Pacific Ethanol Follows the Fold (PEIX, VSE, AVR)

Pacific Ethanol (NASDAQ:PEIX) reported third quarter numbers this morning and any resemblance to VeraSun and Aventine (NYSE:AVR) is purely familial. Pacific reported revenues 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 high feedstock costs, low sales prices, and falling demand for gasoline. Each of these companies invested heavily in capacity, only to see demand fall as consumers drove less in reaction to high gasoline prices. VeraSun is currently in Chapter 11, and its stock has been taken off the NYSE. Aventine and Pacific are off 52-week highs by about 80%.

The glow of corn ethanol was strong when the federal government mandated renewable-fuel standards, but what we've got here is an example of the market hammering an industry regardless of federal backing.

Politically, ethanol's a winner. It benefits farmers, it reduces carbon emissions, and it replaces foreign oil. That's why politicians love it--there's something for nearly everybody.

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 the end 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 of 85% ethanol (E85)...