Investing in Biofuel Companies

Sobering Up from Ethanol Inebriation

In the past two years the price of corn in the United States has more than doubled, driven partly by demand for alternative fuels such as ethanol.

That is one of the key pieces of data being used to fuel the growing debate now known as food versus fuel.
And that debate has been increasingly in the limelight as global food prices continue to climb, causing unrest in numerous locations around the world.

In the past few weeks alone we've seen riots in developing nations including Indonesia, the Philippines and Haiti.

But for all the now-known harms associated with using food for fuel, that action isn't the only thing causing food price angst.

World Bank President Robert Zoellick says there is in fact a "perfect storm of things coming together" that is causing higher food prices--mainly financial market speculators, high energy prices and increased demand for food.

And with rapid advances in technology and refining techniques, biofuels may not be in as much trouble as some would have you think.

You see, a growing number of companies are now pursuing cellulosic technology, which can be applied to a variety of non-food crops like grasses and to waste products like food scraps and corn stover.

Plus, with the problems of first generation biofuels now exposed and known, new biofuel regulations are being imposed to make sure they actually reduce emissions and don't contribute to higher food prices.

Investing in Non-Food Biofuel Companies

If you need evidence that the biofuel market is not dead, just look across the pond.

Over the weekend, Germany's environment minister said the European Union can still achieve its 2020 target of 10% biofuels without adding to soaring food prices.

And biofuel mandates here in the U.S. requiring 36 billion gallons a year to be in our pipelines aren't going away either.

So more and more, it's looking like corn-based ethanol is old news as companies and The Street increasingly focus on investing in cellulosic ethanol and biodiesel.

It may be contrarian, but check out just a few of the recent transactions going on in this industry:

Copec to Invest $650 Million in Forestry and Energy Operations; Company to Research Cellulosic Ethanol Production

Iogen Corp. Receives Tentative Approval for $500 Million Cellulosic Ethanol Plant Near Saskatoon, SK

Range Fuels Receives $100 Million in Funding for Cellulosic Ethanol Research and Production

Coskata Raises $19.5 Million in Funding for Cellulosic Ethanol Research

But this industry isn't limited to just private companies. A slew of public companies are also entering the space, on both the cellulosic ethanol and biodiesel sides.

O2Diesel Corp. (AMEX: OTD) recently entered into an agreement with KL Process Design Group to develop cellulosic ethanol projects in Europe and other burgeoning markets.

Incidentally, KL is the first company to bring a small scale wood waste cellulosic facility to commercial scale in the U.S. That means their technology isn't using food or agricultural land to create fuel.

And I've got my eye on a few other cellulosic ethanol companies that are making ethanol in novel ways, like from construction waste and trash that would otherwise end up in landfills.

On the biodiesel side, Gushan Environmental Energy (NYSE: GU) has been on a near 100% run since March 10th. The China-based producer of biodiesel from animal fat and waste grease has been receiving increased attention from The Street despite posting less than stellar 4Q numbers in early March.

The Bottom Line on Biofuel Companies

The major players in the corn-based ethanol game--Verasun Energy Corp (NYSE: VSE), Pacific Ethanol Inc. (NASDAQ: PEIX), et al.--have been on a significant downslide for the past year or so.

Their decline has kept some of the non-food biofuel plays low as well. But as the truth about cellulosic ethanol and biodiesel is disseminated, and the differences between food-based and nonfood-based biofuels become clearer, I suspect we'll see an uptick in the latter.

Of course, I wouldn't touch any of the traditional corn-based companies with a ten-foot pole.

But picking up some shares of battered cellulosic and legitimate biodiesel companies could be a successful green contrarian strategy.

Call it like you see it,

Nick

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