No matter what your political preferences are, no matter what your alternative energy of choice is — if any — gasoline usage in this country has to have crossed your mind at some point. During the Congressional election cycle last year, almost every candidate had the answer to all of our energy problems. But when the Democrats took over in January, not much was done other than to place energy on a back burner. Recently, Congress picked it off the back of the stove…

Last month, Congress finally started dealing with the energy crisis in this country. Unfortunately, it apparently doesn’t understand what that crisis is. The solution the Senate has come up with is to increase fuel economy in new cars to a minimum of 35 mpg over the next 13 years. The bill also mandates 36 billion gallons of renewable fuel per year production by 2022.

This is laughable considering the current level of ethanol production in the United States is 4.855 billion gallons after more than 25 years of corn subsidies (by the way, the U.S. uses corn for almost 100% of its ethanol produced). Corn is already the most oversubsidized product in the country. Even if every single bushel of corn went into ethanol, it would only account for 28.3 billion gallons per year, according to energy expert Robert Bryce.

Obviously, the amount of corn ethanol can never be that high without new technologies, for two reasons: one, since corn has been subsidized so much for such a long period of time, we have become dependent on it for other things, mainly livestock feed and high fructose corn syrup. And two, it may not even be a feasible alternative to gasoline.

Actual net energy yield of corn ethanol varies depending on who is actually doing the research. Of course, if the study is connected to “Big Agriculture,” the numbers will show that the amount of energy put into making ethanol is far less than the amount of energy the ethanol actually contains. However, if the study is connected to most others, especially “Big Oil,” it appears that it takes more energy to make a gallon of ethanol than the ethanol actually contains.

Not an easy choice — Big Ag versus Big Oil. Whomever you side with, there is still no debate whether or not corn is the best kind of ethanol-making product… it isn’t. Even the largest U.S. corn-ethanol producer would agree with this. In fact, this producer is even looking at better types of ethanol, including the world’s No. 1, Brazilian sugar cane ethanol.

The company is probably familiar to all of you — Archer Daniels Midland Co. (ADM:NYSE). ADM is a $21 billion U.S. company that has recently stated interest in investing in Brazilian sugar cane ethanol.

The company has many choices, but it won’t be cheap. Among the choices ahead of ADM is buying Brazil’s largest ethanol producer, Cosan SA; building its own ethanol plants; and buying up some of the smaller Brazilian companies. Unfortunately for ADM, none of these options is ideal for bringing the amazing sugar cane ethanol back to the U.S.

As I said at the beginning, the last month has been enormous for U.S. energy issues. The Senate has recently passed an extension on ethanol-import tariffs of 54 cents per gallon until 2010. This would almost entirely stop ADM from producing sugar cane ethanol in Brazil and bringing it back to the U.S.

The reason I use the word “almost” is because of the possibility of channeling the ethanol through Caribbean countries, which have limited amounts of duty-free exporting to the U.S.

Regardless of whether or not ADM dives into the Brazilian ethanol market, this ethanol issue just won’t go away. It has been around for at least one generation and has never been hotter than right now. The energy bill that the Senate passed mandating 36 billion gallons of ethanol per year is in Nancy Pelosi’s and the House’s hands right now. So we’ll just have to wait and see.

Sincerely,
Jim Nelson
July 30, 2007

P.S.: My fellow Penny Sleuth editor Christopher Hancock has recently told his readers about a special opportunity in Brazil, which could be more profitable than any ethanol play in the world.

Jim Nelson

Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.

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