Tuesday, September 01, 2009

Feedstock Producers

Supply of feedstock for the so-called advanced biofuels - waste grease, corn stover, forest trimmings or sawdust - is a critical element in the transition away from a fossil fuel economy. This makes a stake in the supply chain a viable option for investors.

We avoided the corn producers supplying the corn ethanol producers on economic as well as moral reasons. (See our posts in early 2007 on the questionable wisdom of Iowa’s goal to transform from the ice cream capital of the world to the country’s “fuel basket.”)

Instead we opted for Darling International (DAR: NYSE) which holds a dominant position in the food by-products industry. The company has a long history of collecting tallow and fat from meat processing plants and slaughter houses for use in animal feed, soaps and other chemicals. It does not end there. Darling also collects used grease from restaurants. Biofuel created a new target market for its finished goods.

Darling has also been trying to break into renewable fuel production. The Company is partnering with local government in San Francisco to build and operate a biofuel plant that will produce fuel for municipal vehicles. Management is still searching for a refinery partner to get into the renewable diesel business. The most recent Renewable Fuel Standards may have improved Darling’s prospects. (See the post August 25th post “Most Renewable.”)

Another promising feedstock is forestry waste - wood chips, sawdust, etc. This makes the paper mill industry a good place to look for future upstream suppliers in the biofuel sector. Consider Canada-based Domtar Corporation (UFS: NYSE) which produces a variety of paper products and lumbar. Domtar has had its share of difficulties, but recent increases in pulp prices have put wind under the stock’s wings.

Even so-called waste streams are likely to experience demand induced price pressure. Traditional uses of these commodities are likely to get edged out as new biofuel plants come on-line. Darling has already experienced increases in prices for its fat, tallow and grease end-products and dairy producers in some areas have been priced out of the sawdust they have long used as floor covering in milking barns.

These economic realities bode well for the waste stream owners like Domtar or the collector/aggregator like Darling who has strong relationships with smaller waste producers.

Neither the author of the
Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy recommendation on DAR.

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