Biofutures International, a stock which has had a pretty rough time since going public at the peak of the market in early May 2006, has just announced news that its unit Zurex Corporation Sdn Bhd has signed a deal with JJ-Lurgi Engineering Sdn Bhd which is to supply components to build a biodiesel plant in Lahad Datu in Sabah, Malaysia.

Of background interest here is that Malaysia took the political decision in late 2005, to encourage biodiesel production from palm oil, to combat the high price of oil and to increase demand for domestically produced palm oil.

The lesson from this is that whilst not everyone is convinced of the environmental and economic benefits of biofuels, in many parts of the world, they enjoy substantial political support.

As a rule, I try and stay clear of the politics on this blog - that's not what investment should be about. Numbers and facts should rule the roost, period. But investors have to take note of the rise in US biofuel stocks in anticipation of President Bush's speech. And we still don't know what he will say !

Meanwhile, today Pacific Ethanol has been upgraded by one analyst to outperform, which is pretty good timing for them.

Oil meanwhile has closed up to $55.

As I said in my blog here on the 17th January "Could it be that the oil selloff has overshot and that ethanol stocks may be on the way up again?"

At the moment, the answer would appear to be yes.

A lot of people in the nascent ethanol industry have been more than a little concerned about the falling price of oil - just take a look at the daily WTI price here. No on has an exact universal figure, but they are worried because US-based ethanol production from corn is only in a profitable range when oil reaches $45 - $50 a barrel.

At a recent OPEC meeting in New Delhi, the Saudi Oil Minister said that no additional cuts in production were planned and this sent oil prices down still further. But reading between the lines of what he divulged, it would appear that he may think that the already planned for 500,000 barrel a day cut due to start on Feb. 1st 2007 will do the job to take oil prices up again.

So could it be that the oil selloff has overshot and that ethanol stocks may be on the way up again?

Today after a quick glance (and I haven't looked at all of the ethanol stocks - see here for those) , Pacific Ethanol is trading up over 4%, Andersons is up nearly 5%, Aventine Renewable Energy Holdings is up 2.45% and this while WTI does not appear to be going south of $51.

Meanwhile, last Friday, Pacific Ethanol was upgraded to neutral by a Bank of America analyst.

The oil ethanol relationship fascinates me. Oil has been so volatile in the last year so timing is everything. For example, if one had bought WTI crude at the end of 2005 ($61.04) and sold exactly at the end of 2006 ($61.06), your total return would have been just 0.03% !

One way or another, I'm sure that the next couple of months in oil prices and the underlying performance in biofuel stocks could prove to be very interesting indeed.

A good piece here that lucidly illustrates the limits of scaling up on biofuels.

Corn futures are now trading close to a 10 year high.

As the article says . . .

"Rising demand for alternative fuels is eroding supplies of crops normally used for animal feed or food processing. U.S. production capacity for corn-based ethanol, already at a record, may double in the next two years, and the government said last month demand for biodiesel made from soybean oil may rise 17 percent in 2007. The U.S. is the largest producer and exporter of both crops."

This reminds me a bit of the solar industry - the same growing pains and rising prices that come from a competitive shortage of feedstock. For the solar industry it's the shortage of high-grade silicon for which they compete with a more powerful semiconductor industry; for the biofuels industry it's the shortage of crops for which they compete competing with the food industry.