Tuesday, January 09, 2007

Food for "Green" Thought

Investors looking at the biofuel producers (or aspiring producers as the case may be) have their work cut out for them. Biofuel is a broad category encompassing several different technologies - fermentation, anaerobic digestion and transesterification. Then there are a variety of choices relating to raw materials and proprietary process alterations. Each technology carries different requirements for capital investment and operating costs. Some investors might appreciate more background information before trying to crunch numbers.

An early mover/shaker in the biodiesel field, Lyle Estill, penned a little tale called Biodiesel Power on Piedmont Biofuels, a biodiesel coop in North Carolina. Estill is among the pioneers in this field and so his thrusts and parries against government regulation and energy politics can be forgiven. He is entitled to complain, especially since
Piedmont Biofuels has gone further than anyone expected - from a small-scale experiment in recycling vegetable oil to relatively large-scale commercial biodiesel production. While some investors may be uncomfortable with the high level of passion among Piedmont’s principals and followers – the fervor is certainly represented in Estill’s book - we note that passion has been the driving force behind a number of investment sectors we now take for granted. Where would the Model T or the automotive industry have ended up without the single minded ambition of Henry Ford?

The majority of books on methane discuss this gas in the context of global warming, but methane is our friend in the production of methanol through anaerobic digestion. It is not easy reading, but Beyond Oil and Gas: The Methanol Economy by Olah, Geoppert and Prakash provides compelling arguments for methanol over hydrogen as the alternative renewable energy source. Olah is a Nobel Prize winning chemist, lending credibility to the team’s viewpoint that, since petrochemicals permeate nearly every aspect of the industrial world, it will take a new source of carbon to replace fossil fuels. Olah and his pals demonstrate how methanol can be changed chemically into the precursors for just about any contemporary “petro” product you can name. Some investors may think this book sounds like a hymnal the choir already knows by heart, but there is a great deal of information in Beyond Oil and Gas that explains methane chemistry and therefore sheds light on the business of methanol production as well as potential demand drivers.

One last book I would like to suggest - The Omnivore’s Dilemma by Michael Pollan - is only indirectly related to the biofuels area. However, I mention it here because biofuel production abuts the food chain and therefore must be understood in the context of competing uses for the organic materials favored for feed stocks, particularly ethanol. Pollan is looking at the food chain in his book, which is divided into sections on industrialized food (think McDonalds), organic food (think Whole Foods) and gathered foods (think the backyard garden or the tomato plant in the window).

In tracing the food we eat back to its origins, Pollan finds some interesting factoids. For example, thirteen of the thirty-eight ingredients in McNuggets are derived from corn. Indeed, forty-five of the items on McDonald’s menu are made from corn, which has is touted by the ethanol industry as the fossil fuel replacement. Speaking of fossil fuel, according to Pollan the food industry burns 20% of the petroleum consumed in the U.S. That is more than what we burn in our cars. The strawberry is Polan’s best example. A single strawberry provides five calories, but it takes 435 calories of energy to get the strawberry from the field in California to a plate on the East Coast. Now there is an economics lesson to ponder!

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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