Almost 3 years after my visit to an ethanol plant in Central NY, the plant owners have filed for bankruptcy. The condition of the credit markets for the last six months have been incredibly difficult for many businesses. But the timing may also be a reflection of the political winds shifting in renewables. Promises for better efficiency have yet to materialize to the degree many had hoped in the ethanol business. Despite these setbacks, I would not count ethanol out. Just look for fewer mom and pop shops. Bigger businesses that are better equipped to weather financial and political storms will become the dominant players. 

In 2006 I visited the plant that was gearing up to be the future of fuel. It was an old Miller Brewing plant that had been converted to produce ethanol. It’s investors believed in the near-future they would be producing, not just corn-based ethanol, but something much more important, cellulosic ethanol. Cellulosic ethanol is so much more efficient, because it doesn’t use corn or sugar, it uses the agricultural waste to make fuel. Three years later, it is still not commercially viable. The question is, can it get to market before the ship sails completely on ethanol?

The pressure on the smaller ethanol producers goes beyond the credit markets. The price of corn has squeezed margins. About half the cost of goods sold for distillers comes from the price of corn. At last check corn feedstock was making up about 80% of a distiller’s COG. So it is not surprising that companies like Northeast Biofuels can’t stay in the game. Larger players in the sector are snapping up the bankrupt companies. Sunoco is reportedly purchasing NEB and there have been other deals like Valero’s move to get VeraSun’s assets. They see what the operators of NEB saw, there will be a future at least in the mid-run for ethanol. It may not be today, and corn based-ethanol may not be the long-term solution, but it will have a role to play during the transition period away from oil. The small guys may have been right, but their timing was off. Now the bigger players are buying their expensive assets cheap and can handle the unattractive margins for a longer period of time than the small shops. As you will see in my video report, the cost of getting a plant built is huge in both time and materials. Valero and Sunoco are in a better position to wait for higher ethanol standards to kick in (like raising gasoline blends from E10 to E15).

http://maryandmoney.com/videos/the-future-of-fuel-cellulosic-ethanol/

Almost 3 years after my visit to an ethanol plant in Central NY, the plant owners have filed for bankruptcy. The condition of the credit markets for the last six months have been incredibly difficult for many businesses. But the timing may also be a reflection of the political winds shifting in renewables. Promises for better efficiency have yet to materialize to the degree many had hoped in the ethanol business. Despite these setbacks, I would not count ethanol out. Just look for fewer mom and pop shops. Bigger businesses that are better equipped to weather financial and political storms will become the dominant players. My video report is a look back, when the promise of cellulosic ethanol seemed closer at hand to some investors in Fulton, NY.
In 2006 I visited the plant that was gearing up to be the future of fuel. It was an old Miller Brewing plant that had been converted to produce ethanol. It’s investors believed in the near-future they would be producing, not just corn-based ethanol, but something much more important, cellulosic ethanol. Cellulosic ethanol is so much more efficient, because it doesn’t use corn or sugar, it uses the agricultural waste to make fuel. Three years later, it is still not commercially viable. The question is, can it get to market before the ship sails completely on ethanol?
The pressure on the smaller ethanol producers goes beyond the credit markets. The price of corn has squeezed margins. About half the cost of goods sold for distillers comes from the price of corn. At last check corn feedstock was making up about 80% of a distiller’s COG. So it is not surprising that companies like Northeast Biofuels can’t stay in the game. Larger players in the sector are snapping up the bankrupt companies. Sunoco is reportedly purchasing NEB and there have been other deals like Valero’s move to get VeraSun’s assets. They see what the operators of NEB saw, there will be a future at least in the mid-run for ethanol. It may not be today, and corn based-ethanol may not be the long-term solution, but it will have a role to play during the transition period away from oil. The small guys may have been right, but their timing was off. Now the bigger players are buying their expensive assets cheap and can handle the unattractive margins for a longer period of time than the small shops. As you will see in my video report, the cost of getting a plant built is huge in both time and materials. Valero and Sunoco are in a better position to wait for higher ethanol standards to kick in (like raising gasoline blends from E10 to E15).

