The Safe Way to Invest in Ethanol

"You just flick a switch," said Jimmy, "and it sends the wood chips over to the rail siding. Flick it back again... and it flows over there... into a truck trailer."

Jimmy Hatcher was explaining how his wood-chip operation works. He bought it from St. Joe, Florida's biggest private landowner, a few years ago as part of a real estate investment in the Panhandle.

Now Jimmy's going into the ethanol business. He can use the mill to make wood chips... and use the wood chips to make ethanol.

Last week, the Florida Department of Agriculture donated $4 million to Jimmy's business. Florida hopes its agriculture industry can supply 25% of the state's energy needs by 2025... and has donated a total $25 million to 12 different farm-to-fuel businesses this month.

Jimmy Hatcher and his son Sam hope to raise another $33 million in federal grants and guaranteed loans to build the plant. I went out to meet them earlier this month...

"The wood-chip mill never really made any money," says Jimmy. "But we did run it for a year... and filled a couple of contracts... just to get some oil in the cogs."

Two years ago, it occurred to Jimmy and Sam to use the wood-chip mill as part of an ethanol operation. Everyone knows you can make fuel from starches and sugars like corn, soybeans, canola oil, and sugar beets. But you can also make ethanol from cellulose. Cellulose is the main component in wood, straw, and plants.

Cellulosic ethanol has two huge advantages over ethanol made from sugar and starch. For one thing, it's abundant... and free. The National Laboratory estimates that America throws away 323 million tons of cellulose every year in household trash, wood waste, mill residues, and corn and wheat stalks. In theory, this wasted cellulose could provide 30% of the country's current fuel needs.

Ethanol production from cellulose does not compete with our food supplies. This is the second major advantage. The corn ethanol boom has caused corn prices to double. We use corn to produce about 30% of the products you see on supermarket shelves.

The only problem is, cellulosic-ethanol technology isn't proven on a commercial scale.

Jimmy and Sam Hatcher were honest with me: They have no idea if this business can make any money. It's a huge risk. They will forge ahead anyway. "There are thousands of people lined up to build the second cellulosic ethanol plant... but no one wants to be the first," they said.

While I'm not ready to invest in cellulosic ethanol yet... I do want to own timberland.

If the cellulosic revolution happens, ethanol producers will compete with construction and paper industries for wood and wood chips. Logs and timberland will rise in price.

Jimmy and his son Sam own timberland. They say timberland is the ultimate protection against inflation. Jimmy made the point that foreigners own trillions of dollars. And one of the safest ways to spend these dollars is to buy American timberland.

Timberland returns have beaten the stock market, too... and every other major asset class... over the past 20 years. According to the NCREIF Timberland Index, timberland has returned 15.1% per year since 1987. Over the same period, large-cap U.S. stocks returned about 12%, small-cap U.S. stocks returned 13%, corporate and government bonds returned 9%, and commercial real estate returned 8%.

Timberland doesn't care about recession, banking crises, or trade deficits, so there's no correlation to the other assets classes. "While we've been talking, my timberland has produced several more tons of fiber," says Jimmy. "And when I sleep, it'll add a few more."

If you are interested in cellulosic ethanol, I suggest you invest in timberland. The easiest way to own timberland is through the large timberland REITS traded on the stock exchange.

If the cellulosic ethanol takes off, you'll see timberland prices rise. And if nothing happens, you'll still own millions of acres of prime American timberlands... you'll earn 5% dividends... you'll beat the stock market... and you'll protect your capital from inflation.

Good investing,