Ethanol is Here to Stay

Includes: ADM, PBW
by: Todd Sullivan

"Why?" - you say. "Haven't you read all the nay sayers on ethanol, Todd? What makes them wrong and you right?" My answer? 2008.....

In 2008, we have another battle for the White House. The "flyover states" [FOS] have decided the past two presidential elections. Yeah, I know Florida in 2000, but had Gore been able to get anybody who did not live on a coast to believe in him (or his home state for that matter), those results would have been meaningless. What is the #1 economic driver in the FOS? Agriculture...

Currently billions of dollars of profits and investment are flowing into the FOS at a rate never before seen. Ghost towns are enjoying a renaissance as people and money are moving back there to compete in this industry. Once-poor corn farmers are staring ethanol production facilities in coops and are now millionaires. They are buying new equipment and new cars, and the value of their homes and land have been jumping. After decades of population declines, the rural FOS's are finally enjoying growth. In short, the American Heartland has not had an outlook this rosy in generations.

So, let's pretend that I am a self serving politician (as if there was any other kind) running for the White House in 2008.

My message is going to be EITHER:

Let's get rid of the ethanol tariff on imported ethanol from the state-sponsored Brazilian ethanol industry so they can undercut our prices. We need to put a cap on the ethanol mandate in fuel. I know you have met the current goal two years early (nice work), but isn't 3% enough? Let's not get too aggressive here. We do not want to upset Exxon. There is no reason to continue to offer tax breaks for those service stations that install E85 (85% ethanol) pumps to spread its use and no reason to require the majors to install them at their stations. As far a Detroit goes, despite the fact that it only costs $100 extra to build flex fuel engines that can run on either fuel or any mix in between, I see no reason for us to require Detroit to actually make its cars with this option (as we do seat belts); they know best. In short, we have this budding industry at a tipping point to where it may or may not eventually become the way we fuel our cars, so let's sit back and see what happens.

P.S. Can I have a ticket to my opponent's inauguration?


Why are we shipping our hard-earned dollars overseas to Arabs who want to do us harm? Why don't we spend those dollars here supporting farmers and hard-working people and at the same time begin to assure our independence from foreign oil?

If I am elected, I will immediately request that congress pass legislation mandating the installation of E85 pumps at all gas stations. If Big Oil wants tax breaks and the ability to pump oil out of Federal lands at a pittance, they ought participate in the security of this nation. Exxon makes a billion dollars a quarter in profits and has paid their former CEO $400 million in retirement benefits, can they not afford the $20,000 it takes to install these pumps? For only $100 per vehicle, we can guarantee the ability of our drivers to have choice in the fuel they use in their cars. All new vehicles should have flex fuel capabilities. If we can legislate the use of seat belts, anti lock brakes, emissions standards, gas mileage and shatter proof glass, why can we not require our drivers be able to support our nation's efforts at independence from foreign oil if they wish? I am calling for the immediate doubling of the renewable fuel standard from 7.5 to 15 billions gallons annually. We are confident that the ethanol industry, which has already met its current goal two years early, can achieve this level. Cellulose ethanol is right around the corner, it has the potential to eliminate all oil imported for gasoline in the U.S. by boosting current ethanol production to 100 billion gallons annually, and I am calling for a doubling of Federal research funds available for this technology...

Now, which candidate is going to win votes west of Pennsylvania and East of the Rockies with these messages? The example might be extreme, but it does illustrate that the current legislative conditions in place for ethanol are not going away any time soon.
The reality here is there will be a competition to see which party can deliver the "best package" to the FOS in return for votes in 2008. The timing is perfect for ethanol and the nation is ready for it. Every poll taken has reinforced the fact Americans would gladly pay more for home grown fuel (ethanol) if it would help ween us off foreign oil.

Saab already makes an engine that gets comparable mileage on ethanol vs. gas (it is a simple process), and the studies that claim that ethanol takes more energy to make than it produces, have been proven false time after time. The fact is that it takes exponentially more energy and dollars to drill for oil, ship it on a boat, refine it and transport it to the market than it does to grow and harvest corn. The studies that claim ethanol is energy negative actually have the audacity to claim the sun's energy as an energy input for ethanol, like were it not for corn the sun would not shine??? It's called "renewable" for a reason, folks. They also take into account the material necessary to make the tractors that harvest the corn as if farmers would not be using tractors for crops were it not for ethanol. They based their findings on corn yields (they are 30% higher today than even a decade ago and growing almost daily) from data decades old, while using today's cost structure for the inputs. These studies are flawed on such a scientifically rudimentary level to be laughable.

So, if you believe the above to be true, how do we profit from this? There has been an explosion of ethanol companies that have begun trading publicly in the past year. I believe that if you believe in the biofuel revolution, your investing begins and ends with one company.

Archer Daniel's Midland (NYSE:ADM): With $35 billion annually in sales, ADM is the world's most prolific biofuel producer. After their current expansion, they will produce over 1.5 billion gallons of ethanol a year (#2 is Verasun (VSE), which comes in at 300 million) for over 20% of the U.S. market. They are also the world's #1 producer of biodiesel. Only 1/2 of their profits come from biofuels, so they will be not as volatile as the "pure play" ethanol companies who have this as their sole revenue source. They are the #1 processor of oil seeds (for cooking oils), coco (chocolate), bio plastics (these degrade in landfills) and high fructose corn syrup. Visit their website to further see the scope of their businesses. The stock of ADM has fallen sharply from its euphoric highs early in 2006 to a level more than acceptable for investors who now want to invest in biofuels.

Remember, ethanol and biofuels are not new. Henry Ford designed the Model T to run on it and even Rudolph Diesel ran the first diesel engine on peanut oil. For generations, oil was just cheaper to use so these biofuel options faded away. With the world as it is today, can we afford to continue our blind allegiance to oil, or must we find a better option? ADM has pioneered ethanol in the U.S. and will be the leader for generations.

Buy its stock and enjoy....