The creativity that comes with the search for alternative fuels has to be acknowledged. I know that replacing fossil fuels will not be easy and will not be done with just one type of alternative fuel. But you’ve got to applaud the folks who are looking for small creative solutions. Maybe the answer is micro not macro. BTW you probably heard this week that the Obama Administration took fuel cell vehicles off the table– essentially saying the infrastructure is not feasible to make the switch. Before we completely abandon fuel cell technology, I think we should consider how it may be the perfect choice for commercial fleets, particularly those that have their own fueling stations. Thinking less-large may reap some pretty huge benefits. Let me know what you think. BTW check the video archive if you want to see what a fuel cell car looks like and what it drives like. -Mary

In the last several days there has been increasing news coverage of how the media is blowing the H1N1 Virus (aka Swine Flu) out of proportion. Some have blamed the media for creating hysteria. While I am not ready to make-like-Joe-Biden (no confined spaces) just yet, I do think most businesses and other organizations would be smart to take the H1N1 seriously and make prudent decisions to help keep their employees/members healthy.
Thursday, I attended the GIC’s Monetary and Trade Conference and host David Kotok drew laughter from the crowd when he took the podium wearing a medical face mask. David wasn’t going for the cheap laugh. He actually takes pandemics seriously and with the right dose of charm and information tried to persuade his audience to do the same. He brought in masks for all attendees to take home, explaining how the N95 mask was different from a dust mask (dust masks can’t stop germs and will do nothing to stop the spread of the H1N1). Then he moved on to the business of the conference.
Serendipitously, that same evening I happened to be flipping through the channels on television and stumbled upon the movie Philadelphia (Tom Hanks character fights discrimination against AIDS patients and wins). The movie did such a great job capturing the fear and bigotry surrounding AIDS and those suffering from it. It struck me that David Kotok’s approach to H1N1 was prudent. The lawyers who fired Tom Hank’s Andrew Beckett, on the other hand, were caught up in the hysterics.
There is a third option, when it comes to reacting to the threats to your well being; that is to be smug or cynical and do nothing. We see it all the time during hurricane season. The folks who think only lemmings and losers evacuate to escape the storm.
Just how serious H1N1 will become in the days and weeks ahead is unknowable at this time. But if history has taught us anything, acting prudently, while it has its costs, is often the best course if you want to avoid becoming a victim. This holds true in investing, as well as pandemics.
If you want to know more about David’s message– take a look at his note below.-Mary

Swine Flu Strategy Update
May 3, 2009

Type A, H1N1 “swine flu” responses range from complete complacency to proactive prevention. We see both in the United States and elsewhere in the world. Some of the leading epidemiologists at the Milken Institute Global Conference give this version of flu a 50-50 chance to be a large-scale killer, according to Barron’s journalist, and my good friend, Jim McTague (see Barron’s, page 34, May 4, 2009).

Cumberland is in the “take this seriously and hope we’re wrong” camp. In our market actions we raised a cash reserve last week. This was easier to do after an eight-week, 30% stock market rally. So I guess it’s fair to say that the swine flu timing was opportunistic. Selling and raising cash at 850 on the S&P 500 index at the end of April is a lot easier than selling and raising cash when the S&P 500 is 666 and the date is March 9.

So far, AH1N1 “swine flu” is looking like the SARS outbreak when it comes to economics and market impact. Swine flu (so far), SARS, and avian flu (H5N1) were and are limited to a few thousand worldwide cases that have been documented and confirmed by lab tests. So far, they have triggered deaths counted in the hundreds.

SARS in 2002-3 had a death rate of about 9.5%. Swine flu (so far) has a death rate of about 6.5%. Avian flu has not jumped to an easily transmissible form. It is still a bird disease. It is also a killer. The cumulative 421 cases in the 2003-9 period have a death rate of 61%, according to the confirmed lab tests. Remember, when it comes to flu, the statistics only count those cases in which a certified lab was able to confirm the virus as the cause of death. Epidemiologists believe that there are many unreported cases in third-world countries and emerging economies.

