Sugarcane is Sweeter, But VeraSun Energy Prefers Corn

• The Company: VeraSun Energy, one of the nation’s largest ethanol producers.
• The Filing: Form 10-Q filed with the SEC on August 11, 2008.
• The Finding: Net sales from ethanol increased $710.4 million, or 499 percent, to $852.7 million for the second-quarter ended June 30, driven by additional production from new capacity and higher ethanol prices. Nonetheless, escalating prices of corn and natural gas continue to depress gross profit, which declined 121 basis points to 7.1 percent as a percentage of sales.

The Upshot: Of the sales increase, $588.2 million was driven by a 214.8 percent increase in ethanol production to 256.5 million gallons, as a result of higher online capacity and completion of the April 2008 acquisition of U.S. BioEnergy. In addition, ethanol prices, on average, rose year-on-year 17.1 percent, or $0.38 per gallon, to $2.59 per gallon.

Corn is the principal commodity used as feedstock in its ethanol production process and comprises the biggest drain on gross profit, eating up almost 53 cents on the dollar of total cost of goods sold. Corn costs were $5.37 per bushel, or $1.90 per manufactured gallon sold for the second-quarter 2008, up from $3.62 per bushel, or $1.29 per manufactured gallon sold for the same period in 2007.

On a cost per gallon basis, natural gas and transportation expenses accounted for 55 cents for the quarter ended June 30, up 10 cents from the prior year quarter.

Looking ahead, VeraSun expects to add 550 million gallons of ethanol to manufacturing capacity in the second-half, taking annual production to 1.64 billion gallons by year-end 2008.

The Question: If crush spreads narrow, might U.S. ethanol manufacturers reconsider sugar cane and/or grass-based feedstock as attractive substitutes to corn-based ethanol?