The Ethanol Investment Craze

Advocates of renewable energy must be happy to see Wall Street firmly embracing the rise of ethanol, specifically American corn-based ethanol. There has been a surge of ethanol popularity in the media, including stories on “60 Minutes” and CNN and “Live Green Go Yellow” ads by GM, and there is a corresponding ethanol craze among investors. The investment interest in ethanol is borderline frenzy. This is dangerous, because investors seem to be pouring in money just on the basis of seeing the word “ethanol,” without any detailed understanding of the corn ethanol industry and factors affecting the ethanol market.

I am an advocate of alternative energy and I have no bias against ethanol or in favor of oil. In fact, politically I am pro-ethanol, both for environmental protection and for energy independence. However, there are economic data to consider when making financial investments. American corn ethanol is being promoted by many of the investment banks that brought on the dotcom boom and bust of 2000, and there might well be a similar bubble growing in ethanol investment that may pop with devastating consequences for American ethanol. While writing a research report on the corn ethanol industry for altenews.com, I came upon an extensive assortment of statistics that will put a damper on corn ethanol in the next five to ten years. After a consideration of market data, there are some interesting and disturbing factors for investors to consider before investing in ethanol in America. There are also some aspects of corn ethanol that will bother environmentalists. I will offer analysis of some of these factors below. There are simple dynamics of supply and demand that will cause the price of corn ethanol to drop within the next ten years. Ethanol demand has been created by federal and state government mandates requiring ethanol use, including the switch from MTBE and the Energy Policy Act. However, fueled by the ethanol investment boom, so many new plants are being built that ethanol capacity will outgrow mandated usage in the near future. When that happens, supply will be greater than demand and the price of ethanol will drop. The profit margin for ethanol producers is dependent upon enormous government tax incentives and tariffs. If government support for ethanol, which is currently propped up by farm state Senators and industry lobbying, were to fade away, then profit margins would suffer fatal blows. Much of the political interest in ethanol is as a way to counter high gas prices which anger voters, and if crude oil and gasoline prices drop, it may sap political support for ethanol. Ethanol gets less mileage per gallon than gasoline, and wholesale ethanol costs more than wholesale gasoline, so if oil prices drop and bring down gas prices it will produce brutal competition from gasoline. Ethanol has not yet achieved mainstream status among drivers, so it must be able to compete with gasoline. Thus, the success of ethanol depends upon the price of oil. There is also a lot of data concerning tight corn supply that may bring the price of ethanol up and lead to competition between corn for fuel and corn for food. Ethanol has been championed by environmentalists and advocates of clean energy. However, there are factors in regards to which it may not be best for renewable energy activists to like the corn ethanol produced in America as opposed to two other kinds of ethanol, the sugarcane ethanol made in South America and the cellulosic ethanol that is being developed in research laboratories. Brazilian sugarcane ethanol is cheaper to produce and more energy efficient than American corn ethanol, and the only thing protecting corn ethanol is the prohibitive import tariff. However, Brazilian ethanol may reach America duty-free through a loophole in CAFTA and the Caribbean Basin Initiative. Brazil’s ethanol has led Brazil to the position of having forty percent of its fuel needs filled by ethanol, marking it as far advanced over America in ethanol usage, in part because of the qualities of sugarcane ethanol. Cellulosic ethanol, which is already being produced in Canada and whose large-scale production is in the development stage, may be six times more energy efficient than corn ethanol and produce no pollution, which would be significantly cleaner than corn ethanol. The American corn ethanol lobby, funded by the ethanol investment craze, may exert political power to suppress sugarcane ethanol and cellulosic ethanol, in which case it may actually act against the anti-pollution agenda of clean energy in the long run. Competition from Brazil and cellulose will also have a harsh impact on corn ethanol profits. There are other arguments that can be made against the environmental benefits of American corn ethanol. The nation’s largest manufacturer of ethanol, ADM, is reported to be burning coal to power its ethanol production plants. Research suggests that ethanol made from coal-burning plants has no net benefit in terms of reducing air pollution. It has also been reported that ethanol plants have enormous water needs, demanding as much as two million gallons per day, which may upset some water conservationists. Another factor to consider is the impact of celebrity endorsements of ethanol, which are distracting investors from the hard data of the ethanol market. Richard Branson and Ted Turner are often cited, but they are reported to have interest in cellulosic ethanol as well as corn ethanol. Bill Gates is perhaps the most well-known endorsement of corn ethanol with his $84 million investment in Pacific Ethanol. What is little talked about is the fact that Bill Gates received extremely generous terms for his investment that the average investor will never come close to. Based on the one-to-two conversion ratio of his preferred stock to common stock, it can be said that Gates paid one fourth of the price that the average investor paid for Pacific Ethanol stock on the same day of the transaction. Also, the terms of his investment give Gates substantial control over the company. Big name endorsements and media coverage are causing an ethanol investment craze that is overwhelming the tendency of investors to invest based on actual data. The full text of my analysis of the ethanol industry and the statistics to support my conclusions can be found in the research report called “Ethanol Investment: Golden Opportunity or Fool’s Gold?” in the research report section of Alternative Energy News Source, www.altenews.com/researchreports.htm. To summarize my conclusions, ethanol deserves political support for environmental and energy independence purposes, but investors interested solely in profits should be cautious. If the ethanol boom goes the way of the dotcom bubble, then various factors will cause the majority of ethanol startups to go bust in five to ten years, having been nothing more than fool’s gold, but the better ethanol companies will survive and prosper, creating golden opportunities for investors who study things such as supply of raw materials, manufacturing costs, and other market data. Anyone who likes ethanol should also be on the lookout for the development of cellulosic ethanol, which will one day revolutionize the biofuels industry. Investors and environmentalists who are troubled by this information are invited to read “Ethanol Investment: Golden Opportunity or Fool’s Gold?” which is available free to the public on altenews.com. About the author… Russell Hasan is a graduate of Vassar College. He is the founder of Alternative Energy News Source (altenews.com). He cares passionately about environmentalism, and his reports and editorials focus primarily on the investment opportunities of clean energy.
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