Good News for Ethanol

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Ford (NYSE: F) and General Motors (NYSE: GM) believe they have seen the (near) future -- and it runs on ethanol. TheWall Street Journal reports that the automotive giants are planning to move aggressively on "flex fuel" vehicles that can run on either gasoline or E85, an 85% ethanol and 15% gas blend. While the plan's benefits to Detroit are debatable, the initiative might be a boon to another group of companies.

As part of their initiative, Ford and GM are intensifying marketing of "flex fuel" autos to position themselves as both environmentally friendly and patriotic for reducing the U.S.'s dependence on foreign oil. Production of such cars and trucks is still expected to be small; the two companies plan to make 650,000 autos this year that can run on E85. However, the automakers are also pushing for an expansion in the number of fuel pumps offering the ethanol blend. The campaign may have some impact, but Toyota (NYSE: TM) and Honda (NYSE: HMC) will doubtlessly remain tough competitors with their more fuel-efficient cars and hybrid models.

In the end, Ford and GM's more emphatic promotion of ethanol will probably be more beneficial to ethanol producers like Archer-Daniels-Midland (NYSE: ADM) and MGP Ingredients (Nasdaq: MGPI). The ramped-up marketing of "flex fuel" offerings will raise consumer awareness of E85, and the additional fueling stations will probably lead to some boost in demand, especially since there are 5 million vehicles on the road already capable of running on the fuel.

To be sure, any near-term demand increase probably won't be huge, since only the most fervent environmentalists and patriots are likely to turn to E85. That's because cars and trucks are 25% less fuel-efficient when running on ethanol vs. gasoline. Even with lots of government subsidies, ethanol is still only somewhat cheaper than gas.

Detroit's embrace of E85, though, will help solidify the long-term position of ethanol as an alternative fuel. Ethanol already has the backing of politicians from the farm states, and their support for the corn-based fuel can only increase as pressures rise to reduce agricultural subsidies. With Detroit also on board, firms like ADM and MGP can rest assured that the future of their ethanol business is bright.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.