Forbes Magazine, 8th May

The price of corn, the primary feedstock for ethanol in the U.S., climbed in the first quarter of 2007, as anxiety about supplies reached a pinnacle. The strain on the nation's corn crop is greater than ever, as the food and alternative fuel industries vie for a share of supply.

What a mess !

Government support for domestic ethanol producers through biofuel mandates is having the perverse effect of reducing their profitability and by extension, future investment potential. As any economist would agree, when demand exceeds supply, prices almost always go up and this is exactly what happens when overnight, you start to demand fuel as well as food from a limited and not quickly scaleable supply of corn. Verasun for example has just posted a Q1 loss primarily because it had to pay $4.05 per bushel of corn compared to $1.87 for the same period a year ago. Let's face it, an over 100% inflation rate per annum in your critical feedstock would hurt anyone.

Having said that, high corn prices can work the other way too; in higher ethanol revenues. Although ethanol pump prices are not risng as fast as corn - according to the same article, $2.13 a gallon on average compared to $1.77 last year. Is this just a time lag?

I don't know.

But it might be a useful performance metric to ask any ethanol producer; what are they paying on average per bushel of corn and how successfully are they offsetting that in higher ethanol sales?

If you'll forgive the pun, this just might be a good way of separating the wheat from the chaff of a struggling industry.

The Andersons, whose ethanol division is involved in the construction of two ethanol plants in Indiana and Michigan that, when completed, will collectively be capable of producing 165 million gallons of ethanol, has just dived on a profit warning, below the Wall Street average, leading to a downgrade.

There is though potential help on hand for all US-based ethanol companies - the summer driving season, which is supposed to kick in around mid-June. And some think that this may lead to $4 a gallon gasoline - see this piece on Bloomberg. So theoretically, the increased demand for fuel in the absence of adequate supply ought to boost the asking price for blended ethanol - but is that right?

Well, maybe not. The futures market is not yet anticipating higher ethanol prices throughout the summer - the peak appears to be now, not in June, July or August. Of course, this would all change very rapidly in the event of major unrest, or worse, a new war in the Middle East . . .

I have the occasional unsubstantiated fear that the Chinese curse of "interesting times" is fast approaching us, or a sustained period of "unknown unknowns" ad Donald Rumsfeld used to say - or even "Black Swans", as described by by Nassim Nicholas Taleb in his recently published book, "The Black Swan: The Impact of the Highly Improbable".

Yet if there's one positive that emerges from any number of potential threats to the world's peace and stability this summer, I just can't see alternative energy emerging on the losing side.

Novozymes, the Danish biomass division of which concentrates on next generation cellulosic biofuels (and is thought to be ahead of everyone else) fell 14 to 532 on profit-taking after the stock rose yesterday, when UBS raised its target price for the group to 600 dkr from 552 dkr following the group's strong first-quarter report.

UBS is compared to Danish Jyske Bank earlier this year, much more upbeat about Novozymes - raising its 2007, 2008 and 2009 EBIT forecasts by 10 pct, 3 pct and 3 pct respectively.

The big picture is that worldwide, concerns about biofuels and their environmental impact appear to be rising rather than diminishing. Already in Europe, plans are underway by the Dutch to establish sustainability guidelines which are almost certainly going to reduce their import from developing countries. This follows the recent admission by EU officials that there was no system in place to tell whether biofuels had been imported (and they presume, perhaps wrongly, from non-sustainable sources) from outside of Europe or not.

In the medium to long run, I believe these legitimate environmental concerns point to a resolution through cellulosic biofuels. Nevertheless, two hard questions remain about cellulosic biofuels, a bit like most fuel cells;

when will they be available?

and at what price?

Novozymes, the Danish biomass division of which concentrates on next generation cellulosic biofuels (and is thought to be ahead of everyone else) fell 14 to 532 on profit-taking after the stock rose yesterday, when UBS raised its target price for the group to 600 dkr from 552 dkr following the group's strong first-quarter report.

UBS is compared to Danish Jyske Bank earlier this year, much more upbeat about Novozymes - raising its 2007, 2008 and 2009 EBIT forecasts by 10 pct, 3 pct and 3 pct respectively.

The big picture is that worldwide, concerns about biofuels and their environmental impact appear to be rising rather than diminishing. Already in Europe, plans are underway by the Dutch to establish sustainability guidelines which are almost certainly going to reduce their import from developing countries. This follows the recent admission by EU officials that there was no system in place to tell whether biofuels had been imported (and from non-sustainable sources) from outside of Europe or not.

In the medium to long run, I believe these concerns point to cellulosic biofuels. Nevertheless, the hard questions remain;

when will they be available?

and at what price?