Bet on Biofuels

03/17/2006 12:00 am EST

Focus:

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

"One of the most interesting alternative technologies is biofuels, which are fuels that can be produced from organic matter," says Elliott Gue. Here, the editor of The Energy Strategist explains the industry and how to invest in this area.

"I’d be remiss if I failed to point out that alternative technologies are not a panacea or solution to the world's energy problems. Even with massive investment, existing alternative technologies will not replace conventional power in any realistic timeframe. The key point to remember is that alternative fuels and technologies do not have to be a solution to the world's energy puzzle to constitute a profitable trend for investors.

"One fuel type that is gaining traction in parts of the world as a partial crude oil replacement is biofuel. An obvious factor supporting biofuels is that they're a renewable resource. Crops can be replanted each year. Further, a variety of crops can be used as the basis for biofuels. Biofuels are also environmentally friendly and significantly reduce emissions of carbon dioxide as compared to traditional petroleum-based fuels. Ethanol, an alcohol that can be derived from a variety of agricultural products, is probably the biofuel that's best known globally.

"Brazilian ethanol is produced almost exclusively from sugarcane, a highly efficient crop. Brazil is the world's low-cost ethanol producer, selling ethanol for approximately $25 per barrel, less than one-half the cost of a barrel of crude oil. The US produces ethanol from corn it's typically used as a fuel additive. Some crops can be distilled into vegetable oils and used to produce an organic form of diesel fuel dubbed biodiesel. The EU has been particularly aggressive in promoting the production of biodiesel, with Germany and France being the two largest producers.

"Roughly 80% of all biodiesel produced in the EU comes from rapeseed. Just as Brazilian ethanol use is pushing demand for sugarcane, biodiesel demand in the EU is currently consuming roughly one-third of the total EU rapeseed crop. The other crop that's gaining traction in biodiesel production is soybeans. Like rapeseed, soybeans can be easily converted to oil. Right now, demand for biodiesel is only a small part of the picture for beans but that could certainly change in coming years.

"Unfortunately, there are very few direct plays on the biodiesel business. However, the increased use of biodiesel is having a profound effect on demand and pricing for agricultural commodities like sugar and rapeseed. Companies that serve and supply the agricultural industry, process crops, and provide fertilizers will all benefit from growing demand for biofuels. My favorite play on this market is US-based agribusiness giant Bunge (BG NYSE).

"Bunge doesn't actually grow its own soybeans and rape; rather, it buys these commodities and then processes them into oil and other usable products. Bunge is the world's largest oilseed processor, a class of crops that includes both soybeans and rape, and has an enormous fertilizer business. It's South America's top fertilizer producer and owns a commanding position in the all-important Brazilian market.

"Many investors mistakenly believe fertilizer is a renewable resource. Many key fertilizers are based on minerals mined form the earth, and these minerals are a depleting resource. A perfect example is potash, a mineral that is usually strip-mined. Another key nutrient used in agriculture is phosphate; phosphate rock also must be mined. Bunge has a solid position in the Brazilian potash industry and owns five of the six largest phosphate mines in the nation. Bunge is also the largest processor of soybeans in South America. With soybean-based oils a key crop for biodiesel production, this market has the potential to grow in future.

"Bunge recently made an aggressive move in Europe, forming a joint venture with a major French biodiesel company, Sofiproteaol. Bunge also benefits as a supplier of raw oils to the industry. With demand continuing to increase, margins should remain firm. Finally, soybeans are the main source of biodiesel fuels in the US and many other countries. It’s not hard to see how the world’s largest processor of beans will benefit from increased demand for soybean oils used in the manufacture of biofuel."

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