How Solar PV is like Ethanol

Posted by Tom Konrad at 10:27 AM | Permalink | Comments (1)

Tom Konrad, CFA

Representatives of Dyadic International (DYAI.OB) were quite upset when I called the company "A Stock to Avoid."  The company has now released audited financial statements for 2007 and 2008.  The lack of such statements was one of the several reasons I said to avoid the company.  Should I retract my article?

Mark Emalfarb, Dyadic International's CEO sent me an email this morning with attached audited financial statements for 2007 and 2008, saying,

I hope that you will act responsibly as journalists and publish a retraction to your article "A Stock To Avoid" which Tom Konrad admits below that he "did not do any in-depth research" before publishing his article.

May I suggest that you have the courtesy of speaking with someone in the know and get the facts next time!

I have no intention of retracting the article, because the company has not been able to find any factual errors, which I would be happy to correct if there were any.  

In that article, I looked into the company, and found just enough information to know that I was not interested in investing.  To Mr. Emalfarb, I respond that he got what he (or his representative) asked for.  The only reason I looked into the company in the first place was because someone at the company had, unasked, added me to the company's email list for press releases.  I presume they hoped for free publicity.  Perhaps they should have checked that I actually liked their business before adding me to their list.  I have written numerous articles which are skeptical about cellulosic ethanol over the years.  A little research of their own (typing "cellulosic ethanol" into AltEnergyStocks.com's search engine, for instance) would have saved them the embarrassment.  For Mr. Emalfarb and curious readers here is a sampling of what they would have found:

• Cellulosic Ethanol vs. Cellulosic Electricity (January 2008)

• Cellulosic Ethanol vs. Cellulosic Beef (July 2007)

• Cellulosic Ethanol and Advanced Biofuels (June 2009)

The company proudly links to an interview with Renewable Energy Magazine, on their website.  I can only conclude that they object not to my lack of in-depth research (since the interviewer did less) but that I did not do any in-depth research and did not have anything nice to say.  Unlike John Petersen, I was not very well brought up: When I can't say something nice, I sometimes shoot my mouth off anyway.  

Because I'm skeptical of the whole cellulosic ethanol industry, I have no intention of doing the in-depth research Mr. Emalfarb claims to want.  No one is paying for the time that I could otherwise spend researching better investment prospects.  For readers willing to devote their own time, I suggest that they first read my previous short article and acquaint themselves with my other reasons for avoiding the company, and then read the recently released audited annual reports, which are available here [pdf.]

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:08 AM | Permalink | Comments (0) | TrackBacks (0)

Tom Konrad, Ph.D., CFA

Dyadic International hopes to use proprietary gene discovery to revolutionize cellulosic biofuel and pharmaceuticals.  Investors should stay away.

Dyadic International (DYAI.PK) says they are applying their "proprietary enabling biotechnologies for multi-billion dollar markets in industrial enzymes, biofuels and biotherapeutics."  A very exciting prospect, and just the sort of thing I've long warned investors to avoid.  In short, they are a company with gigantic claims and not a lot of track record to back them up.

Why I Care (I don't, really)

In our survey of readers, one respondent asked that I write more about stocks to avoid.  Dyadic added me to their press list a couple months ago, probably in response to my popular article on investing in advanced and cellulosic biofuels.  If so, it's ironic. If anyone at Dyadic had read the article and thought about it a little, they would have known that I would not recommend anyone buy the stock, just based on their business plan, let alone the disturbing information I found in their press releases (see below.)

Recently, Dyadic sent me an email starting with the line "As you have shown a prior interest in Dyadic International..." (I didn't.) I decided to take a look at the company.  Here is what I found:

Out of Date Filings, Possible Previous Securities Laws Violations

• The company has not filed an annual or quarterly report since 2006, at which time they were losing money.  Lacking more recent information, we can only assume that the financial situation has worsened.  Because of this, Dyadic does not even meet the minimal requirements to be on our stock list.
• The company has recently reached an agreement with the SEC in which they agreed to cease and desist from violating certain securities laws.
• They recently hired an auditor and they "plan" to begin filing financial reports on PinkSheets.  This would be good news, to someone who believes those plans are credible.  

Conclusion

At this point, I stopped looking.  Why would anyone buy stock in a company that is not providing current information, and whose promises sound too good to be true?  Given limited cash, why not invest it in a company that provides current information and promises to do something useful but believable?  Here are 39 green companies which do just that.

UPDATE: Dyadic has now published audited financial statements for 2007 and 2008.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:26 PM | Permalink | Comments (4) | TrackBacks (0)

There's much excitement about second generation biofuels made from cellulosic feedstocks and algae, be they cellulosic ethanol, biodiesel, biocrude, or electricity from biomass.  There will be winners, but they may not be the technology companies.

Tom Konrad, Ph.D., CFA

At the 2009 Advanced Biofuels Workshop, there were two major themes: developing new feedstocks, especially algae, and the development of new pathways to take biomass into products such as biocrude, which can be used in exiting oil refineries.  

Big Market, Many Competitors

The current federal Renewable Fuel Standard requires the use of 36 million gallons of biofuels, including at least 21 billion gallons of advanced biofuels by 2022.  Advanced biofuels are defined as fuels other than corn-based ethanol and with greenhouse gas (GHG) emissions half that of the fuel they replace.  This creates a gigantic market, so large that some industry observers doubt if it can be met.

Many of these fuels will not be ethanol, a fuel which poses problems with the current fuel transport and distribution infrastructure.  Even for cellulosic ethanol, there are several different processes that different companies are pursuing: Acid hydrolysis, Thermochemical conversion, Biochemical conversion, and Consolidated Bioprocessing, and combinations of these three used in various combinations by various companies.  

Potential products not only include fuels such as ethanol, butanol and higher-carbon alcohols, but biocrude which can be fed into existing refineries.  Other potential products include plastics, and many other products currently produced by the petroleum based energy industry.  

The bewildering array of potential pathways and products make for a very challenging investment landscape.  An investor in any company would need a lot of confidence that the company they are investing in will be able to take their chosen feedstocks to a potential salable product at lower cost than all the competitors out there.  Unsurprisingly, nearly every company feels it has the best process.

Lessons From the First Generation

With so many variables, I find it's often better to take a step back to see what impact the development of the advanced biofuels market will have on the larger economy.  Will there be impacts on the broader economy which will be independent of the eventual mix of products and processes in the advanced biofuels market?

We can learn from the experience of first generation biofuels.  

Below is a chart from William Thurmond, President of Emerging Markets Online and author of Algae 2020: Biofuels Commercialization Outlook, and Biodiesel 2020: A Global Market Survey:

It shows how biodiesel feedstocks (Palm oil, rapeseed oil, and soybean oil) are increasingly following diesel prices.  There is a massive overcapacity for biodiesel production in the EU, as shown in the shown in the following graph, also from Thurmond:

With this excess capacity, if biodiesel feedstock prices were to fall relative to diesel prices, biodiesel producers would purchase feedstock either until they fill their excess capacity, or until feedstock prices rise again to a point where it is no longer profitable to run additional biodiesel capacity.  Put another way, biodiesel producers cannot be more than marginally profitable (and may be unprofitable) so long as there is significant excess capacity.  Excess capacity can only be filled if additional feedstock can be found, or plants permanently shut down.

What does this mean for advanced biofuels?  As advanced biofuel technologies advance, feedstocks prices are likely to rise.

Why Advanced Biofuels are Different

Unlike with biodiesel and starch based ethanol, many second generation feedstocks are not generally internationally traded; many are actually waste streams from other processes, such as yellow and brown grease (the restaurant industry), corn stover, forest trimmings (the lumber industry,) and even municipal waste.  The more that these feedstocks are internationally traded and easy to transport (such as yellow and brown grease), the more likely they are to follow the patterns seen in the feedstocks for first generation biofuels.  According to Thurmond, this has already happened with yellow grease, and the rise in price was a surprise to most biodiesel industry participants.

Many emerging biofuels companies have learned this lesson.  ZeaChem's strategy specifically includes setting up a long term contract to purchase feedstock from dedicated energy plantations because "the availability of sustainable, cost effective raw materials is essential for an economically viable cellulosic biofuel facility," according to Andy Vietor, ZeaChem's CFO, who spoke at the workshop.  BioFuelBox Corporation is tackling the same problem from a different direction: by developing a biorefinery that they expect can produce biodiesel from a zero-cost waste stream (trap grease), but I'm not sure that they have completely absorbed the lesson.  Even trap grease will acquire some value if they can consistently make fuel from it.  I think they could improve their business model by selling their technology as a turnkey solution to the waste stream owner.

Investments and the "Everything vs. Fuel" debate

Investors who expect advanced biofuels to be successful should pay close attention to feedstocks.  Just as supply constraints for batteries will shape the electric and hybrid electric auto market, limited supplies of biomass will shape the advance biofuels industry.  

If an advanced biofuel company expects to make biofuel from an easily shippable commodity, such as wood chips, they'd be advised to stay away, unless that company also plans to contract for their supply of feedstock well ahead of time, and such agreements will probably constrain a company's ability to react to changing conditions.  Lack of flexibility can be fatal to start-up companies.

Companies which produce easily transportable feedstocks being considered by advanced biofuel companies stand to benefit from new markets for their products.  These include forestry companies (wood chips), waste management companies, and most owners of arable or marginal land.  Wood chips are likely to see price escalation even without the advent of advanced biofuels based on them.  Wood chips and pellets can be cofired in many existing coal power plants with only relatively inexpensive modifications, a process which offsets large amounts of carbon emissions at very low cost.  Biomass cofiring was the cheapest renewable energy opportunity identified in California's RETI study last year.  For an apples-to-apples comparison, the greater efficiency of electric motors means that electricity produced from biomass can propel an electric vehicle 81% farther than an otherwise comparable ethanol-fueled vehicle running on cellulosic ethanol produced from the same amount of biomass.

Furthermore, the existing biofuel industry may also find better uses for cellulosic feedstocks than turning them into biofuels.  I attended a session at the 2009 Fuel Ethanol Workshop the following day where gasification of cellulosic waste streams such as corn cobs or stover was presented as an economical way to reduce the carbon footprint of corn ethanol by displacing natural gas used in the production process.

The flip side of the feedstock equation is that industries which compete for feedstock with the biofuels industry are likely to be hurt by rising prices.  Advanced Biofuels may resolve the "Food vs. Fuel" debate, but they will be doing so by, at least in part, replacing it with a new "Everything vs. Fuel" debate.  For instance, the paper industry (especially those companies which do not own forestry assets) will likely be hurt by rising pulp prices, like Mexicans who found they could not buy tortillas.  Recycled paper pulp is an excellent cellulosic feedstock as well.  On the other hand, businesses which produce or collect paper waste may find more robust markets for their products.

This line of reasoning might also give you pause if you're considering warming your home with a wood pellet stove.  The advent of biofuels from wood chips will mean that the price of your wood pellets will start to track the price of petroleum, just like the price of vegetable oils are already doing.   From an economic perspective, heating with wood pellets may become not much different than using heating oil.  We saw the start of this trend last year with wood pellet factories starting to price dairy farmers out of the market for sawdust in the Pacific Northwest.

Algae to the Rescue?

