Energy& Income Letter: "Congress is weighing several proposals that would adjust the renewable-fuel standard to realistic levels; any solution would likely include a measure preventing the EPA from mandating fuel blends that comprise more than 10 percent ethanol. The timing of such legislation remains uncertain, though the risk of running into the so-called blend wall in 2013 or 2014 should spur Congress into action.
Accordingly, investors should steer clear of ethanol or biofuel producers that rely on the US market. Much like solar power companies (a group we've shorted successfully in the past), cellulosic ethanol companies such as KiOR (NSDQ: KIOR) rely entirely on governmental fiat to create a market. Spain-based Abengoa (Madrid: ABR, OTC: ABGOY) is another name that investors should avoid.
Our bearish outlook for producers of cellulosic ethanol doesn't mean that there aren't opportunities for investors to profit from the biofuel industry. Although we don't expect US refiners to push beyond the E-10 standard, we expect ethanol producers to consume more than one-third of the annual US corn crop for the foreseeable future."