be "no."Federal mandates for 11.1 billion gallons of ethanol production by theend of 2009 will certainly be met. But if consumers stop driving,where’s that ethanol going to be sold?

One thing that could happen is that Congress could mandate wider use of85% ethanol (E85). But that would mean a significant change to the USautomobile fleet and to wider distribution of E85. Neither of thosethings will happen quickly enough to save VeraSun or Aventine orPacific Ethanol.

There is some evidence that sharply lower gasoline prices have putdrivers back on the road. And reduced production from OPEC could sendthe price of gasoline back up. That might help prop up ethanol prices abit, but it’s not going to be enough. Corn ethanol was always a poorsolution to low farm prices, improved emissions reduction, and lowerdependence on foreign oil. That simply will not change.

Pacific Ethanol shares are down over 7% at $1.00 on over 300,000shares.  Its 52-week trading range is $0.62 to $9.88 and its averagedaily trading volume is about 800,000 shares.

Paul Ausick
November 10, 2008

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