Algae is the only feedstock that has the potential to be productive enough to supply most of our current liquid fuel demand, but it is still unproven.  Most current algae to biofuel production methods cost an order of magnitude more than the fossil fuels they hope to displace.  This is why most algae biofuel companies are currently targeting higher-value synthetic bioproducts, such as animal feed additives.  But Will Thurmond believes that some algae companies may be cost competitive with fossil fuels as early as 2012, but only in his most optimistic scenario; the process of bringing down costs could take much longer.

There are now three publicly traded Algae companies.  I've previously written skeptically about PetroSun (PSUD.PK,) and Thurmond told me, "Petrosun appears to doing well in the news, but if you examine their financial statements, it's a different story."   More recently OriginOil (OOIL.OB) and PetroAlgae, (PALG.OB) have also gone public.  PetroAlgae is the industry high flyer, and is doing some interesting work growing duckweed, at least according to a hallway conversation.  Unfortunately, the stock is so thinly traded that it would be difficult for even a small investor to get in without significant price impact.  OriginOil shows better volumes, but they, too, are early in their technological development.

Algae has great promise, but the only investments currently available to the retail investor are very early stage.  Even if we were to assume that the algae industry will quickly meet its potential, these three companies only amount to a tenth of the current players, and the rigors of being a public company are not the best environment in which to develop an emerging technology.  Algae could well be a monumental success story, but that does not mean that any of these three companies will participate in that success.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 03:01 PM | Permalink | Comments (3) | TrackBacks (0)

If the Ethanol industry is going to rehabilitate its image, it needs to understand the issues.

Tom Konrad, Ph.D., CFA

In his opening remarks at the 25th annual, 2009 Fuel Ethanol Workshop, Mike Bryan, the CEO of BBI International called on the attendees to "Take back control of the [fuel ethanol] industry's image."  

It's no secret that the ethanol industry is having problems, mostly, in my mind, due to a classic commodity squeeze: the industry has no pricing power either for its inputs (corn and natural gas,) or its products (ethanol, with a price which closely tracks gasoline.)  This is why, and Mr. Bryan said, the industry could not get plants financed a year before the financial crisis.

Conspiracy or Reality?

For Mr. Bryan, this is about jobs.   He went on to say that he is "not a conspiracy theorist, but a realist,"  but undermined his claim to realism by going on to say, "Tell [the people who say we were building too fast,] "about the people who need those plants for jobs.  Tell that to the community that wants to build an ethanol plant in their community."  Profitable businesses create secure jobs; unprofitable businesses create insecure jobs.  Just as I recently pointed out that investors should not be buying stocks because they need them to go up, the ethanol industry should not be building ethanol plants because they need the jobs.  

Ethanol plants have been a great boon to rural economic development.  As a local value added product to low value commodity corn, they keep more jobs in the community, which in turn create more jobs through economic multiplier effects... but only if the ethanol plants are profitable.  If farmers invest in a local ethanol plant (50% of ethanol plants are locally owned), but that plant cannot be run because they cannot sell the ethanol for the price of the corn, there will be no jobs from the plant, and the investors will lose their investment as well.  Perhaps they should have considered investments in a locally owned wind farm, or making their farming operations more energy efficient.

In short, jobs are not created by, and do not justify unprofitable investments.  There are simply better uses for the money, both in terms of jobs and economic returns.

Is there a conspiracy?  Oil companies don't want to change the way they do business, and be forced to blend in ethanol, nor do they like the competition, even if it is only 7% of their business.  That's real money on the margin, even if land use constraints will not allow ethanol to entirely displace oil.  The food processing industry has even more reason to dislike fuel ethanol.  Although only about 10-15% of price rises in food are due to ethanol-induced corn price rises, ethanol makes a convenient whipping boy for price rises which arise from many factors, most importantly the rising price of energy.  But having people who don't like you does not make for a conspiracy.

Peak Oil

General Wesley Clark, Co-Chairman of Growth Energy, is not a conspiracy theorist.  He, too, is passionate about  the need to take back the industry's image in his keynote address.  For General Clark, ethanol is a national security issue, and I completely agree.   Peak oil means that oil will increasingly be sold at a premium, and as scarcity increases, producing countries will have increasing incentives for producers to keep this high quality liquid fuel for themselves.  

Although the most energy efficient way to power a vehicle is with electric power, batteries are too expensive and have too low an energy density to be practical for long trips.  We will continue to need liquid fuels to power longer trips.  As General Clark said, "Is there any doubt that that the costs of Iraq are related to?  This is about America’s need for imported oil.  It distorts our policy.  It creates friend about people who aren’t our friends; it makes enemies out of people who aren’t our enemies."

Carbon

Compared to the value of ethanol as a liquid fuel, arguments about carbon impact are de minimis.  Bob Dinnen, President of the Renewable Fuels Association an industry lobby group, was the most moderated of the general speakers.  Unlike the other speakers, I'm confident that his assertions can be backed up with studies.  He claims a 61% reduction in greenhouse gas emissions for corn ethanol compared to gasoline.  This is almost certainly the result of a best case analysis, but the worst case analysis are no more than a 30% increase in emissions, and with current technology, there is almost certainly some greenhouse gas savings.  Even if there is a slight increase in carbon emissions from corn ethanol, these extra emissions are likely to be minimal, and less than tar sands..  When it comes to greenhouse gas reduction, ethanol, even corn ethanol, is not the enemy.  The enemy of the human race, as Jim Hansen says, is coal, and while we environmentalists should be concerned about any lack of decrease in greenhouse emissions, we should not lose sight of the true enemy.  The ethanol industry as a whole agrees that they need to increase their efficiency and reduce their carbon emissions.  These should be measured as accurately as possible, but any green washing we see in the ethanol industry pales against that coming out of the coal industry.  Given limited political capital, this is where environmentalists should be focusing our efforts.

Food and Fuel

Ethanol is a domestic fuel, that puts corn to a much better use than high fructose corn syrup that contributes to growing epidemics of obesity and diabetes.  From a historical perspective, we pay hardly any part of our income for food.  Ethanol does reduce the price of gas, and the money we pay for that gas stays closer to home.  Given that, an increase in food prices from corn ethanol may still lead to a net gain for the average consumer, and the economic benefits of a domestic fuel should make us willing to pay for a small net increase in our overall food and fuel budget.  

If we're concerned about Ethanol's carbon footprint, we might pause to consider the carbon impact of our food.  If a rise in food prices results from corn ethanol, the decrease in our collective carbon footprint from what we eat.  Whatever indirect land use impact we attribute to ethanol, we should be attributing a similar indirect land-use impact to the soda we drink that's so full of high fructose corn syrup.

Stop Exaggerating

While environmentalists should not be joining oil companies and food processors by piling on the ethanol industry over its imperfect environmental record, the Ethanol industry could do itself a lot of good by avoiding the exaggerated claims they are prone to.

General Clark said, "There’s plenty of all we need to have all the fuel we want and all the food we want," and Mr. Bryan said something similar.  This is simply false.  The US currently has about 200 million acres devoted to corn and soy.   Corn Ethanol can produce about 200 gallons per acre, while soy biodiesel can produce about 50 gallons per acre of biodiesel.  If all this land were converted to fuel production with corn ethanol (incidentally degrading the land and increasing fertilizer usage), that means we could produce 10 billion gallons of ethanol, the equivalent of about 8 billion gallons of gasoline per year, or about half a million barrels per day.  The US consumed about 20 million barrels of crude per day in 2007, and had to import about 10.5 million barrels of that.  Not all of our imported oil was used for gasoline, but not all of our corn and soy can go to displace oil, either.

The numbers don't add up.  The Ethanol industry undermines its own credibility with these exaggerated claims.

The industry also uses deceptive statistics regarding indirect land use impacts.  Bob Dinnen said that deforestation has to do with grazing and logging, not Ethanol.  They made much of the fact that deforestation has decreased as ethanol production has increased.  Correlation is not causation, nor is anti-correlation lack of causation.  According to a recent article in The Economist, "rate of deforestation tends to move with prices for beef and soya, with a lag of about a year."  This is because the land is cleared for grazing, and then sold on to soy farmers..  As Biodiesel producers discovered to their dismay, rising corn prices leads farmers to shift land from soy to corn, which in turn leads to rising soy prices, and hence to rising deforestation a year later.

As I left the conference on the first day, I walked by Robert Zurbin, author of Energy Victory: Winning the War on Terror by Breaking Free of Oil.  He was sitting in the main lobby with a stack of books to sign.  I had caught the end of his talk an hour before, in which he spun a captivating and convincing yarn about how oil had been key to allied victory in World War II.  I walked up and told him how I only caught part of his talk, but liked what I had heard, and he encouraged me to buy the book.  I was tempted, but then he lost the sale: he told me that, if only 50% of cars were mandated to be Flex-Fuel, it would put a "cap on the price of oil."  While I agree with him that the increased choice would be good for consumers, and even moderate the oil price, there is simply note enough feedstock, either domestically or globally, and too many other valuable uses for that feedstock to cap the price of oil in the face of expanding demand (which is only likely to be restrained by price or economic downturn) and declining oil output. 

There are many good reasons to like Ethanol, even Ethanol from corn.  But it's only part of the solution: Ethanol is not the panacea, and it's not without adverse impacts.  It's also not always good business.  By acknowledging these weaknesses, ethanol advocates would do a lot to raise their credibility with many environmentalists who are natural allies with an industry taking real steps to reduce its environmental impact and enhance our energy security in the face of the much larger challenges of Peak Oil and Global Warming.

My impression is that the major agenda item on the industry's agenda is legislation requiting 50% of vehicles to be flex-fueled.  This would probably be a change for the better, definitely from an economic perspective (the added cost to the vehicle is fairly minimal.  Unfortunately, the use by carmakers of flex fueled vehicles as a loophole in CAFE standards serves to undermine environmental goals.  If the industry wants more environmental allies today, it will need to be clear than environmental goals will not again come second. I think most environmentalists would get behind a 50% or higher requirement for flex fuels vehicles if it were in conjunction with the closure of the flex fuel loophole in CAFE standards.

Posted by Tom Konrad at 07:50 PM | Permalink | Comments (0) | TrackBacks (0)

This entry continues a series on companies I sold as part of a portfolio cleanup prompted by the mess on Wall Street.  In the first entry I describe what I plan to do with the cash, and the second was about Carmanah Technologies.   UQM Technologies was one I didn't sell.

In May of last year, I took a look at competitive forces in the corn ethanol industry.  While I was rather negative on the industry at the time, when ethanol stocks fell in the summer and fall of 2007, I called the bottom much too soon, and decided to dabble in the industry.  I thought that Pacific Ethanol's (PEIX) strategy of arbitraging the costs of transporting corn vs. the costs of transporting ethanol and distillers dried grains would lend them some protection from industry overcapacity.  Whatever protection they might have had was not enough.  With current liabilities exceeding current assets, and operating cash flow from the last 6 months exceeding cash on hand, PEIX will probably need to raise new capital to stay afloat, something I doubt they can do on favorable terms in today's climate.

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 07:42 AM | Permalink | Comments (1) | TrackBacks (0)

The first and last word in any discussion of biofuels should always be "Feedstock."  Feedstock is the "Bio" out of which biofuels will eventually be made, whether it be corn, sugar, jatropha, algae, palm oil, switchgrass, forestry waste, or municipal solid waste.  

