Is Sugar-Based Ethanol a Sweet Deal?

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Sir Richard Branson wants our cars to have a sweet tooth, as the Virgin Group billionaire entrepreneur has been advocating the use of sugar cane-based ethanol as opposed to one derived from corn. Considering the impact that rising corn prices have had on inflation, not to mention food supplies, he may have a point.

Branson can rattle off his take on the economics of sugar-based ethanol at will:

• It's seven times more efficient to run a car off sugar than corn.
• It requires only $100 to alter your existing car's battery to get 85% of your fuel from sugar.
• Unlike with hydrogen fuel, you wouldn't have to eliminate the entire current fleet of cars on the road to switch to sugar-based ethanol.
• Brazil by itself could create enough sugar plantations to supply the U.S. -- without damaging the rain forests.

Those are pretty compelling arguments. With world food prices soaring over the past couple of years and resulting food riots endangering the stability of countries around the globe, current U.S. policies seem ludicrous.

I'm always willing to give the maverick Branson the benefit of the doubt. Any CEO who's willing to appear nude in the middle of Times Square to launch his Virgin Mobile (NYSE: VM) phone service (OK, Branson was actually in a "nude suit") is someone worth listening to if not, um, watching.

There are a lot of vested interests working at cross-purposes to Branson. Not just Big Oil plays like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), but also corn-based ethanol producers like Archer Daniels Midland (NYSE: ADM) and VeraSun Energy (NYSE: VSE).

So to whom can you look to turn sugar into gold? Perhaps the leading name right now is Cosan (NYSE: CZZ), the largest sugar and ethanol producer in Brazil. Of course, Archer Daniels isn't putting all its husks into just one corn silo, and has itself expressed a desire to diversify into the sugar cane-based ethanol market.

Now, having seen the damage ethanol demand has done to corn prices, you have to wonder about the sweet stuff. Sugar prices might be at some of their lowest levels as supply outstrips demand, but increasing the need for sugar to make fuel would likely cause them to spike.

Given the potential with sugar-based ethanol, it could be time for you to embrace $4 a gallon gas, and perhaps profit from the trend, too. And you don't have to parachute nude into Times Square to do it.