Summer Picnic Without Corn at BioFuel Energy

The Company: BioFuel Energy, an ethanol producer
The Filing: Form 8-K filed on June 26, 2008
The Finding: BioFuel Energy started commercial operations at its two 115 million gallons per year ethanol plants in Wood River, Neb., and Fairmont, Minn. Surging corn costs suggest that the debt-riddled ethanol producer will be struggling just to keep the two plants online.

The Upshot: Gross profit depends principally on the "crush spread," which is the difference between the price of a gallon of ethanol and the price of the amount of corn required to produce a gallon of ethanol. Using its dry-mill technology, BioFuel management expects each bushel of corn will yield approximately 2.7 gallons of fuel grade ethanol. Based on the price of a bushel of corn at June 30, 2008, of $7.57 (December 2008 delivery), the cost of corn per gallon of ethanol would be approximately $2.80 (0.37 bushels per gallon x $7.57). As such, the "crush spread" would be a loss of $0.03 per gallon based on the June 30, 2008, ethanol price of $2.83 per gallon (for December 2008 delivery).

When operating at nameplate capacity, the combined plants are expected to produce 230 million gallons (Mmgy) of fuel grade ethanol and 720,000 tons of dried distillers grains, annually, to be distributed by agricultural conglomerate Cargill. Consequently, the projected gross operating loss would be $6.9 million -- which does not even include the rising cost of another raw material, natural gas!

At March 31, BioFuel had committed to the purchase of 8.6 million and 6.2 million bushels of corn to be delivered to its Fairmont and Wood River locations, respectively, between April 2008 and December 2009 -- less than 20 percent of the 41 million bushels of corn per year needed to operate each plant at nameplate capacity.

Servicing long-term debt of $166.1 million combined with fixed obligations totaling several million dollars each month limits the ability of BioFuel to hedge with third-party commodity brokers more of its raw material needs.

Unfavorable input prices aside (corn and natural gas), in the future BioFuel would need to compete against more cost-effective feedstock technologies, such as plants that produce ethanol from cellulose-based biomass.

The Question: Management has already canceled plans for a third ethanol facility. Does anyone want to guess when the company itself will be terminated?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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