Before the era of peak oil, we lived in a world of plenty, which meant that we could squander energy, not only by driving Hummers, but by feeding energy intensive products such as corn crops to livestock, and by dumping "free" sources of energy such as garden waste and used cooking oil into landfills.

The era of cheap energy is over.  The signs are all around, and even peak oil deniers point to expensive-to-extract reserves such as deep water drilling, Canadian tar sands, and even Colorado's Oil Shale.   These sources of oil are not only more expensive to extract, they are are also more carbon-intensive, meaning that regulation of greenhouse gas emissions will raise their price further.

Commodity Squeezes

In terms of biofuels, I've long argued that there is simply not enough feedstock available, and that even if there were enough feedstock to replace all the oil products we use today, there are many other potential uses which will compete for the output of scarce land and water, such as a replacement for coal in electrical generation, and fodder for livestock.  Biodiesel producers may find that the best quality oil is bought up by refineries to make green diesel instead.  In fact, it seems that almost any form of biomass can be converted to Bio-crude and processed in a conventional refinery.  We'll even have to decide if municipal waste should be recycled, burned for electricity, or turned into cellulosic ethanol.

I'm unconvinced that anyone knows exactly how the limited feedstocks we have available will be used, or what process will be most efficient in converting them into their final form.  This makes it difficult to find a biofuel investment that I can be confident will succeed.  One biofuel technology after another has been caught by a commodity squeeze, first corn ethanol and now biodiesel makers.  Polyannaish investors expecting limitless supplies of feedstock for cellulosic ethanol should take note.  Higher commodity prices do not always lead to more supply.  Sometimes higher prices lead to lower demand, and the next boom could easily become the next bust.

The Sure Winner

The only sure winners from limited and increasingly valuable biomass will be the people who produce it: farmers, foresters, and (perhaps) trash haulers and recyclers.  What do farmers do when they have spare cash?  They buy farm equipment, quite often from Deere & Co. (NYSE:DE)  Few stock have ridden the biofuel boom as well as Deere, with the stock rising 400% in the last four years in a nearly uninterrupted uptrend, without the thrills and spills that have turned so many investors off of corn ethanol.  

The beauty of Deere as a biofuel investment is that there is no need to know what the biomass will be used for, or what form it will come in.  In nearly every scenario I can envision, Deere is likely to be a major supplier to the industry which grows it.  From algae to Jatropha, if Deere does not yet sell equipment to plant, tend, and harvest it, it seems a good bet that they will design one.  This technology agnosticism, combined with their wide dealer network in agricultural areas, makes the company seem to me the safest way to bet on biofuels as a trend.

Deere's close relationship with farmers also gives them an opportunity to profit from another up-and-coming crop: Wind.

Even with a 9-year run up, the stock currently trades at a trailing P/E of 22, and despite its construction arm, has not yet been hit hard by the turbulence in the housing market.  Since I expect the housing situation to only get worse over the coming months, a sharp decline in construction income or a continued broad market decline may be just what prospective investors need to pick up this solid biofuel play on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in DE.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:46 PM | Permalink | Comments (1) | TrackBacks (0)

Romm v. Kholsa

In a persuasive series of articles, entitled "Pragmatists vs. Environmentalists" (Parts I, II, and III) on Gristmill, Vinod Khosla provides the reasoning behind his "dissing" of plug-in hybrids, which drew the ire of Joeseph Romm.  Neither seems to think the argument is settled, and Joeseph Romm returns fire here.

As someone who knows as much about investing as Joe Romm and has written as much about Climate Change and Energy Policy as Vinod Khosla, I feel the need to jump into the debate and settle the matter.  (Will either of them will notice?)

To summarize, Khosla argues that cellulosic ethanol shows more promise for reducing carbon emissions than plug-in hybrids because he sees the barriers to plug-ins (the need to improve batteries and clean up the grid) as harder to surmount than the barriers to cellulosic ethanol (the improvement of conversion technology.)  In his words, 

I consider replacing coal-based electricity plants (50-year typical life) a much longer, tougher slog than replacing oil with biofuels (15-year car life).

Romm blasts back reiterating the multiple problems of corn ethanol in response to the first of Khosla's series, but has not yet responded to his point about cellulosic.  I thought I'd tackle the point about cellulosic myself.

There Isn't Enough Biomass

According to the National Renewable Energy Laboratory's From Biomass to Biofuels [.pdf] study, given all the available biomass in the United States, we will only be able to displace a little less than 2 billion barrels of oil equivalent a year.  But we currently use about 7 billion barrels of oil a year, so to displace all our oil usage, we would need nearly a 4x increase in fuel efficiency (not the 1.5x increase in internal combustion engines Khosla talks about.) 

Image source: NREL (From Biomass to Biofuels)

If the problem we're trying to solve is the need to displace petroleum as the transport fuel of choice (because of both climate change and peak oil), Khosla's "solution" can at best only tackle about 40% of the problem.

A Third Way: Cellulosic Electricity

Now let's return to Khosla's belief that it is simpler to replace the fuel (petroleum) in vehicles than the fuel (coal) in the grid, because of the longer lifetimes of coal plants than cars.  If you take a moment to review my article Ten Insights into Carbon Policy, you will note (insight #2), co-firing biomass in existing coal plants is more effective for reducing carbon emissions than turning it into liquid fuels.  You will also note (insight #9) that electric drivetrains are inherently more (5x) efficient than gasoline drivetrains.

Khosla may be right that we are not going to shut down old coal plants quickly (although my own utility, Xcel Energy, is planning to do just that.)  But even given an existing fleet of coal plant some biomass can be cofired with coal in existing plants with relatively easy retrofits.  Cofiring biomass is part of the Arizona Renewable Energy Assessment, which Black and Veatch predict would cost about 6-7 cents per kWh, and the limited amount included in the assessment is mostly due to Arizona's limited biomass resource.

According to the NREL report referenced above, converting biomass into cellulosic ethanol can be done at about a 45% efficiency (i.e. 45% of the energy of the biomass makes it into the fuel.)  In contrast, biomass can be converted at 33-37% efficiency [pdf] when cofired.  Combining this with the 5x improvement of drivetrain efficiency that comes with electric propulsion, and the same amount of biomass converted to what I'll call "cellulosic electricity" will take a vehicle 3.8x as far as it would in the form of cellulosic ethanol.  In a more recent article on Biomass, Vinod Khosla states "we consider [Energy Return on Investment] a less important variable than carbon emissions per mile driven."  If carbon emissions per mile driven are the most important variable, a 3.8x increase in miles driven on the same energy source will lead to a less than 27% of the carbon emissions per mile driven.

While cellulosic electricity is still not sufficient to displace all of our current petroleum use, it comes much closer than cellulosic ethanol.   Biomass cofiring with coal also tends to reduce SO_x and NO_x emissions.

Direct Combustion of Biomass

Biomass is a distributed resource, seldom available in large quantities in any one place.  This will be a problem for the cellulosic ethanol and cellulosic electricity industries.  Only a fraction of the available biomass will be close enough to existing coal plants that it will be practical to transport for cofiring.  Cellulosic visionaries see a system of distributed ethanol plants, yet that still leaves the problem of getting the fuel to market, since the current pipeline system for petroleum products has difficulty accommodating ethanol.  

On the other hand, while distributed direct- fired biomass generation of electricity is probably twice as expensive as cofiring with coal, distributed generation leads to opportunities for Combined Heat and Power (CHP), or cogeneration.   CHP can displace heating fuels such as natural gas, propane, or electricity, and often have combined efficiency from 50% to 80%.  In addition to the potential of displacing additional fossil heating fuel, cellulosic electricity is identical to the fossil fuel derived kind.  Therefore, unlike cellulosic ethanol, cellulosic electricity is completely compatible with the existing electric grid, leading to far fewer difficulties in transport.

A Cellulosic Sideshow

While I'm sure that economic techniques to convert various forms of biomass into ethanol and other liquid fuels will be developed, including by some of the companies in Khosla's portfolio, I think it is unlikely that a large fraction of what is likely to become an increasingly valuable and scarce resource, biomass, will be used for ethanol.  As a scarce resource with relatively inelastic supply, the price will rise to the point where only the most efficient uses will be profitable.  In most cases, cellulosic ethanol is unlikely to be one of the most efficient uses of biomass.

Khosla's dichotomy of replacing cars versus replacing coal plants is a false dichotomy.  While it is easy to retrofit gas cars to burn ethanol, it is also easy to retrofit coal plants to burn some biomass.  Given the dispersed and varied nature of the feedstock, both solutions are likely to coexist for a long time, but biomass cofiring has a little-heralded head start (unlike cellulosic ethanol, it is already progressing beyond the experimental stage), and cofiring's superior efficiency should allow it to keep, and widen its lead.

But Vinod Khosla will have little reason to weep.  His Concentrating Solar Power investments will also be fueling our cars, and his "clean coal" technology has the potential to produce carbon-negative cellulosic electricity.

Posted by Tom Konrad at 02:25 AM | Permalink | Comments (9) | TrackBacks (0)

Priming the E85 Pump

This Sunday, I had dinner with my aunt, who lives in Chicago.  She recently bought an Impala LT (she's a loyal GM customer), and was surprised when she received a $1000 debit card with which to buy E-85, the 85% Ethanol, 15% gasoline blend used in flex-fuel vehicles.  

I was not able to find any web reference to this offer (including on the GM website), but Google still had a cached article from HowStuffWorks.com which explained: To help defray fuel costs, GM, as part of its "Live Green, Go Yellow" E85 ethanol campaign, gives buyers of its flex-fuel vehicles a $1000 debit card toward the purchase of E85 ethanol fuel. (As of November 2006, the offer was good only to buyers in the Chicago and Minneapolis areas.)

To me, this is a sign of desperation, both on the part of GM to sell a car rated 16 MPG city / 24 MPG highway as "green." If GM really wants to help defray fuel costs, might I suggest not fighting increased CAFE standards?

It's also quite possibly a sign of desperation on the part of Midwest ethanol producers, who are producing ethanol at a record pace despite rising corn prices, but have difficulty transporting it out of the region because the corrosive and water-absorbing nature of ethanol means that it must be transported by truck or rail rather than pipelines.  I speculate that Ethanol producers and distributors contributed to these debit cards as a way to make new Flex-Fuel vehicle owners aware that they could use E-85 and to give them the incentive to seek out and become familiar with the stations where E-85 is available.

For Investors

Is this good news for Ethanol investors?  Possibly.  It's a clever way to overcome some of the biggest barriers to E-85 use: lack of familiarity with the fuel, and lack of awareness among flex fuel vehicle owners.  Ethanol producers have taken a beating in the stock market, but if this campaign and others like it are successful, they may spur demand for ethanol in precisely the region where we have over-capacity.

Investors should not consider ethanol stocks to be particularly green, but ethanol does begin (in a small way) to address the problem posed by peak oil: how do we get liquid fuel from other sources which we can use in our current car fleet?  So an investor more concerned about peak oil than global warming might consider taking another look at ethanol stocks now that they're selling at much better prices than they were just a few months ago. However, I still prefer producers based outside the Midwest or ones that also own the corn they use.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 03:51 PM | Permalink | Comments (2)

One of the keys to staying ahead of the game in money management is lateral thinking.  I start with the trend, and then try to think of industries or companies that might benefit, but are not on everyone else's radar.  With Peak Oil-driven demand for biofuels, regular readers know that I consider the people who produce the feedstock (farmers, and industries whose waste can fairly easily be converted into biofuel) to be the most certain winners. 

