Since we’ve immersed ourselves in the matter - and since the cellulose/grain ethanol argument isn’t going away - it may be worth spelling out the pros and cons of each form of ethanol production, so we can identify which companies stand to win or lose.

Ethanol isn’t new. More than 6 million automobiles in the United States are ‘flexfuel’ vehicles, which can use regular gasoline or ethanol. So, there’s no more experimentation that needs to be done to prove ethanol’s viability. The issue (as it always eventually is) is expense. What does it cost, and what will it cost to deploy on a large scale?

In its early stages in the U.S., the question was irrelevant - all ethanol ultimately came from corn….the ‘grain’ ethanol variety. In South America, their ethanol comes from sugar cane, and is equally viable. The decision of which plant to use largely comes from availability - there’s lots of corn here, and there’s lots of sugar cane there.

Only recently has the base-ingredient debate been stirred up, as the production technology has advanced to the point where cellulose materials (like sugar cane) work just as well as grains (like corn) when creating ethanol. So, at this point, ethanol can be extracted from pretty much any plant. Even wood can be used to generate ethanol, since it’s cellulose. However, wood has been tougher to work with so far.

Now, we wanted to make that distinction so we could make these points….

• Cellulose-based ethanol can be derived from any plant, including grass, as well as animal waste. Therefore, it doesn’t consume plants that can be eaten.
• The ethanol created from cellulose is exactly the same as the ethanol created from grain.
• Cellulose-based ethanol is potentially more efficient to produce than grain-based ethanol. Grain ethanol requires the consumption of natural gas, while cellulose ethanol can be created chemically.
• More than 25% of the United States’ corn is used to create ethanol.

What about efficiency? There’s been a long debate regarding whether any grain ethanol was ‘worth it’; early production actually required more BTU input than the ethanol put back out. So, energy was actually lost.

Now, however, there’s a slight energy gain….1.5 units of energy are created for every one unit of energy consumed in the process. More than that, there’s a major net gain in terms of petroleum used to generate grain ethanol. For each gallon of petroleum consumed in the process, 13 gallons of ethanol are produced.

The net energy gain from cellulose ethanol will soon be even better. Input costs wll be even lower too; grass and waste are obviously cheaper than corn.

Though corn ethanol makes up the majority of the industry, longer-term, cellulose ethanol makes the most fiscal and social sense. So, companies relying on corn ethanol alone may be running into a headwind in the near future. These may include agricultural giants like Archer Daniels Midland (ADM), who have enjoyed great financial success recently, but only because of expensive corn.

Bigger picture, as cellulose-based ethanol makes ethanol more attractive in general, auto manufacturers who offer no flexfuel vehicles will likely see diminished demand. U.S. automakers are particularly vulnerable. However, the liability may take years to fully materialize.

The potential beneficiaries of ethanol’s growth could be oddball names like Diversa (DVSA), which produces the enzymes needed to create cellulose ethanol. Or, SunOpta (STKL) may find their ethanol production facility is a profitable one, and decide to expand the business.

It’s not just off-the-radar companies that could benefit though. Mainstream players such as DuPont (DD) are also positioned properly to profit from ethanol and its growing need for infrastructure.

If you have other stats, figures, or companies related to ethanol’s advent, please add them below. We’ll be adding our own thoughts and ideas as the industry/trend develops.

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