Ethanol, the spirited corn-based fuel that has reaped some $6 billion a year in federal subsidies, took a hit on Thursday as both houses of Congress voted on separate measures to rein in some of the industry’s lavish tax breaks.
The Senate on Thursday voted 73-27 to end both the 45-cent-a-gallon federal ethanol refining subsidy and the 54-cents-a-gallon protective tariff on ethanol imports. On the other side of Capitol Hill, the House voted 238-128 to cut off Department of Agriculture funding for new pumps that enable fuel stations to dispense fuel with ethanol content.
While the White House has vowed to veto attempts to totally repeal the subsidies, the desperate need to address ballooning budget deficits almost ensures that the days of big ethanol breaks are over. That could have a chilling affect on shares of corn-based ethanol companies – particularly small-cap names:
1. Pacific Ethanol (Nasdaq:PEIXD) dropped 12.32% of its value on Thursday to close at $1.27; the stock has dropped more than 85% since its high of $8.75 last September.
2. Green Plains Renewable Energy (NYSE:GPRE) slipped 1.2% to close at $10.66; it is trading 22% below its 52-week high of $13.64 last October.
3. Andersons (Nasdaq:ANDE) slipped 0.8% to close at $38.16. The stock is down more than 25% since its 52-week high of $51.23 in March.
- Archer Daniels Midland (NYSE:ADM). Company executives said Thursday that elimination of the subsidies could benefit them if corn prices drop as a result. Shares dipped 0.2% to close at $29.52.
- Petroleo Brasileiro (NYSE:PBR). This Brazilian ethanol company produces – and exports – sugar cane-based ethanol, gaining a double-benefit from elimination of the domestic corn subsidy and the protective tariff. The stock slipped by nearly 1% on Thursday to $32.50 and is trading about 24% below its 52-week high of $42.75 in March.
- Bunge (NYSE:BG). This New York-based company also relies on sugar cane to make ethanol. The stock closed down 1.18% to $65.50, but is still trading nearly 43% above its 52-week low of $45.83 last July.
Surprising Winners: The unlikely winners in the ethanol subsidy fight are poultry producers, ranchers and other companies that profit from livestock such as chicken or beef. Here’s why: diverting corn to produce ethanol raises prices dramatically for feedstock.
In 2000, only 7% of domestic corn was used to produce ethanol; by last year, it was 39%. Ethanol critics, who have long lamented the subsidies, received added support last week from the World Bank and other international organizations, who tagged the breaks as a cause of rising global food prices.
Here are three poultry stocks that got a bounce from the vote:
- Pilgrim’s Pride (NYSE: PPC). Pilgrim’s Pride jumped 8.7% on Thursday to close at $4.62.
- Sanderson Farms (Nasdaq:SAFM). Sanderson was up 4.3% to $44.90
- Tyson Foods (NYSE:TSN). Tyson closed 2.8% higher at $18.08.
As of this writing, Susan J. Aluise did not hold an interest in any of the stocks mentioned here.