Cosan's Sugar-Free Debut

I suppose two smokin' IPOs in one week would have been a little too much to expect amid the smoldering wreckage of recent market turmoil. But just because Mr. Market didn't throw Brazilian sugarcane slinger and ethanol exporter Cosan (NYSE: CZZ  ) a welcome bash, as he did for virtualization vendor VMware (NYSE: VMW  ) , doesn't necessarily mean you ought to pull away the welcome mat.

New as it may be to U.S. investors, Cosan is a major force in both the sugar and ethanol markets. Let's look at each business in turn.

Cosan is a top-three global sugar producer, and the second-largest exporter. The timing of the firm's IPO relative to the arrival of Hurricane Dean in the Caribbean is an interesting one. A lot of sugarcane is grown in the Caribbean and the U.S. Gulf Coast. Sugar No. 11, the world raw cane sugar commodity contract, perked up on Friday in the face of a potential weather-induced cut in the region's output. This would be a boon to Cosan, which has projected sagging profits in the face of a global supply glut this growing season.

In the ethanol arena, Cosan is second only to Archer Daniels Midland (NYSE: ADM  ) in production, and first in exports worldwide. To most investors, ethanol is doubtlessly the company's greatest attraction. But to me, the ethanol market's apparent fragility seems to be Cosan's greatest risk. Ethanol prices have plunged since last summer's peak, and when you factor in all the processing capacity being built out by the likes of Pacific Ethanol (Nasdaq: PEIX  ) and VeraSun Energy (NYSE: VSE  ) , ethanol production looks like a risky business to be in today.

Cosan listed shares in the U.S. in order to help fund its huge expansion plans. I see the company spending far more than it generates in cash to grab share in a market where satisfactory returns are far from guaranteed. I have no bias against growth. I'm just not convinced that investors will be adequately rewarded for funding this particular company's plan. For now, I'll be watching Cosan from the side of the field.

We're sweetening the deal with further Foolishness:

Fool contributor Toby Shute has a sweet tooth, but no position in any company mentioned. The Motley Fool's disclosure policy will field any of your questions.

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