In 2011, for the first time ever, more corn was made into ethanol than consumed as food (for humans) or feed (for animals) in the United States.

In yesterday's edition, I talked about an oil services company that benefits from higher oil prices.

But higher oil prices don't just benefit oil companies. In fact, higher oil prices can sometimes hurt oil companies - because higher oil prices frequently reflect higher production costs - so while a company might get more dollars per barrel, each barrel costs it more to get out of the ground. And even though the effect is usually small, higher prices typically result in a somewhat diminished demand.

According to Enerdata, an independent energy consulting company, gasoline consumption dropped 4.5% in North America during the record high oil prices of 2008. That's certainly a significant drop, but as you're probably painfully aware, oil prices more than doubled from the previous year:

For months, former George Soros partner and famed resource investor Jim Rogers has been trumpeting natural gas and silver investments. I've been doing the same in the Resource Prospector newsletter since launching back in March. If you've been sitting on the sidelines, there is still time to take action before these investments run away from you.

Jim Rogerswrote the book on resource investing: Hot Commodities. I urge anyone interested in the topic to go out and get yourself a copy. Right now there are 29 new and 17 used copies of this book on Amazon.

When Jim Rogers said to buy natural gas and silver three months ago, I was already urging you to do the same. Natural gas prices have since risen by more than 25% - and some of the stocks in that sector have done far better.

I've also been pounding the silver drum. Silver is now up almost 10%, but I still think there's much more upside. You can read more about silver's potential in this past issue of the Resource Prospector by clicking here.

Rogers is still bullish on silver, but he recently mentioned another cheap commodity. It's something that Americans use everyday in great quantities - over 160 pounds per person every year.

I can imagine that a few people were waiting for President Obama to follow up his declaration that he was opening up the East Coast shelf for oil drilling with a hearty “April Fools!” but he didn’t.  

It’s for real.   

The decision to open up the East Coast shelf is sure to anger some people. Former Florida governor Jeb Bush was adamantly opposed to drilling off of Florida’s coast, even when his brother George pondered the idea. He felt that oil drilling might spoil Florida’s beaches and impact tourism.   

I don’t know how current governor Charlie Crist feels about offshore drilling, but there will be plenty of vocal opposition. Imagine the irony as both environmentalists and conservative politicians lambaste Obama for this decision to open up oil drilling! 

Pacific Ethanol Inc. (Nasdaq:PEIX) CEO Neil Koehler said the Sacramento, Calif.-based firm believes the United States ethanol industry will continue its robust growth. During a morning conference call with investors, the chief executive said corn supply can match the rapidly expanding production of ethanol and “when it can’t, the technology to convert cellulose to ethanol will be commercially viable.”

Soaring oil prices are enabling ethanol industry growth, he said.

“We are encouraged with ethanol market developments,” Koehler said. “With the high price of oil, limited and expensive opportunities to expand oil production and a robust renewable fuel standard, we do believe the domestic ethanol industry will continue a rapid expansion.”

Koehler said Pacific Ethanol’s customers are “aggressively increasing” their use of ethanol. In 2007, he said the U.S. ethanol industry produced approximately 6.5 billion gallons of ethanol and in 2008, the industry will produce an estimated 9.7 billion gallons to meet a renewable fuel standard requirement of 9 billion gallons. He said the fuel standard requirement will grow to 10.5 billion gallons in 2009 for conventional bio-fuels.

On Friday, Pacific Ethanol announced that it secured $40 million in new equity financing.

“Based on this new equity, we feel we have adequate working capital and financing for 2008,” CFO Joe Hansen said.

Pacific Ethanol was faced with a cash crisis, after incurring construction cost overruns of $27 million during the fourth quarter.

After Thursday’s close, Pacific Ethanol reported fourth-quarter revenue of $130.4 million, from $80.6 million a year earlier. Wall Street analysts . . .

The Pantry, Inc. (Nasdaq: PTRY) CFO Frank Paci said the company has lower expectations for fiscal 2008. Paci made the comments during a conference call.

“Given the deterioration of U.S. consumer spending over the last couple of months, we now believe our comparable-store gas gallon and merchandise sales may be below our previous estimates,” Paci said.