One direction this chain of logic has taken me is to forestry companies.  I'm far from a forestry analyst, so I decided to take small stakes in a few of the more sustainable forestry companies.  When it comes to wood products, the gold (or is it green?) standard for sustainable certification is the Forest Stewardship Council's.  Do not be fooled by watered down industry sponsored pretenders like the Sustainable Forestry Initiative.  Last year, to find sustainable companies, I went to the FSC's list of certified forests, and looked for large numbers that were owned by public companies.

The companies I came up with: Domtar (NYSE:UFS), Tembec (TMBAF.PK), Cascades, Inc. (CADNF.PK), and Potlach (NYSE: PCH).  I later added Catalyst Paper (CTLUF.PK) to my list when reading a news story that, as an aside, mentioned them as a sustainable leader in the Canadian wood and paper industry.  

Scientific?   Not at all.  I consider my investments in sustainable forestry as a diversification with an interesting alternative energy long term upside.  Needless to say, my investments in each company are small.  The ones that didn't make it into the Energy Tech Stocks Interview were ones that had slipped my mind.  I did not end up purchasing them due to the price movements at the time (i.e. my other limit orders executed first.)

I'd love to see comments from readers who know more about sustainable forestry than I do... I'm sure that there are some stand-out forest stewards that I missed when I put together this little diversification.  I personally expect the subprime mess to lead to a prolonged housing slump, at which time even further depressed forestry companies may be excellent bargains... if they are not bankrupt.

DISCLOSURE: Tom Konrad  and/or his clients have positions in the following companies mentioned here: UFS, PCH, CTLUF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:04 PM | Permalink | Comments (3) | TrackBacks (0)

In the most recent two installments of Energy Tech Stocks' interview with me cover my views on transmission stocks, and biofuel stocks.  Readers of AltEnergyStocks know that I am a big fan of electricity transmission, a theme I keep coming back to.  You also know that I have a very ambivalent relationship with both ethanol and biodiesel.  So I liked Bill's transmission article, but I just wasn't able to convey to him the subtleties of how I feel about biofuels.  But he got one thing right: the owners of biofuel feedstock are likely going to be the biggest winners.

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

While you're on the Energy Tech Stocks site, read a little about trading of wind power futures (here and here.nbsp; While I personally have no interest in speculating in wind futures, I predict this will be a great boon to wind farm owners and climate scientists everywhere.  I also predict hedge funds which will use strategies based on emerging inverse correlations between wind power futures and natural gas futures, probably sooner than anyone might guess. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 02:17 AM | Permalink | Comments (0) | TrackBacks (0)

The Future is Cellulosic

It is now widely accepted that the future of ethanol is cellulosic: Rather than distilling corn for ethanol to fuel our cars, accepted wisdom is now that we will be able to replace a large fraction of our current fuel consumption with ethanol distilled from agricultural and forestry waste, as well as dedicated energy crops, such as switchgrass and hybrid poplar.  Cellulosic ethanol also has the potential to alleviate the greatest stumbling block of corn ethanol as a potential replacement of gasoline: that there is simply not enough of it.  Corn ethanol will only be able to displace a small percentage of total US gas consumption.  If the entire current US corn crop were converted into ethanol, it could replace less than 20% of current gasoline consumption.  More realistically, the National Renewable Energy Laboratory (NREL) projects that 4% of gasoline could be replaced without overly affecting corn prices. 

Recently, cellulosic ethanol has been much in the news.  POET recently announced that they were producing cellulosic ethanol from corn cobs and the fiber in corn kernels, while FPL Energy LLC signed a deal with Citrus Energy to develop a biorefinery to make ethanol from citrus waste.  Both of these plants avoid one of the biggest hurdles that cellulosic ethanol still has to overcome: the distributed and varied nature of potential cellulosic feedstocks.   POET will be working with waste that would otherwise have to be disposed of, while the FPL/Citrus Energy plant uses a citrus processing waste which "is available at the plant at no cost [and] with no transportation costs."  

In addition to cellulosic's transportation Achilles Heel, these two projects also show how far we are from tackling the true scale of the problem: POET's plant will deliver 27% more ethanol from an acre of corn, while the "ethanol from citrus peel could... replace about 1% of Florida's gasoline production."  So if these two technologies were to be scaled up to use the entire US corn crop and all available citrus processing waste, we still could replace less than 6% of US gasoline usage with ethanol from these sources.

The Size of the Problem. Source: National Renewable Energy Laboratory

The limited supply of agricultural and forestry waste is why cellulosic visionaries often look farther a field, to other sources of agricultural waste in addition to corn cobs and citrus, as well as to dedicated energy crops.  NREL estimates that while we can produce about 0.3 billion barrels (oil equivalent) of ethanol from corn, the biochemical conversion of inedible carbohydrate would be able to supply 1.1 billion barrels of oil equivalent, or about 17% of current oil consumption.

Using Non-food crops 

This leads inevitably to talk of switchgrass, and other "energy crops."  If land which is not currently considered suitable for conventional agriculture can be used to produce high-energy content feedstock for our ethanol plants, we will have a source of supply of fuel for our vehicles that does not impinge on our food supply.  One much discussed option is using Conservation Reserve Parcel (CRP) land to grow highly productive perennial  grasses such as switchgrass and miscanthus.   While miscanthus seems to be more productive than switchgrass, switchgrass has the benefit of incumbency: many of the existing CRP parcels are already planted with swithgrass, a North American native.  Another contender is a diverse mix of native prairie plants, which has more than twice the energy yield of any native monoculture.   

Before we can move to a system of growing energy crops, and transporting those crops to cellulosic ethanol plants, we first have to find a process of breaking down cellulose into something that can be easily fermented into fuel.  We can already accomplish this, but the sticking point remains cost.

DOE Cellulosic cost goals.  When I first saw this slide, I asked an NREL spokesman why they assume that the price of feed will drop to $34 per ton.  He replied that they had to in order to achieve DOE's cost targets.

There has been considerable progress in reducing the cost of conversion and enzymes.  One interesting pathway being explored is to adapt natural systems, such as enzymes from the guts of termites, or to use fungi to help break down resistant cellulosic material.   

Let Cows Eat Grass

Cows evolved to eat grass, including proposed energy crops such as switchgrass, which is already used as forage for livestock, and the more productive mixed prairie plants (including grasses.)   We don't have to wait until the technology for converting grass into ethanol becomes economic to use grass to increase ethanol production: Instead, all we need to do is to supply the grass to the cattle, and use the corn that they would have eaten instead to produce ethanol.

Feedlot operators will doubtless protest at the massive logistical problems of bringing hay, rather than corn, to feedlots where cattle are fattened. However, these logistical problems seem to me to be on the same order of magnitude as supplying that same grass to cellulosic ethanol plants, if it is too much to ask of the cattle industry to let the cattle "harvest" the grass themselves by grazing.

How much ethanol could we gain by shifting cattle feed to ethanol production?  In the 2005/6 season, 6.1 billion bushels of corn was used for animal feed, about 1.8 billion bushels of which went to feed cattle, compared to 1.6 billion bushels used to make ethanol.  Hence, we could double ethanol production by using corn currently fed to cattle.  And, since distiller's grains, a byproduct of ethanol production is usually fed to cattle, not all of the current feed corn would have to be replaced with hay to do so.

In addition to the logistical problems of getting hay to feedlots, beef producers have other objections to "finishing" cattle on grass.  First, corn-fed cattle can be fattened much more quickly than grass fed cattle (by as much as a year.)  In addition, corn feeding produces a juicer steak with more marbling than grass feeding.  Offsetting these advantages of grain fed cattle are the health advantages of grass fed cattle.  Grass fed cattle have much higher concentrations of CLA and Omega-3 fatty acids.   While the health benefits of CLA have only been demonstrated in animals to date, the American Heart Association says Omega-3 fatty acids benefit the heart of healthy people, and those at high risk of â€” or who have â€” cardiovascular disease.  These are the fatty acids for which wild fish are prized, and which some believe may be able to cure a wide variety of ills.

Finally, the same arguments that are made against corn based ethanol apply equally well to corn-fed beef, because they are essentially arguments against using corn, rather than against making ethanol.  For instance, the fossil energy used to grow corn is the same, regardless of use, and so this fossil energy is consumed equally if it goes into our cars or into our cows.  I have not done the calculations, but I expect that much of the benefit in terms of our personal carbon footprint which might be gained by giving up beef altogether might also be gained by eating grass-fed beef.  According to a recent Japanese study, over two-thirds of the energy in beef production goes towards producing and transporting the animals' feed.   Just as the feedstock for ethanol has a large effect on its energy balance, so does the feed of the cattle we eat.  

There may be other benefits as well, such as fewer dangerous E-Coli outbreaks.  The strain of E-Coli which put most of us off spinach last year only grows in the guts of grain-fed cattle, not grass fed ones.  

How it Might Happen

Rising corn prices are already making it less economical to feed corn to cattle.  Clearly, we are not going to see 1.8 billion bushels of corn a year diverted from cattle feed to ethanol overnight, but the changing economics are likely already having an effect.  As it becomes more expensive to feed cattle, a rational owner will look for alternatives, and grass will surely be one of these alternatives.  Over time, I expect to see cattle spending more of their lives grazing, and less at the feedlot.  I would not be surprised if this trend has already begun, and recent statistics show that new cattle placed in feedlots are down 15% from 2006 and 6% from 2005 for the month of June.  

Over the longer term, some feedlots and dairies will close as they are used less intensively, while others will shift to feeds which contain more distiller's grains and, eventually, hay.   Other potential substitutes for corn in feed include some of the other options which are being considered for cellulosic ethanol, such as corn cobs (which have long been fed to cattle) and stover.  All this will come at the price of more expensive beef and milk, but it will be less expensive than it would have been if methods remained unchanged, as well as healthier to eat.  We will probably eat less beef overall, and be healthier for it.

Investments

Companies hoping to use grasses as a feedstock for cellulosic ethanol plants may find themselves in unexpected competition with cattle, and so excitement around companies such as BlueFire Ethanol Inc. (OTCPK: BFRE) may be overblown.  However, to the extent that they plan to use feedstock which cannot be fed to cattle, a shift in cattle feeding should not effect them much.  BlueFire is currently focusing on urban landfill waste, something I hope no one is contemplating feeding to cows.  I do not know of any public companies that are currently focusing on grasses as a feedstock.

Conversely, the opportunity to double the amount of corn available to ethanol production may confound analysts who expect the ethanol boom to end due to rising corn prices.  I admit that I have also worried publicly about a commodity squeeze in corn (here and here).  Considering the recent gloom about ethanol producers due to rising corn prices, now may be a good time to make a contrarian bet on conventional ethanol producers such as Archers Daniels Midland (ADM), Green Plains Renewable Energy, Inc. (Nasdaq: GPRE), US BioEnergy Corporation (NASDAQ:USBE), VeraSun Energy Corp (NYSE: VSE), and Pacific Ethanol (PEIX).   

