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Regardless of its growing use and secured future, the ethanol industry has often been a far from profitable endeavor. Just two days ago, Bloomberg reported that up to 20% of sugar-cane mills in Brazil's most productive region may soon be closing or sold due to selling ethanol for a loss. Of late, the same woes could be said of the feedstocks needed to produce ethanol. Droughts in both the United States (2012) and Brazil (2010) have given the corn and sugar industries real headaches of their own when it comes to price volatility. Yet for the ethanol business model, this balance between the prices for sugar/corn and those for ethanol have become an unstable proposition. This model remains highly dependent upon numerous volatile factors within the respective market pairings, and both markets require an ideal price in order to operate efficiently.

For this reason, it appears as if large players in the bioenergy business have been shopping around for alternative markets in order to hedge their operations. One such company that investors should begin to recognize in light of this problem is an industrial biotechnology company named Solazyme (SZYM). Introducing the world's first carbohydrate-to-oils technology platform, Solazyme has developed the ability to provide additional market value to such companies that would otherwise be constrained solely to the sugar/corn or ethanol markets by themselves.

Here are three quick advantages Solazyme's technology offers to ethanol producers:

  1. Access to higher-margin markets. By converting sugars into oils, the market spectrum significantly rises to cover a $3.1 trillion market space.
  2. Responsive market flexibility. The company can use the same infrastructure and change product output within a matter of days to address a whole new market space.
  3. Unrivaled product capabilities. Through the ability to design oils, the company continues to create new valuable oils not found in nature, which are useful to industry.

There is a prevailing understanding between energy investors that more value can be found in the production of oil than in the refining of it. The concept being that there is more benefit to be had the higher one goes up the value chain. The same logic continues to prove itself in the case of Solazyme as well.

Whereas many companies have been striving to produce the end product of ethanol, Solazyme has been perfecting the ability to design and manufacture a more varied and potent output found in triglyceride oils. In doing so, the company taps into a much more diverse product line with significantly higher margins than many of its counterparts in the advanced biofuel industry. Now, with over a decade under its belt in developing its technology and proving its ability to scale up accordingly, the company is beginning to profitably move into large-scale commercial operations.

One large sugar/ethanol producer to quickly realize this technology's value was Bunge (BG), a company with an $11 billion market capitalization. As quoted by one of Bunge's Managing Directors, Ben Pearcy, he stated that Bunge is "excited" to partner with Solazyme in order to link the company's sugar and vegetable oil value chains. Indeed, the partnership has proven to turn into a rather large hedging bet when one considers the numbers involved.

According to the Wall Street Journal in an article found here, Bunge has a sugar processing capacity of 21 million metric tons but was only able to produce 17 million metric tons in 2012. When browsing through Solazyme's S-1 filing found here, we see that Solazyme believes that it is able to produce 400,000 metric tons of oil for sugar mills capable of providing up to 8 million metric tons of capacity. In the latest development of the partnership found here, it appears as if Bunge is willing to commit to the production of 300,000 metric tons of oil. As a result, it appears as if Bunge is willing to dedicate to the partnership with Solazyme 29% of its current sugar production capability and about 35% of what it was actually able to produce in 2012.

Yet Bunge isn't the only ethanol producer turning to Solazyme. In a similar case, the largest ethanol player in the United States, Archer Daniels Midland (ADM), is also turning to the niche oil producer. In forming a collaboration with Solazyme, ADM offered the company access to its premiere facility in Clinton, Iowa, that was formerly occupied by biopolymers and biochemicals company Metabolix (MBLX). Within less than a year after ADM terminated its arrangement with Metabolix, Solazyme had secured its place into the production facility.

In this collaboration with Solazyme, ADM opens the door to a diverse range of product markets, which can complement their existing operations. As I wrote in my article found here, it appears as if that collaboration could lend a helping hand to ADM's ongoing struggles in cocoa production. The ability to address existing markets for large agricultural companies appears to be a vital link for their willingness to partner with Solazyme.

As referenced in this article found here, both ADM and Bunge have had their share of troubles lately when it comes to producing ethanol derived from corn or sugar. Yet as each company continues to struggle in their respective markets, both have surprisingly turned to Solazyme. This may seem odd considering that the two companies are generally expected to be rivals in the Agricultural space.

For a company with a $514 million market capitalization as of March 20, it remains relatively impressive that Solazyme has been able to snag the attention of at least two of the largest companies in Agriculture. Perhaps a more impressive feat remains the track record for Solazyme to convince these partners to allocate capital and/or other necessary resources to these partnerships as an expression of their commitment. In the case of ADM, the company was even willing to accept issued stock in lieu of cash payments for some services.

With such a rapid adoption of the company's technology to the business plans of these large ethanol players, the outlook of Solazyme continues to appear bright. Investors looking for a long-term growth investment should continue to conduct their due diligence on this company. There is something to be said about a rapidly developing company that is deploying its technology with the present day leaders of the industry.

Disclosure: I am long BG, SZYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.