Going forward, The Pantry announced in a press release that it now expects fiscal 2008 gas and merchandise sales below previous expectations due to weak consumer spending. The firm expects fiscal 2008 merchandise sales of between $1.6 billion and $1.7 billion and gas gallons sold to be between 2.1 billion and 2.2 billion gallons.

The company has also become involved in distributing ethanol at its gas stations. Pantry receives a $0.51 per gallon federal tax break for blending ethanol, CEO Peter Sodini said.

“It remains to be seen how much of a longer term benefit we’ll realize from this program,” Sodini said. “We continue to pursue the rollout of ethanol at additional stores and we’re working to overcome the logistical challenges presented by a lack of ethanol infrastructure in the southeast.”

Shares of Pacific Ethanol Inc. (Nasdaq: PEIX) are sagging on news before the start of trading that the ethanol producer will halt construction of a plant in California.

Sacramento, Calif.-based Pacific Ethanol announced that it will suspend construction on a plant near the small town of Calipatria in the southern part of the state and wait for market conditions to improve.

“We remain committed to completing our ethanol project,” said CEO Neil Koehler in a statement. “However, given current ethanol market conditions, we feel it is prudent and strategic to suspend construction until the market improves.”

The facility, originally scheduled to be operational in the fourth quarter of 2008, is designed to produce 50 million gallons of ethanol a year.

Pacific Ethanol is currently operating two plants and owns a 42% stake in a third. The company, the largest West Coast-based producer of ethanol, is building two more facilities, expected to be up and running in 2008.

Ethanol, which in the United States is produced primarily from corn, is viewed by some as a clean energy alternative to gasoline and has been the focus of much recent attention. However, increased demand for ethanol has lifted the price of corn and narrowed the profit margins of ethanol producers.

At 1:24 p.m. ET, shares of Pacific Ethanol (PEIX) had declined $0.01, or 0.16%, to $6.10. The 52-week low of $4.20 was set on Nov. 23, while the 52-week high of $18.79 was established on Jan. 23.

Sanderson Farms, Inc. (Nasdaq: SAFM) CEO Joe Sanderson said ethanol demand will keep the grain market “high and volatile.” The chief executive said grain costs will add about $0.02 per pound to the poultry processor’s cost of producing a pound of dress chicken. Sanderson made the comments during a midday conference call.

“In order to offset this cost, the chicken market must move in tandem with this cost. While I have confidence that the fundamental rules of supply and demand in economics will work to maintain industry profitability over the long term, we recognize that short-term swings are inevitable,” Sanderson said. “However, we will manage our company as we always do, which is the same goal regardless of where we are in the chicken cycle.”

Before the opening, Sanderson Farms reported fourth-quarter net sales of $426.9 million, below analyst estimates of $429.2 million. Last year, Sanderson Farm’s fourth-quarter net sales totaled $291.7 million.

CH Energy Group (NYSE: CHG) today lowered its 2007 full-year earnings guidance due to a lower earnings contribution from the company’s Griffith fuel distribution subsidiary and higher corn prices coupled with lower ethanol prices.

The Poughkeepsie, N.Y.-based company said it now forecasts earnings between $2.50 and $2.70 per share, down from the previously forecasted range of $2.55 and $2.80.

With regard to the Griffith fuel distribution subsidiary, the small cap said earnings contributions were depressed by $0.05 as the result of unusually warm weather at the beginning of the current heating season. Specifically, CH Energy said it lowered its estimate to between $0.20 and $0.25 per share from $0.25 and $0.30 per share.

Additionally, corn prices and lower ethanol prices have caused CH Energy to lower its earnings expectations for its Cornhusker Energy Lexington plant. The firm now expects earnings for this unit to range between $0.40 and $0.45 per share, down from previously forecasted $0.40 and $0.50 per share.

The small cap also noted that 2007 earnings expectations for its regulated utility Central Hudson Gas & Electric Corporation remain unchanged at between $1.90 and $2 per share.

Shares of CH Energy Group (CHG) were halted in pre-market trading.

US BioEnergy Corp. (Nasdaq: USBE) CEO Gordon Ommen said the ethanol producer’s expansion plans will allow the company to maintain its market position and build long-term value. Along with new ethanol plan construction, the company is building a transportation system that will allow it to move ethanol more efficiently from its facilities. Ommen made the comments during a midday conference call.

