The Bush administration is standing strong on its intensive ethanol push. So why is a top American company shifting its emphasis to Brazil? The answer is that there are too many political question marks in the developing U.S. biofuels market.

Let's look at what went down in Washington this week. None other than Dubya's successor, Texas Governor Rick Perry, had filed a request with the Environmental Protection Agency to halve ethanol requirements because he says they are causing severe economic harm to his state's ranchers and food producers.

Livestock ranchers and farmers are hog wild at the dizzying swings in corn prices. The commodity spot price for the grain dropped off a cliff in July alone after more than doubling since last August. Those who utilize corn as a primary feed blame the price jump on the sevenfold increase in ethanol's contribution to the national fuel supply.

Under law, the EPA can change mandates if the damage is seen to be severe.

But the feds rebuffed Texas, sticking to the Renewable Fuels Standard that sets the following targets for ethanol as part of the nation's gasoline mix:

• 7.5 billion gallons of renewable fuel (ethanol and biodiesel) per year by 2012, and
• 36 billion gallons by 2022

Responding sharply to the administration's intransigence on Thursday, Governor Perry said, "Any government mandate that artificially props up a single industry to the detriment of millions of Americans is bad public policy."

What about the price decline we're witnessing now? Well, the wheels for Texas's protest were already in motion by late April, well before the time corn dove back down in the past month. Plus, many market observers and worried politicians think we're locked in a long-term uptrend as long as ethanol decouples corn from traditional grain demand sources.

Archer Daniels Midland Company (NYSE:ADM), the top grain processor in the world, is kicking off a major project in Brazil's sugar-based ethanol industry after suffering a 58 cent-per-share profit drop on Wall Street this week.

London's Financial Times reported that ADM has found the U.S. market to be more of a hindrance than a help when it comes to turning biofuels into bucks.

Executive VP John Rice said that a combination of higher input costs from corn, labor, and even steel for facilities are slamming ADM's balance sheet, which helps explain the new focus on Brazil.

"We don't see the margin out there right now and finding capital is also very tough."

In the U.S., where a phalanx of lobbyists and legislators have created one of the heartiest subsidy regimes in the developed world, finding capital is very tough?

For Pete's sake, ADM alone spent $330,000 on lobbying in the second quarter of this year alone...

And that got them and other players like Monsanto, Deere, and Dupont a nice chunk of future income from the $300 billion farm bill this year.

The point is that biofuel isn't just big business, it's big politics.

John McCain is against subsidies for ethanol and all other farm subsidies, but Barack Obama knows that in his home state of Illinois and throughout the central states there are entire towns—and potentially millions of voters—banking on biofuels.

As for ADM balancing Brazil and domestic U.S. production, CEO Patricia Woertz says investment in sugar ethanol directly and through partners is of strong interest to the company. She also played off a possible win for Brazil at the World Trade Organization that would call foul on U.S. corn subsidies.

Perhaps ADM would be better served by developing the best technology rather than spending tons on propping up sources like corn that are proven to be inefficient.

BP is working both ends, saying this week that along with Verenium Corp., they're developing cellulosic ethanol technology that would use plant waste instead of straight grain feedstock.

We're keeping an eye on the entire international biofuels scene here at Green Chip Stocks and Green Chip International, and not throwing the baby out with the bathwater. There is a good chance that winning biofuels will come out of this period of investment and experimentation.

We'll let you know about the best opportunities for investment as they emerge.

Regards,

Sam Hopkins