Let’s face it; the record on conventional biofuels as a carbon-reducing, environmentally friendly, energy security-enhancing, cost-effective solution has come in for an absolute battering in recent months. And that’s not altogether unfair. Food prices have risen because the feestocks are not quickly scaleable, the rainforests in Borneo are being decimated to grow palms, no one will ever be oil price independent from instability in the Middle East (especially a WMD exchange between Israel and . . . take your pick) and oil prices are still going up.

So enter the slimy, green stuff.

When I look at this, I see a failed pond. Oxygen poor, virtually lifeless. But algae likes that. Alternative energy enthusiasts are intrigued because the energy density of algae is much greater than crude. Algae can also be refined to make petrol, diesel, jet fuel, and chemical feedstocks for plastics and drugs.

There is as yet though, no listed stock - according to AEI criteria - in the business of algae. Just this OTC stock, Global Green Solutions, which is mentioned in this article here. I suspect that will change in the next few years. And the dream is to connect a coal plant’s CO2 emissions to an algae pond - this project here in New Mexico believes a 1 acre algae pond can absorb between 258 - 450 tons of carbon dioxide a year. It does seem though that we need a lot more enhanced genetic engineering of the enzymes to make this a large scale commercial reality.

America is reaching the end of the summer driving season, usually a signal for a fall in gas or petrol prices. For America’s nascent ethanol industry, this price fall is being compounded by several other factors.

As this article in the Chicago Tribune makes clear, the woes of the ethanol industry are also being compounded by;

i) Higher corn costs - due to the competition for food or fuel from a limited feedstock
ii) Higher plant construction costs - a 10% increase from $2.20 a gallon, up from about $2 a gallon
iii) Looming oversupply - There are currently 128 ethanol plants in the U.S. Seventy-seven plants are under construction and eight are expanding

We have seen these problems translate into much worse results for bioethanol stocks.

Take VeraSun Energy Corp., America’s third-largest ethanol producer by capacity, blaming higher corn costs, the company reported earlier this month that Q2 profit fell 23 percent. And then there’s Aventine Renewable Energy Holdings Inc. whose profit fell a massive 49 percent.

Actually, I rather doubt that this will go on and on. Apart from which, falling ethanol prices - which benefit the consumer rather than the producer - has to be a good thing. So keep a close eye on the ethanol price, either once a week through my newsletter (just sign up on the top right-hand corner of this page), or more often here.

Presidential candidate U.S. Sen. Barack Obama will be the keynote speaker at the grand opening of VeraSun Energy ethanol plant in Charles City, Iowa, next month.

Talk about political connections !

Verasun, one of quite a few US-based bioethanol stocks that have not done so well since the great spring fallout of ‘06, could use a shot in the arm. It also helps that oil is touching new highs, making people think harder about the alternatives.

I took a decision to stay out of politics on AEI, from the word go. As far as I’m concerned, for investors, it’s about the numbers and in a rational world, that is all that should matter. I’m also not American and it’s improper for me to comment on American politics. But what I would like to share with you is an insight from a Republican activist I received on a recent trip to Washington DC. He told me that Obama passed what I call “the corridor test”. Truth be told, far too many aspiring politicians will not give you the time of day, or a simple hello as they pass you in the corridor if they think you are not important to them. From their point of view, that’s rational. The trouble is, people like to talk and it works against them. Everyone, without exception, hates being made to feel unimportant.

But Obama, according to my Republican friend, passed the corridor test with flying colours. The same though, he said, could not be said about Hillary Clinton, who habitually rubs people up the wrong way.

So the message of this is if you are a listed alternative energy company seeking political support, pick your politician wisely. And Verasun, evidently, has thought about this and done very well with Senator Obama.

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 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?

US Ethanol production is a tough business to be in right now - as is evinced by the performance of US ethanol stocks since the beginning of the year. They appear to be quite simply out of favour with investors.

