The national average for gasoline prices struck $2.70 a gallon this week. That's up more than 29% from a year ago and the effects are still being felt. Many consumers are looking for less expensive alternatives and many are hoping corn-based ethanol will provide that relief.

Excitement surrounding ethanol as the near-term alternative to gasoline is impossible to deny. The excitement has changed boring old agriculture stocks like Archer Daniels Midlands (ADM:NYSE) into the new generation of “hot” alternative energy stocks.

Will ethanol be the quick fix? 

Most studies point out that it probably shouldn't. For instance, it takes 1.65 gallons of ethanol to produce as much energy as a gallon of gasoline. In other words, if you were getting 300 miles out of each tank of gasoline in your car, you would only be able to travel 195 miles if you filled up with ethanol.

Also, ethanol production is very costly. Not only a dollars and cents way, but in energy costs. A recent University of Stanford study discovered that once the extra electricity, transportation, water, and other expenses used in ethanol production is factored in, it takes the energy equivalent of 1.0435 gallons of gasoline to produce one gallon of ethanol. That's like buying a $100 bill for $104. Not a good deal at all.

Whether ethanol makes sense on paper or in the lab doesn't really matter. The federal government, agricultural industry, and majority of the public are all behind ethanol and are determined to make it work. And when there's this kind of financial and political support, there are bound to be hidden profit opportunities.

I'm not talking about ethanol stocks. Though there will be eventual winners in the growing crowd of ethanol stocks, one sector that's going to really benefit has remained off many investors' radars. That's the agricultural chemical industry.

You see, most of the ethanol produced in the United States is from corn. Corn prices have remained fairly immune from demand from ethanol makers. Corn has traded as high as $3.25 a bushel in the spring of 2004, but ended last week at $2.35 a bushel despite the construction of new ethanol manufacturing plants. A decline in corn prices like that while ethanol production has increased proves ethanol won't drive corn prices through the roof. 

To see why it won't, just look at the corn production capacity of the United States . The country is producing more corn than it can consume. The United States exported more than $4 billion worth of its extra corn production last year. 

Also, the U.S. government currently pays corn farmers a total of $10 billion each year in subsidies to not farm their land at all. That's keeping 35 million acres (about 1.5% of the nation's land surface) of tillable soil unproductive. There could easily be plenty of extra corn supply if needed.

Farmers can change the crops they plant too. Each year farmers choose between wheat, barley, corn, soybeans, etc. Naturally, farmers will plant more corn if it's more in demand than other crops. 

Finally, corn already has many uses. Just think of how many items use high fructose corn syrup. Out of 30,000 items in your average supermarket, corn is an ingredient in 3,700 of them. Corn is also the primary feedstock for the nation's 105 million cattle and 60 million hogs and pigs.

An extra layer of demand for corn from ethanol will not throw the entire system out of whack. It's simply going to change farmer's practices. Farmers are going to produce more corn to meet the increased demand. That's, however, easier said than done.

Corn requires large amounts of nitrogen in order to grow. As it grows, corn draws large amounts of nitrates and phosphates from the ground. As a result, if corn is planted in the same field year after year, there will be noticeably diminishing returns. That's why crop rotation has been used for thousands of years. 

Traditional crop rotation simply won't cut it anymore given the extra demand for corn. Farmers are going to be fertilizing more and more to ensure their fields have enough nitrates and phosphates to grow enough corn to meet demand. 

I realize 99% of cornfields are already fertilized. However, farmers are going to have to increase their fertilization purchases to keep their cornfields output high and to support the switch from other crops to corn. As a result, the indirect winners in the ethanol boom will be fertilizer producers.

Not all fertilizer companies will be big benefactors though. Only those fertilizer companies with significant revenues generated from nitrate and phosphate-based fertilizers will become farmers' best friends and profit machines. 

That's why Mosaic Company (MOS:NYSE) and Bunge Ltd. (BG:NYSE) , two leading corn fertilizer producers, are going to be delivering market-beating returns to investors over the next couple of years. Granted, there is very little product differentiation in the fertilizer market, but these two tried and true market leaders will utilize their economies of scale to prosper from the pressing ethanol trend. 

Enjoy your holiday.

Andrew Mickey
Editor, BreakAway Investor