Although mega deals are usually good for stock market sector pricing, they aren’t typically positive for sector economics unless you have a dumb seller and dumb buyer. As one of my associates at Lehman Brothers once said, “The Acquirer wants the Acquiree at a low price and the acquiree usually trades at a low price because of sector economics.” Now enter the institutional investor who loves to bet on sector consolidation in which we are now seeing in the ethanol sector. Expect a move upward for ethanol stocks.

Enter VeraSun Energy Corp, which announced that it will acquire US BioEnergy Corp. for $700 million. The deal is announced as the industry faces inventory problems as well as pressure from activist groups protecting agricultural pricing and environmental issues.

Besides subsidies that Congress has given ethanol producers, Congress is considering increasing the mandate for the number of gallons of ethanol that the oil companies are required to use. Excess inventories and increases in corn prices have helped dampen the enthusiasm that we saw for ethanol companies just a year ago.

Donald L. Endres, Chairman and Chief Executive Officer of VeraSun said, This merger is an opportunity for two leading companies in the renewable fuels industry to capitalize on synergies and provide value for shareholders.

We have highlighted the developing debate regarding ethanol and whether the problems that it creates are worse than the disease. The Wall Street Journal did a beautiful job yesterday in telling this story.

Nobody does it better…..”

The US Government gives ethanol a $0.51 (51 cent) federal subsidy while also imposing a $0.54 tariff on imported ethanol. Even some proponents of ethanol are crying foul. Said one industry insider to Ethanol Blog, “Market Dynamics should not require unfair competitive practices to make ethanol a viable energy alternative.”

Here’s more.

All the signs are now pointing to the fact that ethanol may not be the answer for $100 barrel oil prices. Ethanol prices have tumbled over 50% while some are also blaming ethanol for record crop prices. As one Washington insider who wished to remain anonymous said, “Solving one problem to create a new problem is not a good solution. In the case of ethanol, I’m not sure what problem it’s actually solving. It’s not our answer for to combat our dependency on oil.”

Some energy industry experts are starting to agree with that assessment. Scientists at Cornell University have recently concluded making the fuel uses more energy than it creates. David Pimentel of Cornell University who has studied the production of ethanol for 2 decades has concluded processing ethanol requires 29 percent more energy than it produces. In addition, researchers at Stanford University have added that the use of ethanol provides little or no benefit to the environment as compared to fossil fuels.

The Bush Energy Plan has resulted in 20 separate laws and incentives to encourage ethanol use. However, this hasn’t discouraged Georgia and Florida from restricting ethanol use during the summer when officials are concerned that evaporation can create smog problems.

Ethanol prices should begin to level off as the market finally absorbs the overcapacity. One industry expert said that ethanol production results in a 33% gain in combustible energy because fertilizer and pesticide costs to grow corn should not be included in the price to produce ethanol.

Fuzzy math?

There’s more arguments against ethanol each day and smart money is starting to pay attention to some of the naysayers because there are arguments are quite compelling.

I recently read a report titled “Bioofuels:Is the cure worse than the disease?”. The report received a lot of press and I highly recommend reading it.

I just found an interview with one of the authors and he continues some of the arguments that he made in the report.

As a young man growing up in New York, we used to joke on Saint Patricks Day that we were wearing green underwear. Now it seems that everybody wants to be green and it has nothing to do with being Irish.

I was watching the Democratic Debate last night and I was quite surprised that none of the Democratic candidates have gone green this far into the campaign. Yes, of course they are all proponents of green energy and renewable energy alternatives because that’s central to the Democratic platform. I’m talking really green like Joe Biden dropping his pants and displaying some radiant green underwear. Or better yet, John Edwards giving us that corny smile with a button pinned to his chest that says something like “Go Green”.  Expect one of the Democratic Candidates to really jump on this bandwagon before the end of the year.

It’s a green world, even the famed Johns Hopkins University is going green. Right now, they’re just stating that they’re hiring a new head of media relations to attract corporate dollars. In my eyes, they’re going green

It’s a Green Wonderful World

If you drink a lot of beer, you may want to start an anti-Ethanol campaign. This could also mean a problem for the independent brewer industry or anybody that doesn’t include Budweiser, Miller or Molson. The big companies have the ability to hedge against higher wheat, barley and hop prices but the tremendous growth seen in the independent brewer industry may come to a screeching halt. Expect 10% increases right across the board for independent brewers to offset skyrocketing commodity prices. What’s the cause? Ethanol.

Barley and wheat prices are skyrocketing due to land that was once used for these crops now being used for ethanol. In addition many farmers are now using the land that was once used for barley and wheat for higher paying feed crops to offset the loss of corn as a feed crop.

As for hops which are a key ingredient to add stability and flavor to beer, acreage dedicated to hops in the United States fell 30% between 1995 and 2006.

As for the beer market, there are two certainties going forward. Expect higher prices over the near future and less new beers because experimentation costs money.

With oil prices hovering near $100 a barrel, we must begin to wonder if ethanol is really the answer to our energy problems? If not, how much of an impact will it have to reduce our needs for foreign oil. Keep searching for more alternative fuel. In a recent article written in Energy Policy by James and Stephen Eaves, they arrive at a conclusion that’s a harsh reality.

If the United States devoted all its corn production to the production of ethanol, “We could displace only about 3.5 percent of current gasoline consumption.”

Who said that Rumpelstiltskin was a fairy tail? If you live long enough, you may just see a man turn straw into gold and Colorado-based Range Fuels is about to break ground on a new fuel plant in Georgia which will turn wood chips into ethanol.

To date in the U.S., ethanol has been produced from corn while in Brazil it’s produced from sugar cane. Range Fuels is backed by Khosla Ventures, a Menlo Park-based VC that is very active in the renewable energy space. The plant is expected to be completed by 2008 with an initial capacity of 20 million gallons of ethanol per year. The plan is permitted for a maximum capacity of 100 million barrels per year.

Some are asking this question. With ethanol prices cut in half and much plant construction on hold, what could Vinold Khosla and the team at Range Fuel be thinking?

Khosla had this to say in an interview with Forbes: