The technology behind Ceres Inc. is proven, if sophisticated. The small Thousand Oaks firm develops genetically engineered seeds, with a focus on sweet sorghum. The crop harvested from those seeds is refined into ethanol, a fuel used in vehicles. But ultimately the company is like most other agricultural outfits – it can’t research its way past the weather. At the end of the day, Ceres needs rain, which it hasn’t received. The company’s fate is currently tied to Brazil, where the vast majority of its sweet sorghum crops are planted. But weather in the South American country has been especially dry. Investors are not pleased. Since going public in a $65 million initial offering in February 2012, Ceres’ two full seasons of planting in Brazil haven’t lived up to expectations. Now the stock is down nearly 90 percent from its $13 IPO price. Shares closed at $1.47 on Sept. 11. “There’s no question Ceres is behind relative to where investors expected it to be,” said Pavel Molchanov, an analyst that covers the company for St. Petersburg, Fla. brokerage Raymond James & Associates Inc., who has the equivalent of a hold rating on the stock. “But the company was not guided to earnings at this point in its development. It’s still in the burning cash phase,” he added. Quarterly reports have reflected the company’s struggles. It has yet to post a profit and in its second quarter report in July, Ceres had a loss of $9.3 million, almost $1 million more than the same period a year earlier. Revenue was just $1.4 million. In total, it has lost about $60 million since its IPO, but still has almost $19 million in cash on hand and just $130,000 in debt. And in an Aug. 31 regulatory filing, Bamco Inc., an affiliate of New York investment management firm Baron Capital Group Inc., said that it had sold more than 1.34 million shares, leaving it with just 250,000 shares, a 1 percent stake. Bamco, which is controlled by Robert Baron and had been Ceres’ seventh largest investor, did not give a reason for the sale. Still, Wall Street is hardly calling Ceres a bust. None of the seven analysts who follow the company are recommending investors sell, and four have the equivalent of a buy rating, according to Bloomberg News. One analyst still urging investors to load up, Caleb Dorfman at Houston investment bank Simmons & Co. International, said 87 percent of the cars in Brazil are flexible-fuel vehicles, which are capable of running on alternative fuels such as ethanol derived from sweet sorghum. And given that Brazil is an emerging economic power of about 200 million people, even a slice of that market could mean big business for Ceres. “They are still early in the development stage, so earnings are sort of secondary,” Dorfman said. “And the whole market for this is in its infancy.” Ceres Chief Executive Richard Hamilton was not made available to comment for this story. But Gary Koppenjan, director of investor relations, said in an email that the firm is working on staying effective in adverse weather conditions. “Weather presents both challenges and opportunities,” he said. “We are also working on traits that provide greater drought tolerance.” Growing problems Ceres was founded in 1996 by a group of investors including its current chairman of the board Walter De Logi, who served as chief executive from Ceres’ founding through 2002, when he became chairman and Hamilton took over the position. De Logi has worked in alternative energy for decades, serving as chief executive of Plant Genetic Systems from 1986 to 1996, a plant biotechnology company that was eventually sold to a company owned by German conglomerate Bayer AG. Sweet sorghum is a type of grass with high sugar content and stalks of the crop can grow 15 feet high or more. Ceres sells its bioengineered sweet sorghum seeds to farmers and mills, which can ferment juice squeezed out of the stalk and convert it into ethanol. Ceres believes it has a role in Brazil’s ethanol industry, even though sugarcane supplies the vast majority of the country’s ethanol and is harvested about 200 days a year. Sweet sorghum can only be harvested for about two months, but could fill in for times when sugarcane is not available and demand is high. Its operation in Brazil began about two years ago through its wholly owned subsidiary, Ceres Sementes do Brasil in Sao Paulo. “There is broad interest and support for the sweet sorghum opportunity from ethanol mills as well as the government,” said Koppenjan. But Adhemer Altieri, communications director at Brazilian sugarcane industry association UNICA, said the ethanol industry in his country is huge at $40 billion. More than 90 percent of new car sales are for flexible-fuel vehicles. He noted sugarcane is refined into fuel at all 400 mills in the country, while sweet sorghum is little more than an experiment. “Sure there’s a demand, ethanol has been a part of life in Brazil for decades,” he said. “But I don’t think there’s enough of a volume yet to consider it any sort of shift.” Regaining confidence Dorfman, the analyst from Simmons & Co., said Ceres will have a lot riding on the next couple of years. Due to the crops’ lackluster performance, farmers in Brazil are hesitant to plant large amounts of the sweet sorghum seeds. “If companies can get comfortable with the crop next year and see some success, you could see the potential for a large ramp up in 2015,” he said. And to penetrate the U.S. market, Ceres would have to compete against the corn industry, which accounts for nearly all U.S. ethanol production. There also has been the development of fracking technology in oil and gas exploration, which has unleashed huge amounts of domestic gas. “Anything having to do with alternative sources has been impacted by fracking and the cheap natural gas. Everyone looks at that as being near limitless,” said Jeffrey Volenec, past president of the Crop Science Society of America in Madison, Wis. and professor of agronomy at Purdue University in West Lafayette, Ind. “But sweet sorghum is easy to break down and completely renewable, so it’s a great opportunity.” Ceres’ potential for growth in other areas of plant technology also is limited. The company received a $3.5 million grant in December to help increase rice yields in Asia from the U.S. Agency for International Development. Also, it is working on products for the next generation of biofuels, but both those endeavors are years from bearing fruit. Another problem may be one of perception for investors. Analysts have the company listed and covered as an energy crop company, an agricultural firm and even a biotech startup. And the strange thing is that all these varying descriptions have some foundation in reality. In essence, Ceres is a combination of all three. The company produces seeds in the U.S., Puerto Rico, Bolivia and Brazil. It also operates a 1-acre seed warehouse in Amarillo, Texas. And it’s a small firm, with only about 100 employees. But like any other company, good science and novel markets won’t trickle down to the shareholder – unless a company makes money. “There isn’t anything drastically wrong with its business,” said Molchanov, the analyst from Raymond James. “It’s ultimately a question of execution. So far, the execution has been relatively poor.”
Growing Pains?
