ethanol article "predicting massive growth!"

Predicting 'massive growth'
Sheer economics are playing a role, as well. As crude oil and gasoline prices remain high, producers look to stretch each gallon of gasoline by adding ethanol, says Aaron Brady, the assistant director of oil research at Cambridge Energy Research Associates.

"Gasoline consumption is increasing 2% a year, and we haven’t built a new refinery since the 1970s. So alternative fuels have to be part of what fills that gap," agrees Tim Newkirk, the chief operating officer of MGP Ingredients (MGPI, news, msgs), an ethanol producer. "Otherwise we are going to be even more dependant on foreign oil and also foreign gasoline."

Meanwhile, auto companies like Ford (F, news, msgs) and General Motors (GM, news, msgs) are ramping up promotion of flex vehicles that run on E85 -- hoping they will catch on like hybrids that combine the use of electrical power and gasoline. "Already we are seeing a significant increase in interest," says Bob Dinneen, president of the Renewable Fuels Association.

Taken together, these factors have pushed the price of ethanol well north of $2 a gallon, which means producers are enjoying healthy profits -- since they can make the stuff for $1 to $1.20 a gallon. "The industry is undergoing massive growth as producers expand and as new participants enter the market," says Friedman, Billings, Ramsey analyst Jacques Rousseau. He believes demand will push use of ethanol well beyond the federally mandated minimums -- to 10 billion gallons a year by 2010.

Ethanol's big guns
Producers in the U.S. typically make ethanol by milling corn into flour and then converting the starch to glucose by adding enzymes and cooking it. Then it is fermented into a kind of beer, and the alcohol is distilled off. The country has 97 plants and 33 are under construction, says Dinneen.

Archer Daniels Midland (ADM, news, msgs) is the most obvious ethanol play -- since it controls about 25% of the capacity in the U.S. The company gets about 25% of its operating profits from ethanol and the sale of related byproducts. "Ethanol and bio-fuels are certainly going to be a key driver," says Morningstar analyst Greggory Warren. "They are pumping a lot of money into it. They are talking about spending billions on ethanol and bio-fuel production in Europe, too."

Warren, however, thinks the stock is too expensive, and he is not alone. "With the tightness in the gasoline market it has had a nice run," agrees Brian Hicks, co-portfolio manager of U.S. Global Investors’ Global Resources Fund (PSPFX). "We are waiting for a pullback before we make a move."

Pacific Ethanol (PEIX, news, msgs) is the biggest pure play on ethanol production. The company currently markets ethanol in several western states including California, Nevada, Arizona and Oregon. But it hopes to have five ethanol plants running in the region by the end of 2008. Its first plant, under construction in Madera County, Calif., should be on line by the end of this year.

"Pacific Ethanol is positioned to achieve substantial growth starting in late 2006," says Dutton Associates analyst Paul Resnik. "We believe that the company can turn profitable in 2007 and generate significant earnings in 2008 and beyond." Resnik thinks Pacific Ethanol will make $1.21 cents a share in 2008.