Nothing in the alternative and renewable energy space generates as much controversy and buzz as ethanol - and corn-based ethanol certainly has a number of detractors. While new solar and wind energy projects seem to be functioning okay despite European austerity measures, the U.S. corn ethanol sector continues to disappoint. That is, until now. Poor weather conditions and rising demand has caused another biofuels leader to falter. This stumble could be just what the U.S. ethanol industry needs. (In this article, we'll take a look at biofuels and examine their benefits. For more, see The Biofuels Debate Heats Up.)
TUTORIAL: Commodities: Corn
Rising Currency, Poor Crops
Brazil's status as one of the world's leading biofuel producers could be in jeopardy. Brazilian sugarcane-based ethanol has traditionally been one of the cheapest sources of biofuels, producing eight-times the energy versus inputs. However, according to the U.S. commerce department, Brazil imported nearly 70 million liters of corn-based U.S. ethanol in 2010, up from just 1 million in 2009. The imports of ethanol continued into 2011. The nation imported an estimated 80-200 million liters of ethanol during the first quarter. While Brazil consumes much of its ethanol production, it typically exports nearly 10% to developed nations. This includes the United States. So the shift is certainly interesting. The country has been importing record levels of ethanol due to myriad of factors. (For more, see Investing Seasonally In The Corn Market.)
The surge in ethanol imports reflects disappointing Brazilian production and rising fuel consumption. Two years worth of poor weather conditions have drastically hindered sugarcane growth. The Brazilian Sugarcane Industry Association, UNICA reported that last month that the sugar harvests was ending earlier than normal. Only seven plants were still crushing sugarcane in the country. Last year at this time, nearly 41 mills were still operating through April. Soaring demand in the nation is also helping the U.S. corn ethanol industry. Brazil's adoption of flex-fuel vehicles has helped the sector see tremendous increases in a short time. Currently, there are about 11 million flex-fuel automobiles in Brazil, with the nation adding 2-3 million new vehicles each year.
Finally, strong pressures have also contributed to the increase in ethanol imports. Sugar prices have soared along with other food commodities, making Brazilian ethanol more expensive. In addition, the fallen greenback has made all U.S. exports cheaper for international customers. The one-two punch could be what the U.S. ethanol industry needs. The U.S. is now the world's second-largest ethanol exporter, selling to the Middle East, Europe and Canada. (For more, see An Overview Of Commodities Trading.)
Betting On U.S. Ethanol
With the dollar fallen and worldwide ethanol demand still rising, many U.S. producers believe they are approaching the point where they can compete without state or federal support. The 45 cent per gallon blenders credit (VEETC) is due to expire at the end of this year and some new legislation would provide a safety-net for producers, payable on a sliding scale linked to the price of oil. However, U.S. producers may not need it and now may be the time for investors to add ethanol to a portfolio.
For those investors looking to cash in on the United States' newfound prominence in the ethanol world can mean only one thing: corn. The Teucrium Corn Fund (Nasdaq:CORN) allows investors to bet on rising corn prices and consumption. The ETF makes an interesting play on the rise of U.S. ethanol exports. In addition, for those who want to bet on the overall growth of biofuels, the ELEMENTS MLCX Biofuels Index ETN (NYSE:FUE) can be used as well. (For more, see How To Reduce Taxes On ETF Gains.)
Both Pacific Ethanol (Nasdaq:PEIX) and Green Plains Renewable Energy (Nasdaq:GPRE) are two of the more notable pure- play producers. However, they are not the leaders in terms of volume. Archer Daniels Midland (NYSE:ADM) has the size and global expertise to really gain from the expansion of U.S. ethanol exports. In addition, refiner Valero Energy's (NYSE:VLO) fire sale purchases of Verasun's assets makes it an idle play as well.
Finally, increased ethanol exports will mean more corn planting, and ultimately benefit the agriculture sector in general. The PowerShares Global Agriculture (PAGG) and IQ Global Agribusiness Small Cap ETF (NYSE:CROP) are great ways to play the boom in agriculture.
The Bottom Line
While the U.S. corn ethanol sector has had to play second fiddle to Brazil's sugarcane dominance, recent developments has made the sector desirable once again. Brazil's shift to importer from exporter will benefit U.S. producers. Investors may want to avoid sugarcane producers like Cosan (NYSE:CZZ) and go with domestic corn ethanol stocks like The Andersons (Nasdaq:ANDE). (For more, see Clean Or Green Technology Investing.)
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