As gasoline prices remain around $3 a gallon, ethanol—once used to power trucks and tractors in the Midwest—is touted nationwide as a viable renewable alternative to fossil fuels. Even without a price crunch, ethanol use is likely to increase because the Renewable Fuel Standard in the Energy Policy Act of 2005 mandates that the amount of renewable and biofuels in regular gasoline nearly double in six years, from 4.0 to 7.5 billion gal./yr. by 2012.
At first glance, ethanol poses some concerns for US investors. The industry is fragmented, with many small producers who derive significant support from federal tax credits. Buyers have relatively strong positions be they oil companies, marketers, or other aggregators of supply. And only an import tariff keeps foreign countries, including Brazil, the world's 2nd largest producer after the US, from exporting sugar cane-based ethanol which is cheaper to produce than ethanol from corn, the principal US feedstock. Despite these concerns, there is more to the ethanol story and more than a few potentially lucrative opportunities for savvy investors.
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