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 Biofuel, based on fuel derived from organic biomass from recently living animals or plants or their byproducts, has transformed from a niche alternative to fossil fuels (e.g., gasoline, diesel) to become a booming industry. Driven by a unique cocktail of energy security fears, rising oil prices, low barriers to entry, and government support, the biofuels sector has taken off over the past ten years. Any liquid that stores energy, which is typically utilized by an engine or generator, can be called a “fuel.” The term “biofuels” encompasses a wide range of fuels, including vegetable oils, animal fats, ethanol, biodiesel (any oil or fat that undergoes transesterification to more closely resemble mineral-based fuel), and synfuel (fuel made from gasified organic matter, then liquefied to form fuel). The main common trait of all these fuels is that they are derived from organic biomass, rather than minerals. Biofuels are made using a fairly simple process that typically involves harvesting feedstock, or the raw materials (e.g., soybeans, sugarcane), crushing the feedstock, separating the dry matter from the oil, then re-crushing and/or further processing to extract as much oil as possible. The resulting oil can then either be directly consumed (e.g., by vehicles with specially designed engines), further processed (e.g., into biodiesel), or blended with mineral-based fuel before being delivered to the end user at gas stations and depots around the world (the most common blends in the U.S. are E10 (10% percent ethanol blend) and E85 (85% ethanol blend). Only some biofuels, most notably biodiesel, can be used in traditional internal combustion engines. Other biofuels, such as ethanol, must be blended with mineral-based fuel in order to be used in existing engines. The most common inputs into biofuels vary by country. In the U.S., corn and soybeans are most prevalent, while Europe tends to use flaxseed and rapeseed, Brazil sugarcane, and Asia palm oil. Brazil is in many ways the pioneer of the biofuels industry, having introduced ethanol from sugarcane (and flexfuel vehicles capable of running on ethanol) over 25 years ago as method to reduce dependence on oil imports. 
[edit] Drivers of the Biofuel IndustryGovernment mandates -- Governments around the world, for reasons that combine environmental friendliness, concerns over energy security, and a desire to support local farmers, have offered a wide variety of subsidies to biofuels. Typical subsidies include forgiveness of the consumption tax typically placed on fuel for vehicles, a tax credit for blenders who blend in biofuels with mineral-based fuels, and research subsidies and programs to develop new technologies for biofuels production. Beyond these subsidies, governments around the world have virtually guaranteed a market for biofuels by mandating biofuels usage to be blended with renewable fuels (e.g., the 2005 Energy Policy Act in the U.S. requires 4 billion gallons of biofuels consumption in 2006 and 7.5 billion gallons by 2012). In part thanks to mandates like these, demand for biofuels are expected to grow by 20% annually, to 92 million metric tons per year in 2011.[1] Price of oil -- Biofuels still represent a tiny fraction of total fuel consumption (to put it in perspective, total gasoline and diesel consumption in the U.S. is roughly 180 billion gallons, versus 4 billion gallons of biofuels consumption in 2006), and as a result, the price of biofuel is driven by the price of it’s nearest substitute, oil. As oil prices rise, it becomes increasingly attractive to produce biofuels, and more feedstocks for biofuels become economically viable. Price/availability of feedstock -- The majority of the production cost of biofuels comes from the cost of the raw materials, or feedstock, used to produce them. Therefore, as feedstock prices increase, producing biofuels becomes less profitable. As a result, biofuels producers are constantly considering alternative feedstocks— for example, the recent run-up in corn prices and wheat prices (see chart below), both of which can be used for biofuels, has led several major biofuels players to diversify into other biofuels technologies. Utlimately, biofuels may even drive up the prices of other fruits and vegetables, as farmers convert more land to biofuels feedstock. Second-generation biofuels use non-food feedstocks like grass and reeds to make biofuels, which would make the cost of the fuel independent of food prices. These feedstocks are lauded for growing well on land that wouldn't support food, freeing up land capacity, but environmentalists are skeptical because many of the plants that are expected to be used are categorized as "invasive species". The have a high likelihood of spreading outside of the growing land and using resources, thereby killing native plants as well as food crops on adjoining lands.[2] Because of this, environmentalists have appealed to the United Nations to ban or limit using such feedstocks to refine biofuels.  [edit] Companies who stand to benefitCompanies with control of feedstocks and vertically integrated biofuels refiners (i.e., refiners with exclusive control over supply of feedstocks) will benefit from the rise in biofuels, as they can offer commercial-scale supply of an increasingly scare commodity. Archer Daniels Midland, with its dominance of the corn-based ethanol market in the U.S. and an increasingly diversified portfolio of biofuels feedstocks overseas, should continue to benefit. Cargill, another large feedstock player, is privately held. It is expected, however, that despite these companies' market strengths, they will only exert control over around 30% of the market for biofuels thanks to the rapid expansion of the market.[3] Suppliers to the biofuels sector, especially construction companies with refinery expertise and equipment suppliers, should benefit from a biofuels boom, regardless of which feedstocks or refiners end up on top. These would include Lurgi, the market leader in providing turnkey biofuels refineries, and Titan International, which manufactures wheels and tires for makers of farm machinery. Both will benefit from increased investment in biofuels. In addition, Caterpillar (CAT)'s role in agricultural equipment supply will also make them benefit from any drive towards increased farming activity. Along the same lines, chemical companies and seed suppliers should benefit from a biofuels boom. Monsanto, in particular, would likely benefit, as concerns regarding the safety of its genetically modified (GM) seeds for human consumption would be nullified if they were used to produce biofuels. Dow Chemical has also been developing a robust chemicals program for use with biofuels. Diversa (DVSA) is another major producer of enzymes used to make biofuels from biomass and cellulosic feedstocks. [edit] Companies who stand to loseContrary to popular belief, pure-play biofuels refineries may not necessarily benefit from a biofuels boom, as biofuels refining is not technically complicated, with relatively low capital expenditures. Capital, and new competitors, are flooding the market for biofuels refining, fueled at least in part by the current low interest environment. Rising feedstock costs, for those who are not vertically integrated, could ultimately eat into profit margins. Pure-play refiners such as Pacific Ethanol or Aventine would fall into this camp. Companies who rely on biofuels feedstocks for alternate uses are also at risk, should a biofuels boom drive up the price of feedstocks. Tyson Foods, which is a major consumer of corn for its chicken feed, would be particularly negatively impacted— Credit Suisse First Boston estimates that every 10-cent increase in the price of a bushel of corn cuts 5 cents per share of profit from Tyson. This negative impact will ultimately depend on which feedstock for biofuels “wins”— corn and soybeans have benefited greatly in the short-term, but over the long-term, cellulosic ethanol or sugarcane could end up salvaging Tyson’s profitability. The rise in corn prices has already reportedly caused riots in Mexico over excessive tortilla prices. Companies competing for acreage with biofuels companies may find themselves out of luck as a result of the biofuels boom. For example, breweries such as SAB Miller or Heineken will face the double challenge of struggling to find acreage for growing barley and rising cost of other commodity inputs into the brewing process. Either way, biofuels may be on the rise and a good thing to keep an eye out for. [edit] References
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