“This positions US BioEnergy to become one of the largest volume shippers of ethanol in the U.S. by the end of 2008, adding transportation efficiency to our growing list of competitive advantages,” Ommen said.

Before the opening, US BioEnergy reported third-quarter net income of $11.1 million, or $0.15 per share, above analyst estimates of $0.08 per share and up 34% from $8.3 million, or $0.12 per share, a year earlier.

For the three months ended Sept. 30, the St. Paul, Minn.-based company’s revenue totaled $148.3 million, below Wall Street projections of $154.9 million and compared with $154.4 million during the prior-year period.

Despite lower ethanol prices and sales, US BioEnergy achieved greater quarterly income by selling more volume and cutting costs. Before taking hedging-related gains and losses into account, the company’s corn costs averaged $1.25 per gallon of ethanol sold, compared with $1.35 per gallon of ethanol sold a year earlier. The firm’s total cost of goods sold during the three-month period decreased 10% to $121.3 million, from $135.2 million during the third quarter of 2006.

VeraSun Energy Corporation (NYSE: VSE)
Brookings, SD
http://www.verasun.net/

52-week low / high: $9.75 / $26.90
Shares Outstanding:  78.29 million
Market Capitalization:  $1.02 billion

Mount Rushmore isn’t the only money-maker in South Dakota these days: VeraSun Energy Corporation (NYSE: VSE) has recently emerged from the state’s corn fields as a leader in the ethanol sphere.

Founded in 2001, the company is one of the largest producers of ethanol in the United States for use in E85 (85% ethanol and 15% gasoline) used in Flexible Fuel Vehicles (FFVs). 

VeraSun Energy operates five ethanol production facilities (bio-refineries) with a combined capacity of 560 million gallons per year. Three additional facilities under construction will double capacity to one billion gallons per year by the end of 2008, the company estimates. 

VeraSun also sells byproducts of the ethanol production process used as feed and is developing a process to extract oil from dried grains for use in biodiesel production.

In May 2005, VeraSun launched its proprietary brand VE85 and has secured distribution through more than 100 retail stations in 11 states and the District of Columbia. In August 2007, the company launched its product at 20 stations through an agreement with Kroger convenience stores.

Revenues for the quarter ended June 30, 2007 were $169.6 million, up 10.4% from $153.5 million in the same quarter, 2006. Analysts see 2007 as an energetic year for VeraSun, projecting revenues of $792.5 million, up 42% from $558.0 million in 2006. They are even more bullish about 2008, projecting sales of $1.77 billion (mean estimate), a 124% increase from the 2007 estimate. EPS is expected to be $0.36 in 2007 and $0.60 in 2008. 

With Congress setting a goal in 2005 for 7.5 billion gallons of ethanol to be produced annually by 2012, investors should watch this stock. The growing demand for this biofuel could allow for farming more energy from your portfolio.

Note: VeraSun Energy Corporation (VSE) is on the “Watch List” of Growth Report, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, VeraSun Energy displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Growth Report portfolio at a later date.

Commodity, low-tech businesses usually lack investment fizz, unless that business is somehow tethered to the Utopian world of alternative energy.

One tethered energy source, ethanol, is responsible for more fizz than any other thanks to politicians left and right, environmentalists and sundry rent seekers chatting it up as the most expedient solution to the putative energy-independence conundrum.

The chat is backed by more than rhetoric: it’s backed by legislative muscle. The Energy Policy Act of 2005 requires that at least 4 billion gallons of ethanol and biodiesel be used in 2006, increasing up to at least 7.5 billion gallons in 2012, with an annual increase of approximately 700 million gallons each year. More recent legislation passed by the Senate (but not the House) amps ethanol usage to 8.5 billion gallons in 2008 and 13 billion gallons in 2012.

What’s more, the legislation is heavily slanted in favor of the home team. Imported ethanol is subject to two duties: (1) a 2.5% ad valorem tax and (2) a tariff of $0.54 a gallon, rendering imports uncompetitive.

Citing the potential boon from more favorable energy-policy iterations, influential Lehman Brothers analyst Mansi Singhal on August 30 scribed a research note upgrading ethanol producers VeraSun Energy Corp. (NYSE: VSE) and Aventine Renewable Energy Holdings Inc. (NYSE: AVR) to "overweight" from "equal weight” while upgrading the entire sector to "positive" from "neutral.”