Corn ethanol is certainly not going to bring the United States anywhere near energy independence, and it does little or nothing for the fight against global warming.  It has, however, provided a relatively harmless use for the massive glut of corn created by US agricultural policy, at least in comparison to feeding ever greater amounts of corn to cattle and high-fructose corn syrup to humans.

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: ADM.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 09:13 PM | Permalink | Comments (3) | TrackBacks (0)

Last night, I attended a talk in the Rocky Mountain Institute's "Quest for Solutions" lecture series titled "Biofuels: Panacea or Pandora's Box?"  We were told that a video of the event will soon be up on RMI's website.  Most of us were probably there to hear Amory Lovins speak, and no doubt most of the news coverage of the event will focus on him.  Amory is a visionary as well as an engaging speaker, and Tom Foust of the National Renewable Energy Lab helped shed light on the science of biofuels, but for stock market investors, the speaker with the most useful insights was without a doubt Mark Wong, CEO of the private corn based ethanol company, Renewable Agricultural Energy (RAE). 

Here are some of his insights helped refine my perspective on the ethanol industry:

Ethanol Supply:

    There is currently an oversupply of ethanol on the market.  As evidence, Mr. Wong cited the fact that in recent months, ethanol blenders have been able to capture most of the federal government's tax credit, while in the past, most of this subsidy has gone to ethanol producers, a situation which attests to the increased bargaining power of blenders over producers which stems from the current overproduction.  He expects the current oversupply to worsen over the next couple years.   After the talk I asked him if he felt that his company could make a profit, given the oversupply he cites, and he felt it would be possible if oil says above $70 a barrel.  I told him that I wouldn't be surprised to see $90 oil before the end of the year and he agreed.

    If we can extrapolate RAE's economics to public ethanol companies, traders should think of ethanol stocks as leveraged bets on the oil price, similar to long term oil futures.  They are likely to swing between profit and loss mostly due to oil price movements, but the percentage change in profit or loss will be large compared to the percentage change in the price of oil.  Given that I think it is likely the price of oil will rise further (and possibly dramatically) this year, that would certainly be a reason for speculators to buy ethanol stocks, now that they have retreated from the massively inflated levels of 1-2 years ago.

Competitive Strategies:

    RAE is currently still in the process of adding ethanol plants.  Mr. Wong detailed several factors the company considers when choosing plant locations.  He mentioned the local supply of corn, access to rail transport, other uses of corn in the area, access to water, and local demand for distiller's grains, all unsurprising considerations.  Interestingly, RAE has chosen to reduce the ethanol yield they get from a bushel of corn in order to provide a better feed (in the form of distiller's grains with a higher percentage of carbohydrate) for livestock.  He didn't say it, but I infer that one factor in this decision is the current low profitability of ethanol.

    More surprising to me was his emphasis on the yield variability of nearby corn crops.  I would not have thought of this, and as such, I believe that it may be a useful too for gaining insight into the riskiness of public ethanol producers.  A producer working with a highly variable supply of corn feedstock would be considerably riskier than a producer with an assured supply.

The Future

    In the future, RAE plans to use anaerobic digestion on their lower value output streams to produce gas which can be used in the distillation process, which should increase the net energy benefits of their process.  Mr. Wong also brought up the idea of using fractination to separate the corn into various components before they process it, which he expects will allow them to improve process efficiency.  Prior to this, I had only considered fractination as an early step in the process of making cellulosic ethanol.  This interested me, because one of the pioneers in biomass fractination technology is PureVision, a private, Fort Lupton based company where I know the management, and this is an existing (as opposed to the nascent cellulosic ethanol market) where they can apply their technology.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:40 PM | Permalink | Comments (2) | TrackBacks (0)

The Great Ethanol Debate: Shoddy Economics all 'Round.

Like many environmentalists, I'm not a big fan of the ethanol industry, especially corn ethanol.  From a net energy standpoint, even advocates agree that you only get a little more energy out than the energy you put in (Energy Return on Energy Invested or EROEI of 0.9 to 1.5, depending on whom you ask... some say it's much lower.)  At this point, most environmentalists simply decide that ethanol isn't sustainable enough for them, and go back to talking about photovoltaics (EROEI around 8, PDF) and wind (EREOI 30-70, PDF).  The last two are from my calculations from numbers given as energy payback  (As an aside, I think most of these measures of energy economics are crude and only give a partial picture.  We should really be looking at energy net present value (NPV) or internal rate of return (IRR), analogous to economics NPV or IRR which would apply a discount rate to future energy flows, for all the same reasons we don't look at payback or similar measures in economics.)

If we did take a net present value approach to energy return on investment, we'd find that ethanol started looking a lot better, because we can use the ethanol as soon as it is made, a process which could happen within a year of the first seed of corn being planted, in comparison to solar photovoltaics, which, if they have an energy payback of around 4 years and last 30 years, will end up having and "Energy IRR" of around 12% (this number is for conventional crystalline silicon: Thin film and concentrating PV have potential to be a lot better because of lower energy use in manufacture), compared to an "Energy IRR" for corn ethanol (using a median 1.2 EROEI figure and a one year lifecycle) of 20% (although the uncertainty in this number is much larger than the uncertainty in the number for PV.) 

So the bigger problem for me is not Energy Payback, but the environmental damage associated with the way we raise corn.  Energy isn't everything.  I feel that the "low energy return" argument does not hold a lot of water.  My main problem with corn ethanol lies in the negative externalities of corn production, such as high water use, fertilizer runoff, and soil mineral depletion.  And then there's always the food vs. fuel debate, where even the IMF is weighing in.  

Is the ethanol industry a good long term investment?

Clearly, the debate on the possible benefits of corn ethanol is far from settled.  Regardless, ethanol has strong political support, and we can expect continued rapid increase in US ethanol production.  Does it follow that the industry will produce good returns for investors?  Will increases in production be accompanied by increases in profit, or will ethanol producers find they cannot sell their product at a price high enough to cover their full costs?  To answer that, we have to understand the competitive forces in play in the industry, which I will look at from Michael Porter's Five Competitive Forces Model.  The more and stronger competitive forces are at play, the less attractive the industry will be in terms of producing attractive returns on investment.  These forces are the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, internal competition, and the availability of substitutes.

Threat of New Entrants

Corn ethanol production is easy to establish.  Distilling grain into alcohol has been around for all of human history, and while the techniques have been refined, the basic production process is well known.  The remarkable number of new plants being built testifies to this. This is a big strike against the long term profitability of the industry.  

Bargaining Power of Suppliers

The major suppliers to the ethanol industry are corn growers and the suppliers of process heat (often produced by natural gas, but more innovative firms are using gas from anaerobic digestion of manure from cows which also eat some of the distillers grain byproduct.)  In most cases, these are commodities, meaning that neither the suppliers nor the ethanol industry has any real bargaining power.  I consider this a modest negative for the industry, but may give competitive advantage to firms such as Archers Daniels Midland (ADM) and the Andersons (ANDE) who have vertically integrated supply chains, as well as firms who can use renewable sources of process heat to lock in energy prices.

Bargaining Power of Buyers

Ethanol is also a commodity, but it has the interesting property that it can't be shipped through the same pipelines as other liquid fuels because it's water soluble.  Hence, ethanol must be transported by truck, rail, and ship to markets that do not currently.  To me, this means that ethanol producers in the Midwest are likely to have a much harder time than ones in California, such as Pacific Ethanol (PEIX), and Hawaii, where they now have a 10% ethanol mandate, but little or no local production, despite their large sugar industry. 

Internal Competition

See my comments above about internal competition in the US industry, but the 800 pound gorilla here (especially for states on the East of Gulf Coast) is imported ethanol from Brazil.  For the moment, that internal competition is contained somewhat by the United States' punitive tariff, but if the political will to maintain that fails, Brazilian ethanol's better price structure (and better energy returns, since it's made from sugarcane) would be traumatic for the industry.  In my mind, the internal competitive outlook is not very good.

Availability of Substitutes

Ethanol is a substitute for both gasoline and MTBE.  At the moment, much of ethanol's momentum is due to the ban on MTBE.  However, many consider ethanol to be a poor substitute for MTBE because of it can increase smog formation in some circumstances.  If a better oxygenator were found for gasoline, the prospects for corn ethanol on the coasts would likely be bleak.  In its E85 formulation, ethanol is touted as a gasoline substitute, and until cellulosic ethanol becomes economic (which would lead to a new set of problems for corn ethanol, and might happen much sooner than  expected), we can reasonably expect that gasoline will generally be more prevalent than E85.  So the economics of ethanol hinge on the lack of another substitute for MTBE, which currently puts ethanol in a good position on the coasts, where MTBE was formerly used, be puts the industry at the mercy of gasoline price swings in the Midwest.

Conclusion

Regardless of how you feel about ethanol from an environmental or net energy perspective, the prospective ethanol investor should be very careful about investing in corn ethanol producers at random.  As I have argued here, vertically integrated producers, Californian producers, and producers who use renewable energy based processed heat may have a competitive advantage over a generic Midwest ethanol plant, but such competitive advantages seem slim and could rapidly vanish due to outside events. 

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: ADM.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:20 PM | Permalink | Comments (3) | TrackBacks (0)

In the face of a declining overall energy market today, three of our favorite alternative energy stocks posted strong gains on high volume.

The Oil Services HOLDRs ETF (OIH) was down 2% and the PowerShares WilderHill Clean Energy ETF (PBW) was down 1.7%. Indeed, the vast majority of the energy stocks that we track were in the red. But bucking the trend were two energy stocks that we have profiled in the recent past and a third company that we will begin covering today.

First on the list is our favorite wind energy play, Welwind Energy International (WWEI). We recommended Welwind during October of 2006, when it was trading around $0.07. It closed today at $0.18, up 26% on 4X average trading volume. That is more than a 900% gain in the six months since we first initiated coverage on Welwind.

Next on the list of breakout stocks today is Nova Biosource Fuels (NVBF). Nova just announced a move from over-the counter to the AMEX, which will be effective on Monday, May 14. Nova recently held its official groundbreaking ceremony at the site of its planned biodiesel refinery in Seneca, Illinois. The plant is expected to have a 60-million-gallon per year biodiesel production capacity from locally generated, low-cost feedstocks, including rendered animal fats and oils and recycled vegetable and animal- based greases. Nova’s stock price increased by 4.5% today on 12X normal trading volume.

Our final stock is getting its first mention on Gold Stock Bull today. Despite being the darling of the ethanol investment community and attracting funding from none other than Bill Gates, we have been hesitant to recommend Pacific Ethanol (PEIX). We watched the stock quadruple during 2006 from $10 to nearly $45, but couldn’t see any fundamental justification for the rise and held off. PEIX has since retreated to around $15 in an overall downturn amongst ethanol producers.

So what is driving our optimism with Pacific Ethanol? A shift from hype to substance. The Sacramento, Calif.-based company swung to a first-quarter profit, earning $1.9 million, or 5 cents per share. During the same quarter last year, Pacific Ethanol lost $612,000, or 2 cents per share. This first-quarter profit was generated from revenue that more than doubled to $99.2 million from $38.2 million. Pacific Ethanol sold 37.5 million gallons of ethanol, almost twice as many as it did a year ago, and ethanol prices were up more than 20 percent.