Take Green Plains Renewable Energy, who recently lost its CFO, Brian L. Larson, after joining just 6 months ago. They have just announced the results of their annual meeting;

i) Three directors, Barry A. Ellsworth, Brian D. Peterson, and Herschel C. Patton, were elected to serve on the Board of Directors for three year terms. The terms of these directors expire at the 2010 annual meeting.

ii) The 2007 Equity Incentive Plan was approved by the shareholders of the Company

My gut instinct is that investor sentiment will recover vis a vis US ethanol producers in the next couple of years. This will come about when company’s like GPRE finally start to bring onstream their two 50 million gallon ethanol plants later this year. Too many alternative energy companies seem more like an idea rather than a product-selling, profit-maximizing organisation. In the long-run, more investors are drawn to the latter.

Sao Martinho, Cosan and Santa Cruz have just joined forces to buy Usina Santa Luiza. The acquired company has an annual sugarcane crushing capacity of 1.8 million tonnes, uses 19,000 hectares of cane plantations on leased land and acquires 200,000 tonnes of cane per year from suppliers.

Sao Martinho’s currently crushing capacity of 10.3 million tons a year will get another 750,000 tons from this deal, as they have a 42% share. All in all, there does seem to be some consolidation going on in the Brazilian ethanol industry and so I do wonder how many affordable opportunities there will be for the likes of Clean Energy Brazil plc. Since raising $200m from their AIM float in December, they have already earmarked or spent the cash on investments and some would ask how much market appetite there is to give them more funds.

We can only wait and see.

US Bioenergy, an ethanol producer that IPO’ed last December has announced a very successful Q4 - sales were up 10 times on Q4 2005 and it was also a profitable quarter.

This should all be very encouraging except that US Bioenergy is trading below its IPO price of 14, while the price of oil has crept back up to $65. Investors may have fallen out of love with ethanol, but it does appear that there is not a great deal of correlation between the price of oil and the price of ethanol stocks. Instead ethanol stocks have been much more affected - as per this concise article on Motley Fool to;

i) the uncertainty surrounding future demand for ethanol
ii) the risk of higher corn prices
iii) concerns over long-term profitability for the major players in the market.

Ultimately, the greatest failing of conventional first generation ethanol technology is one of scale. It has been estimated that the absolute that can be produced today from ethanol - if everyone pulls out all the stops - is 5 million barrels a day. That’s just not enough to make any serious impact on global consumption of approx 86 m barrels a day, still rising at 1 - 1.5 m barrels a year.

Clean Energy Brazil plc, the newly-listed investment vehicle for Brazilian biofuels has just acquired an indirect minority stake of 49% in Usaciga Acucar Alcool e Energia Electrica SA for a consideration of BRL267.86 million (US$130 million).

Clean Energy Brazil’s philosphy is to invest in integrated sugar and bioethanol production units in Brazil thereby creating exposure to Brazil’s domestic bioethanol market, the global sugar market and future growth in global bioethanol demand.

My view is that in principle, it’s a great idea to set up a fund that goes into Brazil to buy up ethanol production for exposure to its investors back home. It’s just that looked at in a distanced and sceptical way, could one be entirely convinced that they are going to;

a) do a better job than the Brazilians at their own industry ?
b) not pay over the odds for acquiring their ethanol assets when the oil price is high ?

Of the 6 strong CEB team only two appear to be Brazilian - so some awkward analysts might wonder if any of the other 4 speak any Portuguese?

I don’t doubt that ethanol seems set to boom for at least the next 10 years in Brazil. The real test for biofuel producers may only come when the price of oil comes down - not a complete impossibility if the Middle East stabilizes and alternative energy technologies mature to mass market. And don’t think it won’t happen fast, especially if the price is right. Compared to two years ago, the Toyota Prius is already looking old-fashioned to what’s coming through now. Just look at this crazy vehicle here - the Minicat which runs on compressed air. With 3 times the range of electric lithium ion battery vehicles and rechargeable in a mere 3 minutes, this is a very, very radical departure - if it takes off. Admittedly, most Americans wouldn’t be seen dead in a dinky looking vehicle but many Europeans and Asians view these looks as a plus.