Other analysts are less sanguine, expressing concern that increased capacity means increased pricing pressure and margin squeezes down the road. On that front, Bank of America analyst Eric Brown recently predicted that the "relentless supply" of new ethanol production will lead to a 70% contraction in margins by 2009.

Even less sanguine are the free-market economists who believe ethanol economics are a fiction. The sector can’t exist at industrial levels without subsidies and tariffs; therefore, it exists at the whim of elected officials.

Political intervention invariably produces unintended consequences, to be sure. Corn prices have nearly doubled this year, soft-drink manufacturers have struggled to buy corn and corn syrup and environmentalists have fretted over new stresses on America’s farmland. All have powerful lobbyists with access to Congress’s ear and could stymie future pro-ethanol legislation.

That said, a complete 180 is unlikely. Alternative energy supporters have the wind at their back. The ethanol market thrives and money is being made, though who will continue to make money as competition, output and unintended consequences multiply is anyone’s guess. For that reason, investors might consider ethanol exposure with less of a California-gold-rush tack and more of an established-diversified-company one.

One company fitting the established-diversified mold is MGP Ingredients (Nasdaq: MGPI), a $225-million market-cap based in Atchison, Kan., that tempers its ethanol exposure with specialty and commodity wheat proteins and starches.

As American consumers continue to feel pain every time they pull up to a gasoline pump, renewable energy remains a popular talking point. The question is when will there be more action than talk, and when will investors in companies making such alternative fuels as ethanol reap a bumper crop of benefits in share price.

Ethanol obviously has grown beyond a fad as an energy source, and Aventine Renewable Energy Holdings Inc. (NYSE: AVR) is one of the biggest producers and marketers in the United States. The company was established in 1981, giving it a marketing strength absent from many of its recently arriving competitors. Little goes to waste at Aventine: while its strength is ethanol, the company also produces and markets biodiesel and such byproducts as corn gluten feed and meal, distillers products, carbon dioxide and brewers’ yeast.  

With plants in its hometown of Pekin, Ill., and another in Aurora, Neb., the company’s annual production capacity is around 207 million gallons. Planning for another plant in Indiana, along the Ohio River, is under way, and will bring the eastern Corn Belt into the company’s domain in late 2008 or early 2009.

Including its marketing alliances, the company marketed and distributed 697 million gallons of ethanol in 2006, or nearly 13% of the total volume sold last year in the United States. Customers include Royal Dutch Shell plc (NYSE: RDS.A), Marathon Oil Corporation’s (NYSE: MRO) Marathon Petroleum, BP plc (NYSE: BP), ConocoPhillips NYSE: COP), Valero Energy Corp. (NYSE: VLO), Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX).

Since its July 2006 initial public stock offering, Aventine Renewable Energy’s shares have fluctuated substantially, following the ebb and flow of negative and positive news reports about alternative fuels. Other than for a few days after its IPO priced at $43, investors haven’t seen the stock trading anywhere near that level, with shares most recently idling in the $13-$16 range. During its first quarter as a public company, Aventine’s board authorized a $50 million share-repurchase plan.

Few would deny that the pro-green, anti-global warming movement has staying power. Unlike previous upsurges in be-kind-to-the-planet pushes, this time around, it does look as if things are different.

What hasn’t changed for investors, however, is that it’s still tough to make black-and-white decisions about which companies will be able to turn the green movement into gold. Particularly in the smaller-cap space, risks often remain high. Some companies have interesting but unproven technology, while others make great products that lack the necessary sales to reduce costs. And those in the green power space often face years of navigation through – and negotiating with – concerned regulators and slow-moving utilities.

This all goes a long way to explaining why analysts have taken a shine to SunOpta, Inc. (Nasdaq: STKL, TSX: SOY), recently trading at $11.91. Not only does SunOpta have proven revenues for its products, it operates in two distinct “green” sectors. Add in its share of a third business in an entirely unrelated industry, and you have a company that offers reduced risk thanks to its diversification and proven demand, yet retains some of the potential upside that comes with piggy-backing on not one but two emerging long-term trends.