U.S. corn ethanol's on the ropes.
The problems start with water.
That's because domestic corn-based ethanol requires between 3 and 4.2 gallons of water for each gallon of fuel output, depending on whose numbers you trust.
Of course, the domestic ethanol industry gives the more favorable 3-to-1 ratio. Other number crunchers—some of them paid by fossil fuel interests—say the amount of H2O it takes to produce the top American biofuel is too high to justify.
"We're definitely looking at something where the cure may be worse than the disease," said one representative of the industry group Ceres, whose research focus is highlighting the potential economic harm of transitioning to renewable energy.
The real problem, though, is that ethanol is a political "maybe" in an era of decisive and broad government initiatives. Why?
The answer is that, on a worldwide scale, U.S. ethanol is in a sort of confused adolescence. It's not a newborn anymore, but it's still far from full adulthood.
From 6.5 billion gallons in 2007, the U.S. ethanol industry churned out 9 billion gallons of the biofuel in 2008. That's 52% of the world's ethanol production, but still most American motorists aren't able to put ethanol in their tanks.
That's a huge disconnect. Fortunately there's a better alternative...
Sugar Ethanol Sweetens While Corn Ethanol Sours
On the other end of the ethanol spectrum, nearly 90% of the cars sold in Brazil can run on a flex-fuel mix of sugarcane ethanol and refined petroleum.
From humble beginnings during the 1970s oil shock, sugar ethanol outsold gasoline in Brazil last year. The sweet fuel is not only homegrown, it's also cheaper. That's not the case in most U.S. regions, where filling up with corn ethanol blends only becomes economical at astronomical gasoline prices.
Corn ethanol boosters hope for 15 billion gallons of domestic ethanol production per year by 2015, but that assumes continuous funding access and public enthusiasm...
Both are sorely lacking.
Publicly-listed U.S. ethanol producers are coming into the harsh light of the recession as energy prices plummeted and investor optimism on the domestic market cools.
Just in the past month, Illinois ethanol producer Aventine filed for Chapter 11 bankruptcy protection.
Pacific Ethanol (NASDAQ:PEIX) execs recently told investors (including Bill Gates) that it doesn't expect to make it through April, and more companies are looking shaky. PEIX in fact now trades for under 50 cents a share.
Thing is, a lot of firms like Pacific Ethanol and Aventine enjoyed nice market returns for a while.
But they couldn't hang in tough times.
Between market realities and political positioning, corn ethanol falls through the cracks.
The Regional Water Advantage
American auto makers are inching towards a higher proportion of domestic sales of vehicles that will run on E85 and other blends, but as with so many of Detroit's troubles, it may be a case of too little, too late.
We are seeing movement towards more aggressive competition within the U.S. biofuel industry. As weaker companies fail, it's clear that tacking "ethanol" onto a company's name is not the Midas touch.
Regional competition within the U.S. is also picking up, with water as a key differentiating factor between geographies.
The journal Environmental Science and Technology is showcasing a study this month that Midwestern ethanol production is easier on water resources than biofuel produced in the western U.S.
The University of Minnesota study finds that ethanol produced in California uses 2,100 gallons of water per gallon of ethanol!
Minnesota uses 96 gallons of water in similar processing facilities.
Brazil tops all the U.S. states, with the Brazilian Agricultural Research Cooperation agency rating sugar cane crops as Level 1: Zero Impact.
Climate and government initiatives combine to make Brazil the optimal ethanol environment. Some Southern U.S. states like Louisiana can grow cane in similar conditions, but the damage has been done to the corn-heavy domestic investment landscape and public opinion.
Geography matters when it comes to ethanol investing, and all renewable energy forecasts, for that matter.
GEX is up 24% in the past month.
I'll fill you in with all the latest data and investment opportunities from Brazil next week as I take part in the Renewable Energy Finance Forum.
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