Assets: Corny Business

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Jordan predicts this for the industry: “The bigger guys are going to survive and the small guys are going to have some problems. That’s kind of sad. The government mandates were directed to the farmer co-ops,” which are the smallest ethanol producers.

Neal Dikeman, a partner in the San Francisco-based Jane Capital Partners LLC, a merchant and investment banking firm, says he thinks ethanol stocks as a long-term investment is a risky option. “The trick for investors is to understand that this is a short-term opportunity to make profits,” says Dikeman.

He doesn’t see a rosy long-term picture. “Refineries are not a regionalized business. It’s a big player game. With them, there is scale and lower costs, two big drivers of profit.” Investors should avoid smaller, higher cost ethanol companies “unless you can make your money quickly.”

The Archer Daniels Midland Co., the leader in ethanol production in the United States, posted a 4 percent profit during the first quarter of this year, but didn’t meet its forecasts. As a result it saw a 5 percent decline in its share price.

And, as ethanol production increases, consumers will feel the pinch. The price of corn has doubled from $2 a bushel to $4 since last year and is expected to continue to rise as U.S. corn is diverted to ethanol production.

Pacific Ethanol has a plant in Madera, Calif., which opened in October, and is building four others: Stockton, Calipatria in Imperial County, in Boardman, Ore., and in Burley, Idaho. All are expected to be up and running by next year. It also has 42 percent interest in Front Range Energy LLC, which operates an ethanol plant in Windsor, Colo.

Koehler recently told analysts that although high demand has raised corn prices, corn-growing acreage nationwide is increasing by 15 percent and by 20 percent in California. He says the growth will help ease climbing prices. But the one thing that could really clip the company’s wings is if cellulosic ethanol is perfected — UC Davis is one of the world’s leading research centers for turning cheap green plant material, either grown or recycled, into ethanol.

Brazil is already the world’s leading producer of ethanol using sugarcane. For many reasons — not least that it takes as much energy to make corn-based ethanol as it produces — the race is on to create a new process that uses a different raw material. This could leave Pacific Ethanol with lots of outdated plants.

Matt Hartwig, spokesman for the Washington, D.C.-based Renewable Fuels Association, a trade organization for the ethanol industry, believes the success of ethanol companies is obvious. “We’re not talking about totally replacing gasoline,” says Hartwig. “We’re starting to diversify the energy portfolio of the country to where we’re using a variety of renewable energy to power our cars, our homes, our economy.”

Pacific Ethanol wants to be one of the major regional suppliers of this fuel. Buy the stock? You’ve probably missed the easy money to be made. But the market looks pretty bullish right now for all things alternative fuel.

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