Is Ethanol Dead? Not So Fast

Includes: ADM, VSUNQ
by: Max Blankfeld

A few months ago, I wrote about how the number of flex-fuel cars was increasing in Brazil and sugar-cane ethanol has been a thriving industry for years, without causing damage to food production.

Fresh news related to the ethanol industry, both in the US and in Brazil, should point us to the direction where this industry will go in the coming years.

The serious proponents of ethanol for the transportation industry always stressed the fact that using corn for ethanol production was absolutely stupid, as the yield compared to sugar-cane ethanol is seven to eight times lower. Therefore, in a situation where gas prices were to drop, and/or corn prices were to go up, corn ethanol would be totally unfeasible. Well, it did not take long for reality to surface.

Last week VeraSun Energy (VSE), the largest US corn-based ethanol producer filed for bankruptcy. Let's be realistic: no reorganization plan will work for VeraSun if it continues to rely on corn for ethanol production. It simply won't be competitive.

Archer Daniels Midland (NYSE:ADM), another big corn-based ethanol producer seems to be "seeing the light", and announced this week that it has entered a joint venture for the construction of two sugar cane ethanol plants in Brazil. No wonder: sales of ethanol for transportation in Brazil keep growing, and just this week, the Brazilian National Oil Agency has announced that cumulative sales of ethanol until September have surpassed gasoline by 1.6%, measured in number of gallons.

While sales of ethanol for the year had a 29.7% increase over the same period last year, sales of gasoline remained flat. If we look at the month of September alone, the number of gallons of ethanol surpassed by 6% the number of gallons of gasoline consumed in Brazilian roads. The reason is clear: sales of flex-fuel cars in Brazil corresponded so far this year to 87.6% of total car sales (ANFAVEA), and those numbers have been increasing year after year, meaning that the aged fleet of gasoline cars is being replaced by flex-fuel cars, and thus, the market for ethanol can only increase. This is ADM's bet.

But I would want to believe that ADM has another reason for its bet, a reason related to the US market: last year the car industry committed to make half of their cars and trucks capable of running on alternative fuels by 2012 if enough E85 is available. This commitment may soon be transformed into a requirement if the "Open Standard Fuel Act" is approved by the new Congress. The odds are very favorable: during the electoral campaign, at all levels, one of the top priorities stated by all candidates, independent of the party, was "energy independence".

If the "Open Standard Fuel Act" becomes reality, producers of ethanol like ADM will be more motivated to invest not just in the US, but also abroad, because the US consumption of ethanol will substantially grow to a point where the 54 cents tariff over ethanol imports will have to be dropped. At that point we will have competition between different types of fuel, including the widely expected electric plug-in cars, and sugar-cane ethanol will be alive and well.

Disclosure: Author holds positions in VSE and ADM

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