A solution proposed by DaimlerChrysler is to produce biofuel from non-food crops. The answer may be jatropha plant, which is currently used for making biodiesel in India. In fact, trains plying between Mumbai and New Delhi run on as much as 20% jatropha-originated biodiesel. The plant's rugged nature (it can grow in wastelands and even deserts) makes it particularly well suited for harsh climates in developing countries. Plus it's high yielding -- it offers four times as much fuel per hectare as soybean, and more than ten times that of corn.
For now though investor sentiment is fixated with the potential returns on bioethanol. How best then to leverage off the green revolution for alternative fuels? As this column consistently warns, the average investor would be well advised to leave the straight punt on the commodity -- be it corn, wheat or sugar -- to the professionals.
Analysts agree the fundamentals for the market look strong. A.G. Edwards' grains-market analyst Bill Nelson has been quoted as saying ethanol-related demand could push corn prices from $2.05 a bushel to $2.50 over the next five years. Sure, that's going to underpin the companies exposed to the biofuels boom though strategists warn investors not to jump in with both feet. Some characterize seemingly unbridled investor demand for biofuel-related stocks as akin to the dotcom frenzy. And we know how that ended.
Caveats aside, the large listed agricultural names -- Archer Daniels Midland , Bunge and Monsanto -- provide a starting point. Fortune magazine points out that ADM stock has climbed 22% to $28, since it recommended the agribusiness' shares in its 2006 Investor’s Guide.
Meanwhile, investors have zeroed in on one of the few listed ethanol plays. Pacific Ethanol stock has jumped more than six fold from its low in September 2005 to its peak in May of 2006.
But here's the kicker: Pacific Ethanol is losing money right now. "It trades for 21 times book value and 6 times sales," writes Chris Mayer in The Daily Reckoning, the investment newsletter. "Analysts project earnings of 45 cents a shares in 2007, which means Pacific is trading for more than 50 times 2007 earnings. Those are rich prices in any era and reflect investor euphoria."
A novel recommendation for a backdoor play into the ethanol is, quite literally, muck. Ethanol eats up a lot of corn in the production process and corn has one of the highest fertilizer applications of any crop. "Farmers will need more fertilizer as more of their acreage is devoted to the production of corn," Mayer observes. "Therefore companies that provide fertilizer products to a variety of customers in agricultural, industrial, specialty and export markets may be worth a look."
Hmmmm, maybe we’re not that far away from Mad Max than I first thought …
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