China Clean Energy to Benefit from New Chinese Agricultural Policies

On 12/13, the Chinese Ministry of Agriculture announced that it is looking into the question of how much land it will allow for the planting of biofuel crops. This is in light of the worry over local grain supply amid fast-rising international commodity prices. It is abundantly clear that priority will now be given to the planting of food crops, not power crops, unless the land in question is non-arable or mountainous. What is not clear, however, is how these power crops can even be cultivated on those marginal lands (although there are some exceptions, including cassava).

For producers of ethanol (which utilizes grains such as corn and wheat), this is bad news. State-owned COFCO, operating a 200,000 ton plant in the southern province of Guangxi, is already looking into importing raw materials from Vietnam and Thailand. And apparently there's not enough of cassava and other high-carb plants (as next best raw materials) to go round, as these crops are in demand for the production of starch and sugar.

But for biodiesel producers such as China Clean Energy (CCGY.OB), the picture is altogether different. The raw materials for biodiesel include waste palm oil and the Jatropha tree, both of which do not compete with food crops for arable land. Waste palm oil is imported from Malaysia and Indonesia, and Jatropha trees, which are hardy and require little water, flourish on non-productive terrains. The authorities are in fact currently providing farmers with financial incentives to grow Jatropha on lands not otherwise suitable for agriculture.

With crude oil prices continuing to be inflated, demand for alternative fuels, especially renewable biofuels, will increase. And as demand for those expands, the above policies will favor biodiesel more and more, such that in the long run, it may well become the most economically viable biofuel in China.

My Position: None.