Tuesday, August 29, 2006

Stalks and Stocks

Clearly the U.S. economy needs alternatives to carbon fuels for power generation. The use of ethanol as a motor vehicle fuel has been around since the first cars hit the road in the early 1900s. I will also concede that it is laudable to harness value what would otherwise be a waste product sent to a landfill.

Yet it seems more sensible to use the pokeweed for ethanol (See the August 25, 2006 post,
Polk Sallie Annie.) than highly desirable corn that could be used for animal and human food. Unfortunately, pokeweed is probably not any more suitable for producing ethanol than it is for eating.

There is potential in other plants, such as switch grass, and waste products like wheat and corn “stover” (stalks and leaves) left over after grain harvest. Unlike corn, which has great stores of starch in the pulpy part of the kernel, stover yields cellulose.

While it apparently takes another, sometimes difficult step to convert the cellulose in plant cell walls to starch so it can be distilled, the widespread availability of large cellulose feed stocks at low prices make “cellulosic ethanol” a very attractive business proposition. The Renewable Fuels Association provides a concise expose on
cellulosic ethanol.

A number of players, both large- and small-cap, in the agriculture and chemicals industries have been working on projects that would facilitate the plant cell wall to starch step.
DuPont Co. has been cultivating bacterium that pump out ethanol after eating chopped up leaves and plants stalks. Archer Daniels Midland is also experimenting on the use of the cellulose exterior as well as the starchy center to wring more ethanol out of each kernel of corn. Iogen Corporation (private) is operating a pilot plant that uses enzymes to complete the cellulose to starch step.

At least one of the established ethanol producers is close to commercial operations in the U.S. Spain-based ethanol producer,
Abengoa, S.A. (ABGOF: OTC/PK), is planning a pilot in Spain to be followed by a commercial plant in the U.S. that would use wheat straw to produce ethanol. The U.S. subsidiary, Abengoa Bioenergy, plans to use a microorganism developed by Cargill, Inc. for the critical cellulose to starch conversion.

However, Abengoa may not get first mover status in the U.S.
Alternative Energy Sources, Inc. (AENS: OTC/BB) announced just this week that it has optioned a corned of a Kankakee, IL industrial park for a 110-million gallon ethanol plant and earlier announced plans for a similar plant in Iowa. Although these two plants will use corn as feed stock, AENS management claims that they have a cellulosic plant on the drawing board for location in the Eastern U.S.

As enticing as the renewable energy sector in general and ethanol companies in particular might be for the small-cap investor, it is important to remember that market opportunity should not be the only criteria in selecting a stock. The news last week from
Xethanol Corp. (XNL: AMEX) of unexpected changes in top management, provides a good reminder that a company can still falter on poor execution and the stock may follow. XNL closed at $4.85 on August 28th, down 68% from its 52-week high established in May 2006.

1 comment:

Anonymous said...

I have made your web-log one of my favorites. Interesting observations you make in there!!

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