Sometimes it's nice to revisit your old hangouts and reminisce. Investors in first-generation corn ethanol producers, however, just wish they could revisit their money.

The three publicly traded refiners we've been tracking over the past 18 months are moribund. Two—VeraSun Energy Corp. (Pink Sheets: VSUNQ) and Aventine Renewable Energy Holdings, Inc. (Pink Sheets: AVRNQ)—are bankrupt. The other, Pacific Ethanol, Inc. (Nasdaq: PEIX), is solvent in name only; its four operating subsidiaries have all filed Chapter 11 petitions, while the holding company stares at the prospect of standing before the bankruptcy bench itself. So what happened?

Margins Improving, Revenues Still Falling

It's ironic that one of the major factors leading to these companies' woes has improved over the past six months. Since May, the gross dollar yield obtained from the conversion of corn into fuel has risen fourfold, but it's too little, too late.

That's because the margins were so thin at the outset. Crushing corn into ethanol yielded only 37 cents a bushel[1] at the beginning of May, when corn was contracted at $4.14 a bushel, leading to a gross margin of just under 9 percent. But the price of ethanol has since risen 28 percent, while corn's price has fallen six percent, so margins have improved. At last look, the gross yield was $1.88 per bushel, or 48 percent.

Ethanol Vs. Corn

But although margins may be wider now (yet still nowhere near the spreads obtained when these refiners first came online), much of those revenues aren't being realized, due to production shutdowns or asset sales.

For example, seven of VeraSun's ethanol plants are now cranking out blending components for Valero Energy Corp. (NYSE: VLO). In a deal that closed this May, the nation's largest oil refiner swooped in to snatch the ethanol plants from VeraSun's bankruptcy estate.

Valero's not the first of the oil majors to embrace biofuels; big oil has been looking at adding integrative ethanol components to its operations for some time. For example, Royal Dutch Shell plc (NYSE: RDS-B) stepped into the biofuels arena back in 2002 with an investment in a Canadian company that brewed ethanol from plant waste. Chevron Corp. (NYSE: CVX) has partnered up with a forest products company to make fuel out of wood waste. Although ethanol currently represents about 9 percent of the nation's liquid fuel supply, that share is bound to expand in future years, due to federal mandates.

There's a fair amount of caution exercised in these deals, however, especially for projects devoted to so-called conventional ethanol made from corn. Corn-based fuel is energy inefficient, in part because it corrodes pipelines and therefore must be trucked to be blended with gasoline for motor fuel use. Valero, for its part, believes the former VeraSun facilities can be converted to accommodate the production of newer ethanol blends, including those made from feedstocks other than corn.

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