Tuesday, December 19, 2006

Catch a Ray...Postscript

Before moving on to the next topic in the Biofuel Series it is worthwhile to make note of technology advances in the ethanol process that will impact direct costs for feed stock as well as the plant facility. (See the post “Catching a Few Rays” for the beginning of the series.) The importance of achieving advancements in feed stock for ethanol production in particular is underscored by the fact that ethanol prices are not correlated with corn feedstock costs. This means that if the price of corn rises, it will not be possible for the ethanol producer to pass that along to customers.

If you are following the train of thought in this Biofuel Series, this means less reliance on feed stock with competing uses that could drive up costs. Of course, investment in process technology presents another cost, which may or may not be capitalized and amortized as an expense once operations have begun.

There is also a time to market issue. Management of Green Plains Renewable Energy (GPRE: Nasdaq), chose to forge ahead with using the whole corn kernel as a feed stock in order to gain an early foothold in the industry. They believe that efficiencies in using corn will follow, allowing them to get more out of the corn kernel. Their original plant construction plans were based on being able to buy corn at an average price of $2.35 per bushel. The USDA recently increased the midpoint of its projection for the 2006-2007 marketing year average farm price for corn to $3.10. Time may be of the essence, although GPRE chose sites for their plants that are thought to be close to low-priced corn. (More on the location topic in a future post in this series.)

Ethanex Energy, Inc. (EHNX: OTC/BB) is already moving ahead with one of those efficiency technologies called “fractionation.” (
Cereal Process Technologies provides a very good demonstration on how it works.) In short, during the milling process and before distillation, the corn kernel is separated into three components: 1) the Germ for refined corn oil, 2) the Bran for cattle feed and 3) the very starchy Endosperm that can be converted to sugar and then distilled by itself. This added pre-distillation step is expected to reduce processing costs since distilling the endosperm by itself will require less water and less fuel (more on this fuel requirement in a subsequent post on the milling process).

Fractionation is not proprietary to Ethanex as it has been in widely used in making food-grain products for decades.
Biorefining, Inc. of Minnesota has four U.S. patent applications pending, which could put a limitation on late adapters who stumble on Biorefining’s techniques. Biorefining estimates that its “Biomilling” process could lead to as much as a 17% gain per batch in the conversion of starch to ethanol. Thus those ethanol producers seeking efficiency may find it worthwhile to invest in a license of the process.

A small number of ethanol industry aspirants are opting to bypass corn as a feedstock altogether and are working on augmentations to the processes used for producing fuel-grade ethanol. While it takes another, sometimes difficult step to convert the cellulose in plant cell walls to starch so it can be distilled, it will make it possible to use all a variety of plants (switch grass) or plant parts (corn stalks and leaves) in the distillation process. (The Renewable Fuels Association provides a concise explanation of
cellulosic ethanol.)

Alternative Energy Sources, Inc. (AENS: OTC/BB) will initially use corn as a feed stock, but claims to have a cellulosic plant on the drawing board for location in the Eastern U.S. DuPont Co. (DD: NYSE) has been cultivating bacterium that pump out ethanol after eating chopped up leaves and plants stalks. Archer Daniels Midland (ADM: NYSE) 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.

The widespread availability of alternative, high-cellulose feed stocks at low prices make “cellulosic ethanol” a very attractive business proposition. The trade-off is the added investment in process technologies and plant equipment. The verdict is still out on the profit margins for such an operation and whether it will translate to attractive stocks for investment.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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