There are three references for big flu shocks.

The first and the most infamous is the 1918-20 period involving the “Spanish flu.” That was also a variety of the H1N1 strain. Global deaths in 1918-20 attributable to that flu are estimated at between 40 and 100 million, or somewhere between 2% and 5% of the total world population. In the US about 25% of the population was infected with “Spanish flu” and about 500-700 thousand died. In 1918 the first outbreak came in the spring and was as small as the current flare-up of H1N1. The real killer phase occurred in the subsequent flu seasons of late 1918-1920.

In the Asian flu episode of 1957-58, the virus form was H2N2. Estimated global deaths were 1 to 1.5 million.

The third reference is the Hong Kong flu of 1968-9. It was the H3N2 strain and had a low death rate but a high infection rate. Globally it killed about 1 million people.

We have no idea how the current H1N1 “swine flu” risk will play out. We do know that media coverage and information flow is heightened, and that is good thing. Sensitizing large segments of the global population induces many to act preventively rather than remain complacent. We hope that it only takes a few deaths for folks to take this seriously. Preventive actions like closing schools, frequent hand washing, and wearing masks all combine to reduce spread of the virus. A race for a “swine flu” vaccine is underway; scientists now compete with the clock which ticks toward autumn flu season.

At Cumberland, we have distributed masks and hand sanitizers to all our staff; we have a flu pandemic contingency plan and have activated it. I wear an N-95 mask in public places like airports and on flights. We practice risk management in the portfolios we manage and in the business life we conduct. And we hope that the outcome will be inconvenience and not something more severe. It will be another year or two before we know the full outcome of this “swine flu.”

Many thanks to our medical friends who must remain anonymous but who confirm the seriousness of the risk. And also thanks to Barclays Capital, Credit Suisse, Wachovia, and Barron’s for data and concept assistance.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

With rash of hearings, bailouts, investigations and other such activities on Capital Hill, you may not have realized that legislation to help curb climate change is making its way through the U.S. House of Representatives. The U.S., following Europe’s lead, wants to put a price on pollution, particularly carbon dioxide. The hope is that making polluters pay for carbon emissions will encourage them to invest in cleaner energy.

Of course that is the simplified argument. The truth is there is a big expense tied to eliminating coal and other fossil fuels from our biggest polluters, the utility companies. Switching to clean alternatives, while desirable for many, is expensive and time consuming. The concern for consumers is that the energy companies will pass those costs on to us in the form of higher rates. More expensive energy is a tough pill to swallow for Americans already bruised by a tough recession and job losses.

Because of the Environmental Protection Agency’s declaration that carbon dioxide is a threat to human health, change is coming. Either the EPA will make the rules or Congress. That is why it pays to be an educated consumer on this matter. The more you know, the better the national debate.

There are two main proposals out there that could spare the consumer some of the pain. One is Cap-and-Trade, where by the amount of carbon pollution a business can emit is capped at a certain level. The companies that don’t have the technology to stay under the cap, can purchase permits to pay for their excess carbon emissions. The permits could be purchased on the open market from companies whose emissions fall below the carbon quota.

Are you still with me? The big question with Cap-and-Trade: does the U.S. government sell all of the permits at auction (raising over $1 billion in the process, or does it give some away for free to help the Utilities transition to cleaner energy and to prevent a huge run up in energy costs for consumers?

Another plan that has been getting some attention is a Cap-and-Dividend. In this scenario the consumers that do the most to lower their consumption would receive some of the cash (a dividend) collected by the sale of carbon permits. Some feel it is the best way to incentivize both consumers and business. Others find it a logistical nightmare to implement. There are other ideas out there, but right now, the traction is with Cap-and-Trade. You would do yourself a service by investigating the pros and cons of this policy so that you can be an informed voice as the debate gets louder. -Mary Caraccioli