Saturday, March 24, 2007

In Search of E85

This month I headed out into the country’s mid-section to learn about ethanol production. It has been an eye-opening experience.

South Dakota is considered by some as the laboratory for modern ethanol production. Researchers at
South Dakota State University in Brookings have been leaders in ethanol innovation since the 1970s when the first oil embargo spooked law makers and citizens alike. The agriculturalists at SDSU were inspired. It is not surprising that many of the countries largest ethanol producers, Verasun (VSE: Nasdaq) and U.S. BioEnergy (USBE: Nasdaq) have offices and operations near Brookings.

As I puttered out across the South Dakota prairie in my rented Hyundai (chosen for its brilliant red color and purported fuel economy), I was suddenly struck by the fact that nowhere did I see any signs for E85 fuel. E85 standing for 85% ethanol content. Gas prices climbed steadily during by SD sojourn and I saw no relief, either in my psyche or my pocket book, from the availability of non-fossil fuels of any kind.

Now ethanol fuel is something which I am personally acquainted. You see I am a South Dakota native. My first car out of college (a little Dodge with white seats and, yes, a shiny coat of red paint) was regularly filled with “corn squeezings” as it was called. In the late 1970s and early 1980s, there was no problem in finding gas stations with the corn decal on the pump.

Not so now. For all the hype, there in the heart of ethanol country it takes
a map to find a gas station that sells it. In Brookings, in the shadow of Verasun, Dakota Ethanol, and several other ethanol plants, there are only two gas stations that sell E85. An independent BP station on 6th Street and Schoon’s Pump n’ Pak on Main Avenue.

There is more than one lesson in this observation. First, ethanol is apparently not marketable to the farmers who produce the corn. This is something like an insider sale. If the CEO does not want to own the shares, why should investors? Second, distribution must be yet another stumbling block for the ethanol producer. Only independent gas stations appear to have signed on to E85. Will the majors give in? If they do not participate, does that mean ethanol producers will fall short of the economies of scale necessary for profitability?

The ethanol plants of the 1970’s mostly went bankrupt. What will be the fate of the current crop?

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.

1 comment:

American Lung Association of Minnesota said...

We agree that finding highway signs for E85 is a problem, even here in the upper Midwest. We are working with area lawmakers to solve this.

The best source of Information on E85 in South Dakota, North Dakota, Minnesota, Iow and Illinois is this website from the American Lung Association of the Upper Midwest:

Bob Moffitt
Communications Director
Clean Fueals & Vehicle Technologies Progam
American Lung Association of the Upper Midwest