Replies to post #27951 on Alto Ingredients Inc (ALTO)

[pavement13]

From Chen Lin's interview.

TER: Why do you believe the future is so bright for ethanol producers?

CL: In September, ethanol followed oil down in price. But there was a complete rebound and more in October. The conventional wisdom is that ethanol is considered part of gasoline, 10% by law. So when the oil price falls, and the gasoline price falls, the price of ethanol should fall too. That explains the coordinated short attacks on ethanol in the past two months. Shares of Pacific Ethanol Inc. (PEIX:NASDAQ) fell 60%, while the short interests in REX American Resources Corp. (REX:NYSE) more than tripled. I own both these companies, as well as Green Plains Renewable Energy Inc. (GPRE:NASDAQ).

The conventional wisdom about ethanol has been proved wrong. Lower oil and gas prices encourage more consumption. More gas consumption, by law, requires more ethanol—more ethanol, in fact, than can be produced. According to the Environmental Protection Agency, U.S. plants are running at 930,000–940,000 barrels per day. Maximum daily U.S. ethanol capacity is 925,000 barrels per day. That's why the ethanol price rebounded sharply in October and is now higher than in the summer, when oil sold at $100/bbl.

On the supply side, few ethanol plants are coming on line because it is very difficult to get Renewable Identification Number (RIN) permits from the Environmental Protection Agency. So don't expect any major new plants in the next few years. This issue was discussed in detail during the question-and-answer session of the Great Plains' recent conference call.

[pavement13]

I got your message but I can't rely privately. But to answer your question, we saw in October when prices fall dramatically in ethanol, exports pick up significantly which props back up the price. Ethanol prices will be volatile, but because of the very limited supply, they will always be supported. There is essentially an unlimited supply of oil, so the drop won't be as quick to recover. Supply and demand determine commodity prices, not parity with oil. As long as the EPA continues to require a 10% blend and other countries like Brazil have ethanol mandates, the supply constraints due to barriers to entry will support the price.

[pavement13]

As a follow up to my last message, if these mandates weren't in place, ethanol would be forced to be priced so it's competitive with gasoline. But when it's forced to be blended due to government regulations, it should be priced strictly based on supply and demand. And more and more countries are instituting these mandates (China, India, etc), so demand should continue to increase.