Pacific Ethanol’s share price responded by climbing 9.1% on 6X normal trading volume. Despite fears by some investors of an oversupply in ethanol during the back half of 2007, we believe PEIX will continue pushing higher. We have a price target of $22 for 2007, which is a 47% increase from the current price. The chart below shows clear support at $15 and we believe a bounce off this price floor is imminent.

Pacific Ethanol currently has one plant operational, one plant about to open and three other plants under construction. The operational plant is located in Madera, California and has a capacity of 35 million gallons per year. It is the largest ethanol plant on the west coast.

Their second plant is being constructed in Boardman, Oregon and will also have a capacity of 35 million gallons per day. Construction is scheduled to be completed in the next few months.

Pacific Ethanol also has begun construction on three 50 MGY name plate capacity production plants that will open mid 2008. Magic Valley, Idaho will serve growing markets in the Intermountain West, while Pacific Ethanol’s Stockton, California and Imperial Valley, California plants will help meet the growing demand for ethanol in California.

The energy bill passed by Congress in 2005 requires an increase in ethanol use by refiners to 7.5 billion gallons by the year 2012. With Democrats now controlling both houses and looking likely to take over the presidency, we can only expect additional government incentive for alternative energies such as ethanol.

A significant portion of Ethanol demand is coming from the fact that states across the country have banned MTBE (Methyl Tertiary Butyl Ether), a fuel additive formerly required to increase octane levels of gasoline. MTBE has found its way into drinking water and many believe is cancer-causing. Ethanol is the only other commercially viable additive that will bring gasoline into compliance with state and federal clean air regulations. Consumption and production of ethanol has continued rising at a record pace and should be considered as part of any investment portfolio.

Good luck and happy investing!

Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.

Posted by Jason Hamlin at 11:22 PM | Permalink | Comments (0)

While New York's Mayor Michael Bloomberg was busy unveiling a package of measures aimed at making NYC green (including reducing CO2 emissions by 30% by 2030), the state's Governor, Eliot Spitzer, was making his reservations about corn ethanol known, as reported in the Globe & Mail.

This adds yet one more (powerful) voice to the chorus of those skeptical about the viability of the corn ethanol industry.

The article also notes that Dr. Dan Kammen, an influential Berkeley academic and advisor on climate change to California Governor Arnold Schwarzenegger, is also among those who doubt that corn ethanol is the best route to follow to deal with climate change. This likely means that at least one of Arnie's advisors on the politically-sensitive issue of climate change is advising caution on corn ethanol.

Finally, the article recognizes that even powerful foes in high places might not be able to curtail the progression of the "ethanol juggernaut".

Corn ethanol is a classic case of an investment story where one could be labeled as preferring "to be right rather than rich". As far as I go, I see enough red flags to convince me that there is something fundamentally flawed here. But I would definitely be interested to hear more from the "other side". In the meanwhile, I prefer to put my limited supply of money behind things that look fundamentally stronger.

Posted by Charles Morand at 07:35 PM | Permalink | Comments (0)

The International Monetary Fund released its Spring 2007 World Economic Forecast today.

Fuel Vs. Food

There is a short sub-section in Appendix 1.1 ("Recent Developments in Commodity Markets") that I thought might be worth sharing with you. If you download the PDF version of the report and scroll down to page 44, you will find the said sub-section under the heading "Food and Biofuels".

In it, the IMF notes that food prices (as measured by its own food price index) rose by 10% in 2006, driven partly by a poor wheat crop in certain countries but also by (mandated) demand for biofuels in the US and Europe (see graph below).

The report notes that, looking ahead, the prices of crops like corn and soybeans, which are the main feedstocks for ethanol (US) and biodiesel (Europe), respectively, should: (a) continue to rise and (b) begin moving in line with the price of crude oil, which is currently the case with sugar because of its role in the Brazilian ethanol industry.

About the recent news that US farmers are planning to plant more corn acreage next year, the IMF has this to say:

"For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise."

IMF economists also point out that the price of "partial substitutes" such as wheat and rice, as well as the price of meat and poultry, should trend upwards as a result of higher corn and soybean prices. Finally, high crude prices could place further upwards pressure on the price of corn because corn farming in the US is highly energy intensive.

The IMF - Not Especially Bullish on Corn Ethanol

It is the sub-section's final paragraph, in my view, that best captures IMF's view of current US and European biofuels policy. It reads as follows:

"While on a small scale biofuels may be beneficial by supplementing fuel supply, promoting their use to unsustainable levels under current technology is problematic, and long-term prospects for biofuels depend heavily on how quickly and efficiently second-generation substitutes (such as plant waste) can be adopted. Many energy market analysts also question the rationality of large subsidies that benefit farmers more than the environment.

While new technology is being developed, a more efficient solution from a global perspective would be to reduce tariffs on imports from developing countries (for example, Brazil) where biofuels production is cheaper and more energy efficient."

This reaffirms some of the contentions that were made on this site in the past:

(a) The way the US is proceeding with its approach to ethanol will inevitably place inflationary pressures on domestic and global food prices, which will result in tensions at home and abroad.

(b) The main reasons for pursuing ethanol in the manner in which it is being pursued in the US right now are, in order: (a) placate the farming lobby and earn valuable political support in America's hinterland; (b) placate the wean-America-off-foreign-oil lobby; (c) placate the soft environmentalist lobby; (d) combat climate change...oh, wait a minute...I guess no one's settled that thorny energy balance question yet, have they?

(c) Not letting emerging markets export ethanol tariff-free to the US is bad economically for a lot of people, from poor Brazilians to middle-class Americans

(d) Cellulosic ethanol is the only way forward if biofuels are ever to displace oil in a sustainable manner

To Conclude...

"Old news!", you might say...well you're right, except for this: it's one thing when I or some other insignificant blogger bashes (or celebrates) corn ethanol; it's quite another when the top economic think-tank in the world tells you that it sees real long-term viability problems with the way that this industry is currently structured.

To be sure, it's not like the IMF dedicated a large amount of space to this issue, and I'm quite certain that most of the economists who participated in producing this report don't loose sleep over it at night. But the strong terms used in that little sub-section further reinforce what the corn ethanol bears have been saying: enjoy it while it last, because it's not structured to be sustainable in its current form for much longer...and I'm not talking about environmental sustainability here.

DISCLOSURE: The author does not hold a position in any company involved in biofuels

Posted by Charles Morand at 06:53 PM | Permalink | Comments (2) | TrackBacks (0)

Last Friday (Feb. 2), the Globe & Mail's business section (the G&M is Canada's top national newspaper) ran an interesting piece by a senior business writer on cellulosic ethanol. I wish there was a way to view this article for free, but, unfortunately, the G&M charges for access to certain of its articles, and this is one of them.

The gist of the argument is as follows: (a) forget corn-based ethanol, the future lies with cellulosic (yyaawwnn...); (b) deep down inside, Bush knows this; (c) to make cellulosic ethanol competitive, you need super-enzymes that speed up the process of breaking down the cellulose and transforming the biomass into a liquid fuel; (d) because of 2 companies' super-enzymes, the cost of producing cellulosic ethanol will go from about $2.25 a gallon today to $1.07 by 2011; (e) it will be possible, then, to convert about 1 billion tons of biomass into liquid fuel annually, which will equate, in energy terms, to about 3.5 billion barrels of oil, and this without any adverse impact on the food supply.

Sounds interesting? It's because it is. Those of you who visit this blog often know that I belong to the camp of those who maintain that corn-based ethanol is nothing but a distraction.

The 2 companies identified in the article as holding the enzymatic key to unlocking the potential of cellulosic ethanol are: Novozymes, a subsidiary of Novozymes AS [OTC:NVZMF.PK]; and Genencor, a subsidiary of Danisco AS [OTC:DNSOF.PK].

Although both subsidiaries are based in California, both parent companies are Danish and their primary listings are on the Copenhagen exchange (Danisco AS [Copenhagen:DCO.CO] and Novozymes AS [Copenhagen:NZYM.CO]). The Pink Sheets listings are less than ideal...

Novozymes and Genencor have, respectively, a 40% and a 20% share of the global market for enzymes used in ethanol production.

The article concludes with this prediction by Michael Pacheco, director of the National Bioenergy Center in Golden, Colorado: production of cellulosic ethanol could reach 60 billion gallons by 2030, or 30% of total US gasoline consumption.

Besides the US, cellulosic ethanol will undoubtedly, once it can be produced on a cost-competitive basis, spread to other ethanol majors, most notably Brazil.

Posted by Charles Morand at 06:04 PM | Permalink | Comments (3)

Author Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding contributor of Cleantech Blog, and a Contributing Editor to AltEnergyStocks.com.

Quick, what do Ethanol, NAFTA, Mexican Tortillas and Walmart have in common? Don't know? Well here's the story.

I am fascinated by the discussion about ethanol feedstocks issues. There has been a lot of talk about corn production for ethanol either crowding out beef or food production, or driving up the price of food, or failing to supply the demand for ethanol.

I have stated before on Cleantech Blog and other sites that I believe corn is a lot more substitutable than the anti-ethanol and cellulosic ethanol advocates give it credit for. Our take: that the corn price rise from ethanol demand will not be as steep as the worst case, that the industry will find more acreage than expected for corn, and that costs will fall, in part because corn producers (and beef producers) are highly flexible and relatively global. Also that cellulosic processes are a lot harder and will take a lot longer to make economic than expected, and that the end result will be corn ethanol for a long time.

But the subject just keeps rolling - quoting an Inside Greentech interview with David Aslin of 3i:

"Leaving the issue of food substitution out for a moment, as your article pointed out, the sheer acreages that are going to be required are daunting.

There was a dramatic increase in 2006 in corn plantings over the prior year, and the industry forecasts an additional 10 million acres in 2007 in response to the need for fuel. How much of that is going to be available for food if all these ethanol plants being constructed actually come online, and at what price? (Heck, there's way too much corn syrup in U.S. food industry products anyway, so if we take a bit of the excess sugar out of people's food, that won't be a bad thing for the nation's health!)"

At the same time, we have also been saying that corn ethanol is inherently a high cost fuel ($1.50-$2.50/gallon direct cost on a btu basis compared to $0.50-0.60/gallon for gasoline on a direct cost basis - read our blog, and please don't email me arguing the price of crude is over a $1/gallon, it's the COST of finding and producing that crude, not the price the oil companies can sell it at, that matters), with lots of new supply coming on that is going to hurt the economics of US ethanol producers like VeraSun, Aventine, etc.

But this is a whole new angle - the political ramifications of our ethanol industry driving up prices for our neighbors food supply.

One of my friends, the CEO of a fuel cell startup who happens to read Cleantech Blog, emailed me an article today. Basic gist - the Mexican government is concerned that ethanol demand is driving up the price of tortillas! And is trying to decide what to do about it. As they describe the impact:

"Prices for white corn used to make tortillas have been hit the hardest. Although local corn prices are typically volatile around harvest time, which mostly falls in the second half of the year, traders say the farm gate price for white corn saw an unprecedented rise of up to 45 percent in 2006 compared with the year-ago levels in the Mexican market.

Grains traders have forecast tortilla prices to rise between 20 percent and 25 percent during the last quarter of 2006 and the first quarter of 2007. "

My friend's commentary on the subject:

"Even more funny, in the story I heard on NPR, Wal-Mart Mexico is taking advantage of the tortilla price run up to undercut independent tortilla shops. But besides the humor, there may be something here. I think the Mexican government is just out in the lead. I’ve seen at least one piece predicting that additions to ethanol production have been under estimated and that significant corn feedstock shortages will occur in 2008."

