Ethanol plants are at risk of a "shake-out" of the kind which sent many into bankruptcy three years ago, Fitch Ratings analysts have said, in a report warning that a key battle for cotton prices has yet to come.
The rating agency warned that a range of companies, from airlines to restaurant groups faced "increasing pressure on margins" from higher commodity prices ?a prospect causing growing unrest among bondholders.
"The potential for intensifying margin pressure later in the year exists, particular in light of the fact that firms already exhausted most of the easier restructuring options during the recession," Fitch analysts said.
However, the ratings agency was particularly cautious over prospects for ethanol producers who only last year began to emerge in earnest from downturn caused by the last spike in corn prices.
'Distinct risks'
A "rash" of bankruptcies in 2008-09 had not, as might have been expected, improved the sector's pricing power by curtailing production capacity, with failed ethanol plants typically re-emerging under new ownership.
The industry also faced waning political support, with opposition "high" to renewing tax breaks.
And with corn accounting for 60-70% of costs, producers had only limited ability to sidestep the jump in corn prices since June.
The hedging which, according to the US Department of Agriculture, has protected plants until now from higher corn cost "presents its own distinct risks", Fitch said, noting the example of VeraSun Energy, which collapsed after locking in corn at peak prices in 2008.
Diversified groups, such as Archer Daniels Midland and Valero Energy, reliant on ethanol for only a portion of profits were the "best positioned to handle volatility".
'Uncertain reaction'
Fitch added that department stores had yet to feel the brunt of the jump in cotton prices to a record high of more than $2 a pound, and would not until the autumn face the need to raise prices of clothing which account for 50-60% of sales.
