Squeezed Ethanol Makers Looking Elsewhere for Profitability: Archer Daniels Midland Company (ADM), Valero Energy Corporation (VLO)

POET is among several producers now turning a byproduct of the ethanol process into a protein called “zein,” which can be used in packaging, adhesive and other industrial applications. It is also developing a corn-based fiber product that could compete, as soon as 2014, with oat and wheat in cereal and various baked goods.

Green Plains is moving into related new directions as well, but in a significantly different way. It has partnered with filtration maker CLARCOR Inc. (NYSE:CLC) and a private wastewater treatment firm called bioprocessH2O to capture the carbon dioxide released when starch is fermented during ethanol production. It plans to use this to grow algae for production of fish food and various chemicals, and projects sales will provide profits during ethanol downturns.

Green Plains also plans to rely more heavily on its sales of corn oil, which are currently the one profitable aspect of its operation.

The bottom line

Diversity may help some of these producers weather the ethanol squeeze, but any potential stock impact from these moves is still unclear and sure to vary.

ADM and Valero Energy Corporation (NYSE:VLO) are best positioned, if only because ethanol has always been just one part of their portfolios — and a relatively small one at that. POET remains perhaps the most innovative of this group, but unless it goes public it will not be of interest to investors. And no matter what it tries, Pacific Ethanol will remain challenged by its daring decision to locate far from Midwest cornfields.

Anyone with a soft spot for ethanol, then, should be focused on Green Plains. It’s remained a market leader by combining relatively low-cost production methods with solid capitalization, minimal debt, good risk management and a location close to corn supplies. Its foray into algae may help it weather tight ethanol margins, and corn oil sales could continue to grow, but it will first have to get through a coming year that looks very challenging for ethanol.

The article Squeezed Ethanol Makers Looking Elsewhere for Profitability originally appeared on Fool.com and is written by Howard Rothman

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