A Daily Reckoning Special Report
by Kevin Kerr
Driving through the U.S. and being invited to several family farms over the last week or so has been enlightening, and fattening. At each stop, I got an earful of insight and knowledge on several topics, as well as a delicious piece of rhubarb pie and coffee. It’ s one thing to read about the ethanol debate and the challenges for farmers, and quite a different experience to actually meet and talk with them and walk around the fields. That’s exactly what I wanted to do.
I set out on my driving journey two weekends ago, and it has so far taken me to farms and ranches in six states and two countries. In candid interviews with various grain and dairy farmers, ranchers, workers at ethanol plants, etc., over the last week or so, I have gained new insight into what the future may hold for us as commodity investors .
Ethanol from corn has been a mixed blessing for farmers, and those that got in early have done well. In Minnesota, where I grew up, they have 16 ethanol plants and five more under construction. When the ethanol boom started, most ethanol plants were created by a formation of a co-op of farmers in the local area. Many still are run this way. Obviously, each of these farmers has a vested interest in the plant, as it’s where they take their grain to be processed into ethanol and taken to market. That all started back when corn was around 2.50 .
The new plants that are being built today are mostly not co-ops but “private equity,” and the cost of these plants has skyrocketed. Of course, corn is now 4.00 a bushel. Farmers are concerned that simply can’t last. The farmer-owned ethanol plants are already moving into other alternatives, like biofuel made from soybeans.
The concern is that while much of the nation has a mandated 10% ethanol mixture with unleaded, it may not be enough demand to sustain all of these new ethanol plants. Supporters point to the E85 ethanol as the potential wild card; others doubt its realistic impact.
E85 ethanol is up to 85% ethanol and offered only at a few stations, almost exclusively in the Midwest. Automakers have been very slow to create a vehicle that is solely powered by E85, and they cite engine damage and sluggish performance as reasons why.
At one of the truck dealers in Waseca, Minn., near where I visited a farm, I saw some flex-fuel and E85 vehicles, but not many. It seems obvious that if these cars aren’t selling like hot cakes here in the heart of corn country, they are going to take a very long time to catch on in New York.
The corn-based ethanol craze is probably not being shown the door, but may be getting handed its hat. The costs for farmers in mounting food inflation is creeping up quickly: seed costs, fertilizer, fuel, irrigation, transport and leasing of acreage, etc. Costs of renting acres (for farmers who lease the land) have doubled in only a year. Most farmers I spoke with on my trip say it simply will reach a breaking point. They’ve seen it before.
In the commodities arena, corn has still probably got some room to the upside into 2008, but our gears will be shifting in RTA to look at soybeans, as biofuel seems to be getting much more interest and is likely a much more viable alternative. The other market that could be a real sleeper here is sugar.
The sugar market has been beaten down so badly and is in a significantly oversold position right now. As a key ingredient in ethanol from Brazil, as well as a food product, sugar is a commodity that should be at a much higher level right now. Yet temporary surplus supply has taken the price lower. That won’t last.
The ethanol craze almost seems like a game of musical chairs, and before the music stops, we will want to grab whatever profits we have on corn and move on to the next hot commodity.
As farmers make room for corn, soybean and wheat crops suffer…
Wheat is one of those commodities that isn’t sexy. It’s not gold and it’s not oil, so it’s not that exciting to talk about at the club – but there is real money to be made in the wheat market right now. Very few people are talking about it – at least for now – and that’s good news.
Last summer, the United States Department of Agriculture said 49% of the spring wheat crop was already harvested and only 32% of it was rated good to excellent. That’s down from 67% a year ago. This year may be even worse, and demand is growing.
The situation gets even more grim as the United Nations Food and Agriculture Organization is reporting that nearly two-thirds of the winter wheat crop in western and northern China has been wiped out by a prolonged drought. Some other areas have experienced a 40-50% cut in the winter wheat harvest.
The rumbling in the pits is that red winter wheat, while volatile, is one of those crops that simply will go higher in the long term, due to increased demand and ever-decreasing supply. Sounds like a good time to buy.
Useful links on Alternative Fuel
Popular Mechanics – Crunching The Numbers On Alternative Fuels For this special report, PM crunched the numbers on the actual costs and performance of each major alternative fuel.
Alternative Fuels Info Center from PEI We present the latest information on alternative fuel technologies, … As interest in alternative fuels, vehicles and the refueling equipment has grown
Why Ethanol Cannot Live Up to all the “Perfect” Energy-Solution Hype by Byron King, Editor Outstanding Investments
Alternative Fuel News Library Hybrid Cars; Hybrid Trucks; Hydrogen Power; Electric Power; APV; All About APV’s.
Alternative Fuel Matters The activities covered in Alternative Fuel Matters are interdisciplinary, … Printed copies of Alternative Fuel Matters and all classroom materials are …
Alternative Fuel and Hybrid Vehicles DOE OTT Biofuels Logo Many alternative fuels are being used today in place of … For more information, see Electric, Alternative Fuel and Hybrid Electric …
Ethanol Investment Research: Company Profiles by Greg Guenthner, Editor The Penny Sleuth
Investing in Ethanol by Byron King
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