Some Thoughts on Ethanol's Success

My best performing stock this quarter has been VeraSun Energy (VSE). It is somewhat hard to believe with all the negative commentary about ethanol production, (especially from corn) from both environmental types and financial types, how nicely the stock has performed. Since October 1 the stock is up almost 35%, though the ride has been very bumpy. This 3 month chart should give you an idea of the volatility:

As I watch the stock and do some research on the ethanol industry a few facts and thoughts give me positive indications about grain ethanol as a renewable fuel and VeraSun in particular.

• I have started keeping an eye on the CBOT ethanol crush spread. It is quoted at Ethanol Market.com where you can get daily ethanol and grain prices. The crush spread as quoted there is nearby ethanol, multiplied by 2.80, minus nearby corn. Think of it as the gross profit of converting a bushel of corn into ethanol. The spread fell as low as $.44 in mid October and has climbed to the $1.50 to $1.65 range for the last few weeks. This statistic is an easy to keep an eye on the financial outlook of ethanol production.

• The energy bill recently passed by the U.S. Senate calls for 36 billion gallons of renewable fuel by 2022. 21 billion are supposed to be biomass, leaving 15 billion to corn and other grains. From my reading it is doubtful whether other sources of ethanol feed stock can come anywhere near the 21 billion number in the next 1.5 decades. Corn based ethanol is here to stay.

• All phases of ethanol production are becoming more efficient. Distillers now get 2.8 gallons from a bushel, up from 2.3 a few years ago. Farmers get 200-250 bushels of corn per acre, vs. 140 used in the efficiency studies. New corn hybrids will increase production per bushel.

• As a final thought on this topic, political policy towards corn ethanol will be positive as long as those who want to be President have to start in the Iowa caucuses. Corn is the main crop in Iowa and the people there well understand the economics and politics around one of their most important economic factors.

I think VeraSun Energy has positioned itself to take advantage of the factors outlined above. The recent merger with U.S. BioEnergy (USBE) has made the company by far the largest and most efficient pure play ethanol producer.

Note: A recent study has indicated ethanol/gasoline blends of E20 to E30 may actually increase fuel economy of cars on the road today. I wrote about it here.

Disclosure: I currently do not have a position in VSE.

Comments

[Shenandoah]

The massive disinformation campaign by the global oil industry can not overcome one fact: Ethanol will displace 7.9 billion barrels of middle east oil in 2007 with the accompanying reduction in our import bill

[Tom B]

You'd have to be dumber than a brick to invest in ethanol. Don't you comprehend that you get less energy FROM ethanol than you put IN growing the corn? It's a sucker play, like buying into a perpetual motion machine. The second the market collapses, you are screwed.

[Lymon]

If you own a "flex-fuel" vehicle you will discover that the advantages of usig ethanol is zero. A friend of mine stated he gets approximently 25% more MPG using gasoline over ethanol. So ethanol has to be over $3 cheaper per gallon (at today's prices)to make it economical to buy. Ethanol is a government play, big politics on huge corporation farms, we will always be "hooked" on oil.

[lefty]

The only real aternative is hydro electric produced hydrogen. the prime mover, raw material, and generators are already there. Add an electrolizer and compressor and your done! This should be installed in every dam and river in the country. Not to also mention other energy soures-- geothermal, solar, and last but not least, Plasma fired coal,"total clean burn"

[Tom B]

"Ethanol is a government play,"

Ethanol is 100% pork barrel politics. Detroit likes it, because it means NO actual thought-process for them. Sorry-- that thinking will only speed their demise. Kansas likes it because they grow corn. Sorry Kansas, The Dems may well be in power in a year. The only solidly Dem corn state is Illinois, but they have plenty of other businesses. People, of course, DO NOT like ethanol for fuel, because 1) you get less MPG 2) you pay more for food 3) you risk land loss and water shortages.

"The only real alternative is hydro electric produced hydrogen."

The solution to personal transportation is better cars; then hybrids; then all-electric cars, all powered ultimately by conservation/nuclear/w... (and maybe some hydroelectric, wave and geothermal). As a scientist (though not in the energy field) anything else, to me, looks like wishful thinking.

Play ethanol short term, if you must. But keep your broker on speed dial and an extra pair of underwear handy in case things collapse on you.

[winelover]

I love the first guys comments. 'Massive disinformation', please! Big oil is not your friend, or, for that matter, your enemy. It doesn't matter, ethanol is BARELY energy positive, meaning we are dumping about as much energy into making it, as we are getting out. The energy inputs are all oil, and natural gas, mostly imported, BTW. Oh, and water, which is, in the end, is going to be the reason we drop the whole mess. Google 'aquifer depletion' and read about our next bigtime fun. And to the guy who thinks hydrogen is the way to go, please review your high school physics. Hydrogen is NOT an energy source, rather, a carrier. Perhaps it is helpful to look at it more like a battery. It has to be charged, and the energy to do so has to come from somewhere. I have fiddled with electrolizers on some of my diesels, which are outfitted with lots of instrumentation, and have found no perceptible benefit. I am of the belief that electric transportation is going to be our future, and I can't wait. If I never see another spark plug again, I can live with that.

happy holidays!

[Tom B]

"Hydrogen is NOT an energy source, rather, a carrier. "

I you go electrolysis. I think microbial H2 production, if it proves scaleable (and ONLY if) could be a winner.