Wednesday, June 25, 2008

The Break-Out Brazilian Energy Play

By Sam Hopkins | Tuesday, June 24th, 2008

Brazilian sugar refiners are ready to satisfy America's energy sweet tooth.

Here's what I mean, and why the Brazilian ethanol recommendation noted below is about to explode.

Finally, Free Fuel Trade

If knee-jerk reactions could power cars and planes, the world's politicians could replace fossil fuels in a matter of months.

Early in June the United Nations World Food Summit turned into a tag-team tirade against biofuels, with Egypt's Hosni Mubarak and Mexico's Felipe Calderon blaming crop-based energy sources for food riots at home.

There's a kernel of truth there, but developing world demand for food is at record levels because of human consumption, not just biofuels.

In fact, The Council of Economic Advisers and the U.S. Department of Agriculture estimate the total global increase in corn-based ethanol production accounts for only about 2-3% of the recent increase in global food prices . Truth be told, food prices are rising for the same reason as oil prices—rapidly rising demand. And we haven't even addressed the fact that oil prices have risen over 4,000% since 1973, while corn prices have risen a mere 120%. But I digress.

Brazil's Thriving Ethanol Industry

Brazilian President Luiz Inacio Lula da Silva rightly called the huffing and puffing of Mubarak and Calderon an "oversimplification," and added that he is "not in favor of producing ethanol from corn."

That's because Brazil's ethanol industry has been going strong for three decades and is producing sugar cane ethanol with an energy balance 7 times what corn returns.

Brazilian ethanol also costs less to distill from cane to automotive fuel than corn ethanol... about a full third less, at 22 cents per gallon compared to 30 cents for the U.S. stuff. And there are other solutions that haven't even entered the mainstream yet.

I've traveled around South America and heard optimism for sugar beets, jatropha, and other feedstocks you may never have heard of.


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And you haven't heard of them because American politicians have been doing their best to keep them off your menu of energy options.

In fact, Congress is penalizing Brazil for getting biofuels right, to the tune of a 54 cent-per-gallon tariff.

How's that for free trade?

Well here's what's going on right now: Corn ethanol is now so expensive—around $2.80 per gallon—that even after adding 54 cents to Brazilian ethanol's $1.87 market cost, it still comes out at a price advantage to the main U.S. biofuel.

Brazilian Ethanol is Ready to Break Out

That's why we think this company's stock is going to explode.

The American electorate is fuming as gas prices keep ticking upwards, and a few politicians are now responding with a common sense policy change—removing, or at least lowering, the tariff on ethanol imports.

Democratic California Senator Dianne Feinstein says "given the record oil prices and the limited supplies of domestic ethanol," charging 54 cents per gallon more for Brazilian biofuel "makes no sense. Judd Gregg, a Republican from New Hampshire, agrees, so he and Feinstein launched a measure in the upper house to strike the absurd subsidy.

Record flooding in America's corn-producing heartland this summer just adds to the case for energy options.

After all, "energy independence" doesn't mean shutting out the best technology from other parts of the world. It's more about having multiple cards to play when something goes wrong in the energy world.

Whether it's escalating attacks in Nigeria or flooding in Iowa, far-flung parts of the globe are now tied through energy supply and demand.

"The Ethanol Business Has Completely Changed"

The Wall Street Journal says Brazilian ethanol exports should come in at around 1.27 billion gallons this year, up 37% from last year's total.

Most of that will go to the United States, with or without a tariff cut. But how will the Brazilians benefit if we drop the 54-cent innovation tax?

"I would say that without any tariff, we would export around two billion liters (527.7 million gallons) more this year and with a lower tariff, around one billion," one official at Brazil's Union of Sugarcane Industries, told the Journal.

Now, my colleague, Nick Hodge, just back from the Renewable Energy Finance Forum on Wall Street, tells me the sense on the Street is that Brazil is going to ramp up production whether or not we're smart enough to drop the duty.

European markets are now clamoring for sugarcane ethanol, and the same goes for ravenous developing countries like China and India.

"Over the last 10 days, the ethanol business has completely changed," Martinho Seiiti Ono, one of Brazil's biggest ethanol brokers, said over the weekend.

Indeed, the whole energy business is in flux. There are plenty of ways to profit as politicians scramble. We'll keep you up to date with the latest.

Sam Hopkins

P.S. The fact is that most of the winning power innovations are coming from foreign markets these days. Whether in Brazil or Norway, Green Chip International is delivering real returns with new energy ideas, even in today's bearish market. To learn more about our Brazilian ethanol play that's about to break brand new highs, click here.

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