Is Ethanol A Good Buy

Before i dig deep into the details of ethanol, let us find out what exactly is Ethanol and why is everyone talking about it.

Accordingly to Wikipedia, Ethanol, also known as ethyl alcohol and grain alcohol, is a flammable, colorless, mildly toxic chemical compound with a distinctive perfum-like odor. Ethanol can be found in alcoholic beverages. Ethanol can also be used as a motor fuel and fuel addictives. Additionally Ethanol creates very little pollution when burned. To keep it short, Ethanol can be used as an alternate source of energy/fuel, hmmm…interesting. Does that mean Ethanol companies are good buys ? Is this a good time to invest in Ethanol companies ?

Lets go through some facts:
US farmers would face a real bad time without massive subsidies and trade protection from the government due to global competition. In a free global market, nobody would want US crops because they’re plain too expensive. Luckily, with the help of you and me (tax-payers), the US farm industry has been able to survive. But in the past few years, US farm industry has come under intense pressure from their trading partners and their ability to compete is diminishing.

In recent years, Ethanol has gained importance with the US dept of agricultural for the obvious reasons. Ethanol provides a partial route out to the US farm industry; redirect the expensive corn away from international markets to US-based ethanol processing facilities, put in place the right regulation to boost ethanol demand, and keep the low-cost ethanol producers like Brazil away with tariffs. What do you get in the end ? A booming ethanol industry…voila…!!! There are approx 110 factories producing ethanol in the US, who are ever-increasing their capacity. It is expected that the industry’s capacity will thus grow by 113% by the end of 2008. However there are those who are disputing these growth forecasts, stating that the numbers are underestimated. They believe that the consumption of corn for ethanol production will be way higher than predicted. Now this is bad because, with less corn in the market the prices of corn will rise. The end result would be a sensitive debate on food against fuel. (Farmers and ethanol industry v/s environmentalist and general public)

Ethanol is also the political favorite among alternative energy sources. There are signs that the new Democratic Congress wants to move ahead with the ethanol economy. However experts raised concerns that politicians should not close the door to air pollution, climate changes, foreign oil dependence and a dying farming industry by blindly believing in Ethanol.

Conclusion: Whether one likes ethanol or not, it was without a doubt one of the top alternative energy stories, and will remain a biggie in the coming years. While some people are hailing the growth in the ethanol industry, there are some very significant and immediate concerns with corn-based ethanol that will have to be addressed. These concerns could, under a bearish scenario, diminish growth in the sector.

Recommendation: I believe that Ethanol will do good over the coming years and will be a good buy. However the significance of ethanol will phase out with the advent of better solutions for alternative fuel. Therefore the investors should be extremely cautious when dealing with ethanol stocks. Few of the good ethanol related stocks i follow are MON, SYT and my personal favorite VSE.

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  • sJ

    thank you for the comments. Sure will have a look at yours too…

  • Anonymous

    Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now. Keep it up!
    And according to this article, I totally agree with your opinion, but only this time! :)