Big Firms Enter Ethanol Market

by: David Jackson

Excerpt from today's One Page Annotated Wall Street Journal Summary (which you can get emailed to you every morning by signing up here):

Big Players Join Race to Put Farm Waste Into Your Gas Tank

  • Summary: Large companies are entering the market to produce gasoline substitute ethanol. Ethanol is usually made from the sugar in corn, but celluslosic ethanol can be made by micro-organisms consuming crop residue, wood chips and garbage. The economic incentive comes from high oil prices and US government support. The energy bill passed in 2005 mandates use of 250 million gallons of cellulosic ethanol by 2013 and permits Federal loan guarantees for the construction of cellulosic "biorefineries". Each gallon of ethanol is subsidized by a $0.51 Federal tax credit, The Energy Department is now holding a $160 million competition to build the first 3 biorefineries. Leading contenders include private company Iogen, which has partnered with Royal Dutch Shell and Goldman Sachs, Archer-Daniels Midland, Abengoa Bioenergy, a subsidiary of Spanish conglomerate Abengoa S.A, and DuPont. DuPont has genetically modified an enzyme so that it eats the sugar in cellulose. A commercial plant should produce cellulosic ethanol at $1.35 a gallon, versus corn ethanol at about $1 a gallon. Challenges: (1) The ethanol industry consumed 14.4% of the US corn crop in 2005 and is now pushing up the price of corn. (2) Ethanol can't be transported in pipes because it mixes with water, leading to dilution, and must therefore be carried by truck or train and blended close to where it's sold. (3) Ethanol contains 30% less energy than gasoline, leading to lower milage for cars.
  • Comment on related stocks/ETFs: Strongly negative for the small ethanol stocks, as the article highlights the capabilities and resources of the large players without mentioning the smaller companies. They include: Pacific Ethanol (NASDAQ:PEIX), Xethanol (XNL), VeraSun (VSE), MGP Incredients (NASDAQ:MGPI), Aventine Renewable Energy (AVR), Green Plains Renewable Energy (NASDAQ:GPRE), Andersons (NASDAQ:ANDE), Veridium (VRDM) and SunOpta (NASDAQ:STKL). Neutral for Archer-Daniels Midland (NYSE:ADM) as the article highlights the opportunity but also the limits of corn ethanol and increasing competition. Positive for DuPont (NYSE:DD), which appears as a significant ethanol player but whose stock hasn't run up with the other ethanol stocks; chart here. Royal Dutch Shell (RDSA) and Goldman Sachs (NYSE:GS) are investors in Iogen.