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Corn-based ethanol currently supplies 5 billion gallons a year.
In May 2006, Goldman Sachs shelled out $30 million to a tiny company called Iogen.
Tuesday, the DOE announced it was granting $385 million to six biorefineries over the next four years.

In the March issue of Material Profits, you'll read about one of the newest corn-based ethanol IPOs, courtesy of Ann Sosnowski, editor of Diligent Investor.

Corn-based ethanol currently supplies 5 billion gallons a year. Another 6 billion gallons will be coming online in the next 2-5 years, according to Platts.com. But that's less than one-third of what the president called for in his State of the Union speech in January.

How will the industry be able to produce 35 billion gallons of ethanol a year without running into issues like food vs. fuel, or increasing corn costs?

The answer is to take corn out of the equation.

Now, lots of folks automatically turn to sugar as the solution (Brazil's ethanol industry uses mostly sugar beets) and point to Florida and Louisiana's sugar cane industries as possible suppliers.

Unfortunately, that won't work in the United States for two reasons. The U.S. Sugar Program creates a guaranteed price floor for sugar, making it less cost effective for use in ethanol production. I talk more about this in the next Material Profits issue.

But the other key factor is that sugar-containing crops produced further away from warm climates -- sugar beets in Idaho, for example -- have smaller sugar yields. That means we'd have to use more feedstock than our South American neighbors.

Another solution, however, is starting to be talked about in investment circles…

Ethanol Investing: The Goldman Sachs Effect

In May 2006, Goldman Sachs shelled out $30 million to a tiny company called Iogen. This investment was to further a demonstration plant that will produce cellulosic ethanol.

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Cellulosic ethanol is made from other feedstocks besides corn, such as wood chips or saw grass. Other than the benefits of not using corn, other feedstocks are cheaper, available in a wider variety of areas, and can also yield more ethanol.

With this in mind, cellulosic ethanol plants won't be tied to the Corn Belt, or be forced to ship corn across the country and ethanol back across the country. This versatility and promise has led the U.S. Department of Energy to follow in Goldman Sachs' footsteps and provide a significant amount of funding for cellulosic ethanol producers.

The DOE announced this funding one year ago, to the tune of $160 million for three plants.

Tuesday, the DOE announced it was upping that amount to $385 million for six plants over the next four years. Once these plants are up and running, they will be producing 130 million gallons a year.

One of the six companies is BlueFire Ethanol, Inc. (BFRE.PK).

Ethanol Investing: BlueFire Awarded $40 Million

The six companies receiving DOE funds are Abengoa Bioenergy (ABG:MCE), Broin Companies (Private), Iogen Biorefinery Partners (Private), ALICO, Inc. (ALCO:NASDAQ), Range Fuels (Private), and BlueFire Ethanol.

Of the three publicly traded companies, this grant money means the most to BlueFire, strictly from a market-cap perspective. Abengoa has a market cap of nearly 2.5 billion euros and ALICO's market cap is just over $350 million. But BlueFire's market cap is $131.6 million -- roughly half that of ALICO, and less than one-tenth of Abengoa's.

BlueFire also has a very attractive price tag at $6.15.

News of this $40 influx will hit mainstream investors soon, and I think it's a great chance to ride this company to an easy 30% gain in a very short amount of time.

Tomorrow morning, pick up some shares of BlueFire Ethanol, Inc. (BFRE.PK) at or below $6.25.

Instead of a trailing stop or stop loss, I want to give you a specific price to watch for. BlueFire's breakdown point is approximately $4.90. Use that figure as your exit point on a downturn.

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Related Resources
U.S. DOE Aid: U.S. DOE to Invest in Cellulose-to-Ethanol Projects. - RenewableEnergyAccess.com
BlueFire Ethanol: Company website
Yahoo!Finance Quote: BlueFire Ethanol chart. - Yahoo!Finance