Introduction to Investing in Biofuel Stocks

This short guide will look at investments in ethanol and biodiesel.

1. Ethanol

Ethanol production has been rising sharply in many countries, thanks especially to government support designed to promote its use as an oil-substitute transport fuel. The result was that for a while some companies enjoyed good profits and strong share prices.

However, especially in the US, ethanol production has been based on corn. This is a relatively inefficient feedstock, in that it does not render a lot more energy than the energy required to produce it. It also produces less power than gasoline. But a powerful lobby has developed in its favor, and a succession of new American plants has been built.

The result recently has been over-capacity, intensified competition and falling sales prices. Share prices have been falling as well, and investors looking at this sector sorely need a crystal ball to gauge future prices and future levels of demand.

Agribusiness giant Archer Daniels Midland Company is America’s largest fuel ethanol producer. Cosan of Brazil – which produces ethanol from sugar cane – is also one of the world’s largest producers. A pure play ethanol stock is Pacific Ethanol.

In the realm of speculation are a group of companies engaged in researching and developing cellulosic ethanol production.

Cellulosic ethanol can be made from numerous kinds of plant material, including some plant waste and some plants that can be grown very cheaply. But it is thought that at least several more years will be needed before low-cost commercial production is viable. Stocks involved include Verenium Corporation and BlueFire Ethanol.

2. Biodiesel

Biodiesel is the name for an alternative diesel fuel that can be blended with regular petroleum diesel, and can be produced from a wide variety of renewable or waste resources, including many plants and even waste grease or the waste from meat production.

Thanks to government incentives, US production has been soaring, from 25 million gallons in 2004 to 250 million gallons in 2006 and an estimated 450 million gallons in 2007. More than 100 production plants were built during 2006 and 2007, making a total of about 170.

However, the rocketing price of soybean oil – the primary biodiesel feedstock in the US – has seen profits plummet. In January 2008 one producer, U.S. Bioenergy of America, filed for bankruptcy protection, and the country’s largest biodiesel producer, Imperium Renwables, withdrew plans for an IPO.

February 8th, 2008

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