Now, nobody's talking NAFTA yet, but one of the things free trade does is globalize commodities. I'm just waiting for the next reverse "giant sucking sound" attack on NAFTA to follow this corn price rise. Or worse, some blogs are bound to start complaining that corn ethanol is racist, and anti-Mexican. To an economist like me, this price rise is just a perfect example of how globalization can even out the impact of something like ethanol demand on corn prices by spreading the effect across multiple markets and multiple commodities (and drive a new energy commodity export business - see our recent blog) - an example of my point that corn ethanol has longer legs than the cellulosic guys would like. But I'm sure that's not how it'll get reported.

Though you do have to admit - our ethanol craze could make Mexican tortillas too expensive to eat? That's kind of funny.

Posted by Neal Dikeman at 09:26 PM | Permalink | Comments (5)

Besides a slew of clean car announcements connected to the North American International Auto Show, the alt energy topic that has made media and blog headlines most often over the past week has been alternative fuels. We are thus going to run a 2-part series on alternative fuels this week as follows: ethanol today and coal-to-liquids tomorrow.

ETHANOL: INVESTOR FRIEND OR FOE?

I’m going to start this post with a statement of opinion: I don’t really like corn-based ethanol (as an investment), I never have, and, as a result, I haven’t followed this space as closely as I probably should have. AltEnergyStocks.com Contributing Editor Neil Dikeman, in a November post, did a great job of outlining key concerns investors should have with ethanol as an asset class. However, whether one likes ethanol or not, it was without a doubt one of the top alt energy stories of 2006, and will remain a biggie in the years ahead.

Industry Growth: Some Numbers

Ethanol is an interesting beast because, from one point-of-view, it’s merely the new-kid-on-the-block of a decades-long US agricultural policy. Let’s face the facts: US farmers are not, without massive subsidies and trade protection, competitive on a global basis. In a free global market, nobody would want US crops because they’re plain too expensive. Luckily, with the help of US tax-payers, the US farm industry has been able to survive, and, in many cases, thrive. But the US agricultural complex has, in the past few years, come under increasingly intense pressure from America’s trading partners, and cracks in the system are unavoidably beginning to show. Ethanol provides a partial route out of these troubles; redirect the expensive corn away from international markets to US-based ethanol processing facilities, put in place the right regulatory framework to boost ethanol demand, and keep the low-cost ethanol producers like Brazil at bay with tariffs. The result? A booming ethanol industry that is fundamentally transforming the economics of corn farming in the US.

Consider this quote from a recent Bloomberg article on biofuel demand and feedstock prices:

“The 110 factories now producing ethanol in the U.S. have boosted their annual capacity by 12 percent in the past six months, to 5.3 billion gallons, according to the Renewable Fuels Association in Washington. An additional 6 billion gallons of capacity will be added in the next two years as 79 new plants or expansions of factories are completed, the association said.�

The industry’s capacity will thus grow by 113% by the end of 2008, a significant number.

And then there are those who are disputing these growth forecasts, saying they are gross underestimates. Lester Brown, a known environmental commentator, argues that the Department of Agriculture’s projections that ethanol producers will, as a result of industry growth, consume 60 million tons of corn by 2008 are wrong, and says he instead expects ethanol manufacturers to consume 139 million tons of corn by then, more than double (by the way, the Earth Policy Institute, Lester Brown’s outfit, produced this very cool table of ethanol distilleries in the US by aggregating data from multiple industry sources. I don’t know of any other such resource).

However way you look at it, if the ethanol industry is truly responsible for the current rise in corn demand and associated run in corn prices, it is doubtful US farmers will be able to scale up production enough to keep pace with the kind of refining capacity growth discussed above, and prices should thus spike. The result of this will be that the food-Vs-fuel debate, which was mostly academic only 18 months ago, will intensify, pitting farmers and the ethanol industry against environmentalists and other concerned citizens. Another impact of this will be that high feedstock costs will eat away at producers’ margins, as there will be limits to what the market will tolerate in terms of price increases, especially if oil gets cheaper.

Ethanol: The Politicians’ Favorite Kid

There are early signs that the new Democratic Congress wants to forge ahead with the budding ethanol economy. This article from the Green Car Congress provides details on a proposed piece of legislation that, if adopted, would grant significantly more regulatory certainty to the ethanol industry than to just about any other alternative energy industry in America. A nation-wide renewable fuel standard with a 2030 timeframe is something the wind and solar industries could only ever dream of, and this despite the growing controversy surrounding corn-based ethanol. Besides the concerns outlined above, there also remains the fundamental question of whether or not, on balance, more energy is required to bring a unit of ethanol to market than that unit yields once consumed. A recent MIT study does not provide a conclusive answer to that question.

It has become clear that, among alternative energy sources, ethanol is the political favorite. Like the parent who, for one reason or another, loves a kid more than its siblings, Federal legislators have embraced ethanol, and are giving it visibly more motherly love than its available sister solutions, namely tougher fuel efficiency standards and plug-in hybrid technology. But politicians shouldn’t kid themselves; ethanol, it seems, is not the win-win solution to air pollution, climate change, foreign oil dependence and a dying farming sector that some had hoped. Something tells me that a battle is now brewing, and an anti-ethanol lobby, or at least a put-a-moratorium-on-further-ethanol-growth lobby, could emerge sooner rather than later.

Investing in Ethanol: All is not Lost

I’m not suggesting investors steer clear of ethanol altogether here; I’m merely pointing out that, while some people are hailing the growth in the ethanol industry as the next Klondike, there are some very significant and immediate concerns with corn-based ethanol that will have to be addressed. These concerns could, under a bearish scenario, stunt growth in the sector, or at least threaten the profitability of more vulnerable players.

But all is not lost. In my view, corn-based ethanol is one of those transition technologies that will play a key part in America's energy mix for some time, but that will slowly dwindle into irrelevance as better solutions come on-stream. The best plays on ethanol should therefore do well, for a time. While I’m not familiar enough with any of the top ethanol pure-plays to make an authoritative call, certain larger companies have certainly benefited from the ethanol boon so far. ADM [NYSE:ADM], Monsanto [NYSE:MON], and Syngenta [NYSE:SYT] are all names that come to mind. Seeking Alpha’s Ethanol section is a good resource for the would-be ethanol investor.

You should also keep an eye on firms that are working on cellulosic ethanol. Cellulosic ethanol holds great promises, as evidenced by the fact that Goldman Sachs took, in May 2006, a $30 million position in cellulosic ethanol firm Iogen of Canada. But cellulosic ethanol is at least 5 years away.

In short, I’m sure ethanol, as an asset class, can and will make you money. The ethanol investor will, however, have to be cautious, as the waters ahead are not free of trouble.

(DISCLOSURE: I do not have positions in any of the stocks discussed in this article)

Posted by Charles Morand at 10:41 PM | Permalink | Comments (0)

By Neal Dikeman, Partner, Jane Capital Partners LLC, and Founding Contributor, Cleantechblog.com. He has no investments in or financial incentive related to ethanol or ethanol stocks.

Are ethanol stocks risky long-term investments? We think they are. Don’t get me wrong, I’m a big fan of ethanol blended fuels for a whole host of reasons, I just don’t like ethanol as an investment. Here are six solid reasons to be very, very cautious.

1. Demand vs. supply – As with most regulatory driven markets, the demand has come on very fast behind the advent of renewable fuel standards, fuel subsidies, and the phasing out of MTBE resulting in ethanol’s rise as an oxygenate of choice. As a result the demand has far outstripped the historically available supply, and while supply plays catch up the industry has done well. However, as any student of refinery cycles knows, the moment supply catches up with demand at point “n� (and it will), the “n+1� ethanol production will put tremendous price pressure on the market and drive the industry into its first down cycle. (Keep in mind, all those announcements about new ethanol plants are driving growth – but at the same time driving the industry straight for its own readymade cliff).

2. Massive commodity price risk – Ethanol companies, like refineries, typically find themselves at the mercy of massive commodity price cycles. Unfortunately for ethanol producers, they stand at the mercy of several price cycles – corn (which ethanol producers are driving up the cost of), natural gas (the primary fuel), gasoline and crude. When the confluence of cycles is in their favor - life is very good, but when it is bad, it will be very, very bad. Now, for grins, just imagine a bad cycle confluence at the same time supply outstrips demand.

3. Market size pressure – Also, the current volumes of ethanol are a few percentage points of total refining volumes, barely worth fighting over if you are an oil company (a typical ethanol plant is about 5% of the size of a typical refinery) – but if ethanol ever comes near the DOE’s 30% by 2030 goals, do you really expect the oil companies to give up market share easily – especially when they already own most of the blending and distribution? Trust me, it’s not going to be Exxon, BP, Shell, and ChevronTexaco that get crushed in the stampede (and probably not Ag giants like ADM). Just because ethanol succeeds does NOT mean ethanol companies will.

4. Technology change – As the industry matures, and each of these cycles and concerns comes into play, the emphasis on survival will move more and more to low cost and high efficiency – early players with older less efficient (and often smaller) plants may actually be at a disadvantage. On the technology side, I have recently seen technology programs working in everything from more efficient distillation columns to less energy intensive better water removal, to advanced catalysts. And as mature players take notice (oil giant BP is establishing a $500 million Environmental Bioscience Institute for R&D in part in this area), even the winners of the current land grab phase may not actually make money long-term.

5. Ethanol is fundamentally a high cost fuel – As a fuel, ethanol is a fundamentally higher cost feedstock and processing cost than gasoline – just because the oil industry sells gasoline for higher than the ethanol industry can produce it, does NOT mean ethanol is cheaper (an analysis which is so apples to oranges as to be difficult even to begin to dissect)!. I know a number of well known analysts and investors have come out stating the opposite, but the numbers don’t lie. From Is Ethanol Controversial? Should it Be?, by Vinod Khosla - “Ethanol production costs in the US today are about $1.00 per gallon before any subsidies or taxes, substantially cheaper than the production cost of gasoline, even if oil was to decline to the mid-40’s.� They of course are forgetting that when looked at on a comparable cost basis – the full cycle actual cost to make gasoline from crude is on average up to half the comparable cost of ethanol from corn. Just because oil prices are high does NOT mean gasoline is expensive to produce, in large part it means oil companies that own reserves are making lots of profits. It is correct to say that when crude is at $60/barrel, it is economic to produce ethanol (and along with subsidies sell it for a tidy profit), but ethanol will be for now, our highest cost fuel. [Note: Look for our upcoming article on Cleantech Blog detailing the cost comparison]

6. Valuations – Bottom line, these are cyclical refineries producing a commodity product, not technology companies, and refineries typically trade at a TEV/EBITDA of the mid single digits, and a PE in the high single digits to low teens. Currently the ethanol market trades at hefty premiums to the pureplay oil refiners – a recent check had the average of VeraSun (VSE) & Aventine (AVR) trading at 80% higher PE and 110% higher Enterprise Value/EBITDA than the average of Sunoco (SUN), Tesoro (TSO) , and Valero (VLO) .

Are these all possibly reasons pure plays like VeraSun and Aventine are trading at one-third and one-half off their 52 week highs respectively (See our earlier Cleantech Blog article on VeraSun’s IPO)?

