HardAssetsInvestor

Written by HardAssetsInvestor.com  |

June 26, 2007

Biodiesel: The Chicken Fat Problem

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On Monday, Tyson Foods (NYSE: TSN) and Syntroleum Corp. (NASDAQ: SYNM) announced plans to build a refining plant that will take Tyson's animal and grain by-products (fat and grease) and turn it into 75 million gallons of fuel annually.

On Monday, Tyson Foods (NYSE: TSN) and Syntroleum Corp. (NASDAQ: SYNM) announced plans to build a refining plant that will take Tyson's animal and grain by-products (fat and grease) and turn it into 75 million gallons of fuel annually.

Pretty cool, eh?

While the numbers are small when you compare them to the oil industry as a whole, look at it this way: 75 million gallons is equivalent to the all the biodiesel produced in America in 2005 (most of which came from soybeans).

Using oil and grease for fuel isn't new. The so-called “hobbyist” biofuelers have been straining French fry oil for years and running their modified diesel cars with it. But this kind of yellow-grease garage production isn't scalable, and, face it, even though we American's eat a lot of fast food, we just can't consume enough fries to fill our tanks with the leftover oil. That's what makes the Syntroleum deal interesting.

Syntroleum's Biofining(tm) process claims to work with a wide range of inputs – from chicken fat to fry oil – and output a fuel that is cleaner to burn, more stable and more efficient than diesel. Moreover, it can be combined with more traditional biodiesel to enhance its properties, and can run in unmodified diesel engines, Perhaps the most interesting fact is that Syntroleum biodiesel supposedly performs as well as petroleum diesel at low temperatures, a common complaint with grease-based fuels: When it gets too cold, the grease solidifies.

We're saved!

Sorry, got carried away in the press release furvor.

Actually, all of this is still a few years away, as the plant needs to be built and the fuel tested for safety and other concerns. But assuming it all works as planned, it does look promising.

As do the many other “boutique-like” biodiesel companies that have sprung up over the last year. Ethanol gets more of the press, but Biodiesel is still hot.

How hot? That 2005 biodiesel number – 75 million gallons – nearly tripled in the past year: We produced 225 million gallons of biodiesel in 2006, still mostly from soybeans, but many companies are working on finding alternative feedstocks.

The question for investors is: How is this effecting the market? Right now, the amount of biodiesel produced in the U.S. is so small compared to the 50 billion gallons of diesel used in 2006 that it has no muscle to move the market price of fuel. But at least its a start, and for companies like Tyson, the benefits are obvious: You get a chance to look green (not many factory food producers get to say that) and you get a small boost to the bottom line.

As we pointed out in Soaring Soy, the play here remains difficult to find. The building hype around biodiesel could drive the price of beans skyward, but we’re not there yet. The people who really made out on this deal were Syntroleum investors: A stock that had been languishing on diminishing volume received an unexpected shot in the arm from the announcement, gaining 12 percent on 10 times normal volume after the announcement.

The moral of the story is this: Biofuels remain a hot sector where the best plays will continue to be VC-like early stage technology companies. Those are risky bets, but they could bring home the bacon. Or, at least, the chicken fat.

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