Monday, November 22, 2010

New U.S. Regulations Mean That Ethanol Could Make Investors Some Money.

Ethanol has been heavily touted as a substitute for gasoline fuel ever since the oil crises of the 1970's and 1980's. In Brazil, they have had a significant degree of success utilizing ethanol fuel to power their transportation industry. Brazil uses local sugar stocks to feed its ethanol refineries, which has proved to be fairly efficient and cost-effective. In North America, however, corn is the primary source of our ethanol fuel. This is great for farmers, but not really for consumers as corn based ethanol is quite expensive and detrimental to the environment.

The industry, languishing in the doldrums recently, may be poised to make a significant recovery as the U.S. takes steps to increase the ethanol that is blended into gasoline by as much as 50 percent! On Wednesday, the U.S. Environmental Protection Agency announced that it will now allow 15 percent ethanol based gasoline. The significance of this is that it allows the U.S. ggovernment to enact legislation requiring all gasoline to have a minimum blend of 15 percent ethanol. A move such as this would be highly favoured by the U.S. agricultural industry at a time when Obama is in need of some extra support.

Though ethanol may be one way for the United States to reduce their dependence on foreign oil, the industry is heavily subsidized by the taxpayers and it is not clear whether there is even enough refining or agricultural capacity for ethanol to ever truly make a dent in our oil and gasoline consumption. Even in Canada, with a thriving oil and gas industry of its own, the government has been supporting ethanol producers with taxpayer dollars. It provided $119 million — 70 per cent of the cost — for a 225-million-litre-per-year plant at Johnstown, Ont., 70 kilometres south of Ottawa, in late 2008. Not a wise move considering how desperate the government and its people are for cash.

Greenfield Ethanol, the largest producer in Canada, claims that ethanol produces at least 2.3 times more energy than it uses in production and that, compared to gasoline, its use reduces greenhouse gases by approximately 70 per cent. But this claim seems highly dubious, especially considering all of the energy that goes into the highly intensive growth and harvesting of corn in North America. Nonetheless, there is money to be made as an investor in the industry because the Canadian and U.S. governments have proven to be intent on pushing the consumption of ethanol on consumers.

With over 60 billion dollars in revenue, a healthy balance sheet, and a long string of profits, Archer Daniels Midland (ADM in New York) is a great way to conservatively invest in the growth and profitability of the ethanol industry. Its operations include the processing of oil seeds, corn, wheat, cocoa, and other agricultural commodities, and it is a manufacturer of vegetable oil and protein meal, corn sweeteners, flour, bio diesel, ethanol, and other food and feed ingredients. With a current earnings yield of over 9 percent, and a dividend yield of over 2, ADM is a solid choice for many investors at its current price.

For more information on ADM, go to their website at:

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