Can Easing California Regulations Boost Corn Ethanol?

by: World Market Pulse

Considering a proposal from the staff of the state Air Resources Board, California regulators have announced that they could change their view on the environmental impact of ethanol, a decision that might keep the corn-based fuel competitive with other bio fuels. The analysis calculates that the emissions of heat-trapping gases linked to climate change from the production and use of ethanol is required as part of regulations being put in place to meet a state law requiring a cut in greenhouse-gas emissions to 1990 levels by 2020.

As of now, the standard assigns additional emissions to the fuel based on the estimated indirect effects its production has on land use and as a result the air resources board assigns corn ethanol a carbon footprint that's roughly the same as gasoline and greater than other bio fuels. U.S. ethanol producers and supporters have been fighting California's calculations, saying the state puts corn ethanol at an unfair disadvantage against bio fuels made from agricultural and other waste materials.

The proposal to recalculate the Corn Ethanol carbon footprint comes weeks after the U.S. government approved a 50 percent boost in the amount of ethanol in gasoline for newer cars made in 2007 or later, to 15 percent from 10 percent. The announcement comes after the EPA reported that the rise in Ethanol does not harm emissions control equipment in newer cars and light trucks. The Environmental Protection Agency, while approving the request from ethanol producers to raise the amount of ethanol in a gallon of gasoline, named the new fuel E15 gasoline. California is the U.S.'s largest gasoline market and could consume as much as 1.4 billion gallons of corn ethanol produced domestically this year.

Investing in Ethanol

Some investors have certainly made money with ethanol stocks. But investors once made money on dotcoms, too. Making money is no indication that the underlying fundamentals are good. Although investment performance returns from these alternative energy companies may not yet be as competitive as the established companies that are currently in the business of the popular fossil fuels, the technology for these alternative fuel companies may still be a long way away as the issue of having the necessary infrastructure to produce and distribute alternative sources of fuel like ethanol will take quite some time.

Ethanol ETFs

There is an exchange-traded fund ETF that specializes in ethanol and other alternative energy sources: PowerShares WilderHill Clean Energy (NYSE:PBW). PBW came out at around $15 in March 2005, climbed to $24 in May 2006, and is now at $9.35 a share.

PBW Top Holdings:

1. Broadwind Energy, Inc. (NASDAQ:BWEN): 3.01%
2. Ormat Technologies, Inc. (NYSE:ORA): 2.54%
3. JA Solar Holdings Co., ADR ADR (NASDAQ:JASO): 2.47%
4. Universal Display Corporation (NASDAQ:PANL): 2.45%
5. Suntech Power Holdings Co., Ltd. ADR (NYSE:STP): 2.45%
6. Idacorp, Inc. (NYSE:IDA): 2.44%
7. First Solar, Inc. (NASDAQ:FSLR): 2.43%
8. Yingli Green Energy Holding Company, Ltd. (NYSE:YGE): 2.43%
9. ReneSola Ltd (NYSE:SOL): 2.43%
10. CPFL Energy SA ADR (NYSE:CPL): 2.42%

Expense Ratio: 0.60%

Teucrium Corn Fund CORN, a product that offers exposure to exchange-traded corn futures.

CORN Top Holdings:

1. C U0 Pit Comdty Sep10 Corn Future: 37.53%
2. C Z1 Pit Comdty Dec11 Corn Future: 37.38%
3. C Z0 Pit Comdty Dec10 Corn Future: 32.46%

Expense Ratio: 1.00%

Ethanol Market Trends

For two decades, from the early 1980s to the early 2000s, the ethanol industry was largely stagnant. Ethanol production in the US and Canada was growing, but only gradually. Brazil's ethanol output was actually sliding. And worldwide output was stagnating. Then, at the turn of the new millennium, the US government and industry began to push ethanol more forcefully and sales and demand in Brazil, the world's leading producer of Ethanol rose exponentially. The result was a worldwide ethanol production boom that has nearly doubled in five years. The surge in volume has triggered the development of new, more efficient technologies. Right now, the only country with cars running on pure ethanol is Brazil. But a mix of ethanol and gasoline is used in the U.S., the European Union, Mexico, India, Argentina and Japan.

Ethanol Outlook

The Corn Growers Association says that by 2015 a third of all the corn grown — or 5.5 billion bushels — likely will be for ethanol. The Energy Department says it has a goal of 30% of the fuel used by motorists to be ethanol — both corn-based and cellulosic — by 2030.

Corn investment options

Companies such as Corn Products International Inc. (CPO), Archer Daniels Midland Co. (NYSE:ADM), and Bunge Ltd. (NYSE:BG) stand to benefit from rising food costs, particularly increases in the price of corn. As far as the Exchange Traded Funds are concerned the Teucrium Corn Fund (NYSEARCA:CORN) seeks to track the price fluctuations of corn while the Market Vectors Agribusiness ETF (NYSEARCA:MOO) and PowerShares DB Agriculture Fund (NYSE:DBA) offer broader exposure to the agricultural sector.

Corn Fund ((CORN))

The underlying holdings of this fund consist of corn futures contracts traded on the CBOT.
Expense Ratio: 1.00%

Market Vectors-Agribusiness ETF (MOO)

The Index provides exposure to publicly traded companies worldwide that derive at least 50% of their revenues from the business of agriculture. As such, the Fund is subject to the risks of investing in this sector.
Expense Ratio: 0.59%

PowerShares DB Agriculture Fund (DBA)

The Index is a rules-based index comprising futures contracts on some of the most liquid and widely traded agricultural commodities. The Index is intended to reflect the performance of the agricultural sector.
Expense Ratio: 0.75%

Disclosure: No Positions