Conclusion – In the short run ethanol stocks are in a land grab phase ramping to meet demand, and some of these stocks may do well while demand still outstrips supply and the industry is still small, but when this dynamic changes – watch out as the margin pressure will be brutal, and could turn already aggressively valued stocks into a dot bomb style free fall as per gallon profits get crushed. So, make your profits while you can!

Posted by Neal Dikeman at 11:57 PM | Permalink | Comments (2) | TrackBacks (0)

Xethanol Corporation (XTHN.OB) announced that its CoastalXethanol subsidiary has signed a letter of intent with Pfizer, Inc. to purchase Pfizer's pharmaceutical manufacturing complex located in Augusta, Georgia. While details are yet to be finalized, CoastalXethanol and Pfizer are working together to complete the transaction.

The state of the art, 40 acre site includes: an 89,100 square foot manufacturing facility, a 25,000 square foot warehouse facility, 7,300 square feet of laboratory space, and 16,000 square feet of offices and conference rooms. CoastalXethanol intends to retrofit the site to produce 35 million gallons per year of ethanol. The facility will produce ethanol from cellulosic and other biomass waste streams generated by industrial producers in the surrounding areas. [ more ]

Posted by Mark Anderson at 08:09 AM | Permalink | Comments (0)

Green Star Products Inc (GSPI) announced its plans to construct total Bio-Refinery Complexes for production of both biodiesel and biomass ethanol at each facility.

The first Bio-Refinery is planned to be in North Carolina (see GSPI press release dated April 20, 2006) and the location of the second facility is to be announced soon in the northwestern sector of the United States.

Each GSPI-designed Bio-Refinery will have a start-up production of between 10 or 20 million gallons per year with quick expansion capabilities. The facility infrastructure will be capable of expanding to 60 million gallons per year (and further expansion capabilities could reach 100-million gallons per year), ranking them among the largest fuel production facilities in the world. [ more ]

Posted by Mark Anderson at 08:33 AM | Permalink | Comments (0)

Archer-Daniels-Midland Co. (ADM) said it will build an ethanol plant with 275-million gallon annual capacity in Cedar Rapids, Iowa as it looks to expand production of the alternative fuel.

The expansion comes on top of ADM's plans to build a 275-million ethanol plant in Columbus, Nebraska. [ more ]

Posted by Mark Anderson at 07:58 AM | Permalink | Comments (0)

Pacific Ethanol, Inc. (PEIX) announced that it has received all necessary permits to begin construction on a 35 million gallon per year ethanol facility at the Port of Morrow, located on the Columbia River near Boardman, Oregon. The Company further stated that it expects to begin construction, which should take approximately 12 months, within the next thirty days.

The Oregon ethanol facility will provide ethanol for the Pacific Northwest gasoline markets, helping to increase supply in that area and provide a CO2-reducing fuel for the transportation sector. It is expected that the plant's distillers grains will be sold to the local Oregon and Washington dairy and feed markets. [ more ]

Posted by Mark Anderson at 06:53 AM | Permalink | Comments (0)

Archer-Daniels-Midland Co. (ADM) s increasing the capacity of a biodiesel plant under construction in North Dakota to 85 million gallons a year, a company spokesman said on Wednesday.

ADM originally announced the plant in Velva would produce 50 million gallons of biodiesel a year using canola oil. ADM decided to increase capacity to take advantage of economies of scale, said Greg Webb, vice president of public affairs. [ more ]

Posted by Mark Anderson at 11:25 AM | Permalink | Comments (0)

Green Plains Renewable Energy Inc. (GPRE) announced that its project in Shenandoah, Iowa is progressing as planned. The Company received its air permit from the Iowa Department of Natural Resources late last week. Fagen Inc. has set up their on-site construction offices and anticipates construction of the plant to begin early next week. The Company anticipates that the Shenandoah plant will begin producing ethanol in the Spring of 2007. [ more ]

Posted by Mark Anderson at 10:19 AM | Permalink | Comments (0)

Andersons Inc. (ANDE) will conduct a groundbreaking ceremony April 27, 2006, at 11:30 a.m. for its 110 million gallon ethanol plant in Clymers, Indiana.

When completed by the first quarter of 2007, the Clymers plant will be the largest of its kind east of the Mississippi River. Along with the 110 million gallons of ethanol, the plant will produce 350,000 tons of distillers dried grains, an animal feed ingredient. [ more ]

Posted by Mark Anderson at 09:14 AM | Permalink | Comments (0)

With oil and gasoline prices rising ever higher, investors are shifting attention to alternative energy stocks as a promising high-growth sector. A particular area of interest is ethanol stocks and forthcoming ethanol IPOs. Here are companies recently reviewed on Seeking Alpha [ more ]

Archers Daniels Midland Company (NYSE: ADM)
Pacific Ethanol (PEIX)
Xethanol (XTHN)
VeraSun (VSE)
MGP Ingredients (MGPI)
Aventine Renewable Energy (AVR)
Green Plains Renewable Energy (GPRE)
Andersons Inc. (Nasdaq: ANDE)
Veridium Corporation (VRDM)

Posted by Mark Anderson at 07:36 AM | Permalink | Comments (0)

Veridium Corp. (VRDM.OB) announced its receipt of an order from Ethanol Africa for the use of Veridium's patent-pending Corn Oil Extraction System(TM) at Ethanol Africa's new Bothaville, South Africa ethanol production facility.

Veridium's proprietary new Corn Oil Extraction Systems(TM) extract high grade corn oil from an ethanol by-product called distillers dried grain ("DDG"). Veridium's technology has the capability of removing up to 75% of the corn oil from within the DDG in two stages. [ more ]

I have been finding more signs that this looks like its a real company and not just a shell to take advantage of the recent surge and popularity in Alternative Energy and Ethanol. I'm still not completely convinced, but the stock has been performing very well with over 200% gains this month.

Posted by Mark Anderson at 06:53 PM | Permalink | Comments (0)

Veridium Corp. (VRDM.OB) announced its execution of an amended license agreement with Ohio University ("Ohio") for its patented bioreactor process for reducing greenhouse gas emissions from fossil-fuelled combustion processes.

Veridium's original license with Ohio provided for non-exclusive rights to the technology for the purpose of processing exhaust gas streams from electrical utility power generation facilities, and exclusive rights to the technology for applications involving all other sources. The amended license agreement increases the scope of Veridium's license to provide for exclusivity in all applications, including electrical utility power generation facilities. [ more ]

Posted by Mark Anderson at 12:27 PM | Permalink | Comments (2)

Archer-Daniels-Midland Co. (ADM) and Siouxland Ethanol LLC are pleased to announce the formation of an ethanol marketing agreement. As part of this marketing agreement, ADM will market all ethanol produced by Siouxland Ethanol at its forthcoming 50 million gallon Jackson, Nebraska facility. Construction has begun and the plant is expected to be operational in early 2007. In addition to producing ethanol, the plant will produce an estimated 165,000 tons of distiller grains on an annual basis. [ more ]

Posted by Mark Anderson at 08:13 AM | Permalink | Comments (0)

Pacific Ethanol (PEIX) is building a refinery in California for corn based ethanol production in the heart of the California agricultural and dairy land (the biggest agricultural and dairy producer in the country). The refinery is supposed to come on line in Q4 2006, and there are plans for 4 more subsequent refineries. As there is unlikely to be any increased ethanol demand in California (see background above), the supply capacity they are bringing online must be able to disrupt the current out-of-state supply and/or undercut the current prices. They are one of the biggest distributors of that alternate supply in the state, and that is their main business right now. [ more ]

Posted by Mark Anderson at 08:07 AM | Permalink | Comments (0)

Shares of ethanol producers extended their recent rally Monday, as oil refiners continued their rush to substitute ethanol for a toxic gasoline additive before the summer driving season shifts into gear.

The enthusiasm for ethanol is tied to the fate of methyl tertiary butyl ether (MTBE), an additive mixed into gasoline to reduce pollution. However, studies have found that MTBE to be carcinogenic if it seeps into a water source.

States are increasingly banning MBTE due to contamination concerns. Companies wishing to comply with new laws -- and worried about the potential for legal liability -- are turning to ethanol as a replacement for the additive. [ more ]

Posted by Mark Anderson at 08:53 AM | Permalink | Comments (1)

Barons profiles Archer-Daniels-Midland Co. (ADM) in the April 3rd edition. They feel that ADM shares are poised to climb further, literally fueled by its dominance of the ethanol market as investors seek alternative energy investments.

Archer Daniels was believed to have secured a 50-cent per gallon increase in ethanol contract pricing to $1.85 per gallon in recent negotiations. Given ethanol price rises seen in the commodities market, Archer Daniels could reap significant further increases in its next round of talks for October contracts. [ more ]

Posted by Mark Anderson at 08:17 AM | Permalink | Comments (0)

USA Today Money comments about a potential for future increases in gas prices and also shortages in Ethanol.

"Gasoline prices will be unusually high and shortages might occur this summer, because the U.S. ethanol industry can't keep up with the demand for fuel-grade alcohol to mix with gasoline, the head of the U.S. Energy Information Administration told a Senate committee Wednesday." [ more ]

On Wednesday of this week the Senate Environment and Public Works Committee met to discuss ethanol as a substitute for MTBE, a clean-air additive in gasoline. This potential change will increase the cost of refining and also greatly increase the usage ethanol. Refiners currently use MTBE and are now are discontinuing it because MTBE can taint water supplies and Congress has refused to protect them from MTBE lawsuits. Ethanol is the only readily available substitute.

Posted by Mark Anderson at 10:14 AM | Permalink | Comments (1)

Veridium Corp. (VRDM.OB) announced its receipt of an order from a Wisconsin based ethanol producer for the second stage of Veridium's patent-pending Corn Oil Extraction Systems(TM).

Veridium's proprietary new Corn Oil Extraction Systems(TM) extract high grade corn oil from an ethanol by-product called distillers dried grain ("DDG"). Currently, the majority of ethanol production is based on a dry milling technique that utilizes more than 1 billion bushels of corn to produce 3 billion gallons per year of ethanol. The dry mill process converts the starch from the kernel of corn into sugar and then the sugar into ethanol. The balance of the corn (non-starch components) then goes through a dewatering and dehydration process where the byproduct is sold as a commercial feed ingredient called DDG. DDG contains the majority of the corn oil that was present in the kernel. Today, the 1 billion bushels of corn currently used in the dry mill ethanol process contain roughly 300 million gallons of corn oil that is currently sold for about $0.03 per pound as commercial feed. The new Veridium technology presents another option - cost effective conversion of the oil in the ethanol by-product into biodiesel. [ more ]

Posted by Mark Anderson at 09:02 AM | Permalink | Comments (0)

Archer-Daniels-Midland Co. (ADM) announced that it has selected Columbus, Nebraska as the first location for its ethanol capacity expansion. The Company will build a dry corn milling plant with an initial annual capacity of 275 million gallons adjacent to the existing ethanol plant in Columbus.

In September, ADM previously announced that it planned to expand ethanol capacity by 500 million gallons through the addition of two dry milling plants at existing ADM ethanol facilities. Construction, expected to be complete in early 2008, is subject to applicable governmental approvals. [ more ]

Posted by Mark Anderson at 08:55 AM | Permalink | Comments (0)