Taking Stock of Ethanol Crops

In his fifth State of the Union address, President Bush finally fessed up, “…we have a serious problem. America is addicted to oil, which is often imported from unstable parts of the world.”

In reality, the United States has been hedging its oil exposure for many years with billions of dollars in investments across a wide range of alternative energy technologies. However, in announcing the Advanced Energy Initiative, which plans to up investments in clean energy research by 22 percent, the president’s main focus was on weaning America off its oil dependence by upping its use of ethanol to fuel automobiles.

America’s corn belt has been an enthusiastic promoter of ethanol derived from corn, but the government also wants to develop a market for cellulosic ethanol, the non-food parts of grains and other cellulosic material—such as “wood chips, stalks and switch grass”—that can be produced and burned with lower pollutant emissions and at a lower cost. The objective is to see the price of cellulosic ethanol competitive with gasoline within six years.

While ethanol-related stocks soared upon the early release of the State of the Union Address and Bush’s ethanol plug, there are, in fact, few pure ethanol plays. Nonetheless, the media has been abuzz with ways in which investors can get an ethanol fix.

Cellulosic technology—Fortune magazine cites several biotech companies that are improving the cost and efficiency of producing ethanol with low-cost enzymes that speed up the fermentation process. It is not easy for the individual investor to invest directly in these companies today. Genencor went public in 2004 but is now part of Danish food and feed producer Danisco. Canada’s Iogen Corporation is partly owned by Royal Dutch Shell, clearly an oil over an ethanol play. However, do not be surprised to see spin-offs and IPOs to tap the growing potential in ! the bio-enzyme market. It is a safe bet that BC International, part of Vinod Khosla’s growing ethanol venture capital portfolio, Khosla Ventures, is being prepped for a private sale or public offering.

Biorefineries-Pacific Ethanol, the only biorefinery pure play, was the media darling Monday as it soared ahead of the president’s address. It also was the first stock to fall amidst the profit taking in alternative energy-related stocks that followed. It may be worth riding out the volatility, though, as the West Coast’s largest ethanol producer brings five more plants online.

Farm equipment-MSNBC has been sweet on Deere (DE) and Agco (AG) this week; both companies expect to see high demand for the machinery that plants and harvests biofuel feedstocks.

Corn and ethanol marketers- High oil prices and advanced technologies that are driving down the costs of producing ethanol will continue to contribute to attractive margins.

The best ethanol play is likely grain futures. Ethanol futures this week were moving on hard supply and demand numbers rather than the presidential-speak that boosted alternative energy stocks. The Chicago Board of Trade launched a corn-based ethanol futures contract in 2005.

This blog does not endorse the specific stocks mentioned. Stocks are cited for the express purpose of supporting the discussion of general investment trends.