I am writing this in response some of the debates going on around ethanol at the moment, and to provide some research driven facts regarding my position in the area and particularly in VeraSun (VSE).
The real issue is energy security. The more ethanol from US corn in your tanks, the less dependent the US is on foreign imports. This is a no-brainer - oil will go up as the middle classes in India and China grows (see India/China automotive growth targets for next 5 years here). In addition, it keeps the USD in the US; this is why Brazilian ethanol is not a good solution. Every percent of ethanol from US produced corn in the tank of a US driver means that money is being retained in the US economy and that the country is less reliant on foreign imports. Don’t be surprised if you find E/20 at a station near you in the few years
First, some statistics regarding US corn in 2007:
- 19% of corn was used to produce ethanol;
- 4.1% was used to make high fructose corn syrup;
- Over 50% was used as livestock feed;
- About 10% was exported (based on 19.1 billion BU in 2007 and around 1.9 exported);
- Yield in 2007 was 151 BU/acre; Monsanto (NYSE:MON) working on strains which will be available in the next 2/3 years, which will push this north of 200 BU/acre.
Take note that corn is not the only food stuff which has increased in cost. Everything from every corner of the world has, from orange juice to rice. This is being driven by energy costs, increased demand and a very poor product make up (would it be better to make less meat and use more corn directly to feed people? Are we eating too much meat?). The facts are being confused deliberately, in my view; it is not as simple as saying "we now make ethanol so corn is more expensive." Rather, we should be asking ourselves whether we are using our resources in the most efficient way. We will experience a redistribution of food based resources going forward to accommodate our new industries, like ethanol, and change being driven by ever higher energy prices. This will not affect the nutritive value available within the food chain, just the make up of the food within it.
Remember that the net cost contribution of corn in a finished product is not as great as the packaging and transport costs. These are the big drivers which are contributing to increased food prices.
When taking all this into account, the US should be able to replace 10% of its gasoline with ethanol in the next 5-10 years. This may sound far fetched, and I can hear you tapping your keyboards with some vitriolic replies, but before you do, consider this. All ethanol projections I have read assume a replacement percentage based on the current level of gasoline usage. This will not be the case. Many factors will contribute to the final make up of US gasoline usage; for example, more efficient cars, energy usage, logistics, finished product packaging, increased BU/acre corn yields, etc. etc. To consider one fact alone when presenting a view misses the fact that many vectors are at work to reduce gasoline usage while increasing ethanol addition.
Most research companies who are looking into cellulosic are developing either specific enzyme mixes, chemical processes, a combination of both or micro organism based maceration of the cellulose. Note that these companies may develop the technology, but they will also license it. What is important is the infrastructure to distill the mash and then distribute the ethanol. VeraSun is in a great position to benefit from this because it has scale and the infrastructure. In addition, VSE is part of a JV which is working on cellulosic using micro organisms in the medium to long term.
In terms of biodiesel, VSE will have plants online by 2009 and will help reduce the impact of corn prices, giving VSE two revenue streams from one raw material and putting VSE in a stronger position than some of its competitors.
All food prices have risen; this is not due to plants being used for ethanol, but to rising energy costs. Corn is no exception.
Currently there is sufficient corn to provide food and enough ethanol to replace 5% of US gasoline usage (current value 1.7%). This money is kept in the USA and makes the country more independent.
This, coupled with more efficient cars, transport, reduced packaging and more efficient energy usage, will add up to a potential 10% ethanol replacement in the not-too-distant future.
Ethanol from corn is not the answer alone; it is a first step. Ethanol is not that environmentally friendly, but more so than oil, and that isn’t the point anyway. Energy security is the key issue. Oil prices are never going to come back down to 40 or 50 USD per barrel; they will be driven up even further because demand is increasing, will outstrip production and will continue to do so. In the end, oil production will decrease until it is gone. Some people say this started to happen in 2006, some say it will happen in 2012. I don’t know when, but it will definitely happen.
Look at the company, NOT the corn from ethanol debate, and see if you think VSE is best positioned for the future. Be aware that news articles have a political dimension and will mix facts and figures to support their story and misinform investors and the general public
- Morgan Stanley Auto and Auto Parts Global Insights
- Crude oil price increases since 2003 (graph 1994 – 2008 should be the trend setter)
- Petroleum Life Cycle of 42 countries
Disclosure: It is in my interest to pump this company as I own stock, however facts are facts. I am a private individual and not a day trader I am based in Europe and am English.