Is Ethanol Running Out of Gas?

The Daily Reckoning – Weekend Edition
June 2-3, 2007
Los Angeles, California
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.

Kevin Kerr
for The Daily Reckoning

P.S. From the organic dairy farm in Black River Falls, Wis., to the family grain and hog operation in Waseca, many conversations and pieces of rhubarb pie later, I feel very educated and plan to share all my knowledge with both my Resource Trader Alert and Outstanding Investment readers in the coming few weeks.

Meanwhile, Byron is off in Alaska, digging up more juicy information in our never-ending quest to bring you the best insights to make Outstanding Investments.

And, for a very limited time, you can get Resource Trader Alert, Outstanding Investments AND all of the other newsletters and trading services Agora Financial has to offer – for life. We only offer this exclusive membership twice a year…and this is the last time we will be offering the Reserve at this very low price.

— The Daily Reckoning Book of the Week —

Demise of the Dollar…and why it’s great for your investments
by Addison Wiggin

The DR’s own Addison Wiggin spent over a week in the #1 slot on Amazon’s bestseller list – knocking Harry Potter to number two. He then showed up on Barnes and Noble’s bestseller list and debuted on The Wall Street Journal’s Business bestseller list at #8!

The logical next step was for the book to get on the New York Times bestseller list…which it did, sitting strongly at #5!

The Demise of the Dollar examines the reasons for the dollar’s slide – including the nation’s historic trade deficit, the euro, government spending habits, globalization, and other international factors – and offers an up-close look at the Federal Reserve’s attempts to “manage” the dollar’s value.

To purchase your copy, see:

The Demise of the Dollar


THIS WEEK in THE DAILY RECKONING: Every wondered how the Motor City became Murder City? Bill Bonner explores the rise and fall of Detroit in Friday’s essay, below…

The Life and Death of Great Cities                                    06/01/07
by Bill Bonner

“Once upon a time, Detroit was one of the world’s great English-speaking cities…but those days are long gone. Bill Bonner takes a look at the rise and fall of Motor City, below…”

The End of Dollar Hegemony, Part I                                     05/31/07
by Hon. Ron Paul of Texas

“In a speech before the U.S. House of Representatives, Congressman Ron Paul stated that the United States’ dollar dominance is coming to an end…and when this paper money runs out, wealth and political stability is lost. You can read the first part of his speech, below…”

A Flood in the World Markets                                     05/30/07
by Dr. Hans Sennholz

“Some people never learn from the past – and are doomed to make the same mistakes over and over again. Our Federal Reserve exemplifies this, as they continue to direct the credit expansion, which not only has turned housing into a large bubble and rekindled the stock market, but also has given rise to a voluminous foreign trade imbalance. Dr. Hans Sennholz explains…”

Alas, The Demise of the Dollar                                     05/29/07
by Addison Wiggin

“The greenback is in a sorry state of affairs, down against most major European currencies. This weak dollar trend looks like it is nowhere near wrapping up, and below, Addison Wiggin details how a declining value of the dollar has far-reaching effects. Read on…”

Fighting Off Cynics With Golden Gloves                         05/28/07
by The Mogambo Guru

“Given the rather direct tone of our dear Mogambo’s weekly musings, it is no surprise that he gets a certain level of equally, er…direct responses. This week, he rebuts one of these emails with the derisive wit that he is known for – and you won’t believe who it’s addressed to. Read on…”


FLOTSAM AND JETSAM: In a speech before the U.S. House of Representatives, Congressman Ron Paul stated that the United States’ dollar dominance is coming to an end…and when this paper money runs out, wealth and political stability is lost. You can read the second part of his speech, below…

The End of Dollar Hegemony, Part II

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient.  Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars – due to their depreciation – will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble – generated by easy money – has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability.  Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged – as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein – though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries.  Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war.  Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony – it’s dominance as the world reserve currency – is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources – we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.

Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.

Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more.  The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system – like Iraq, Iran and Venezuela – become targets of our plans for regime change.

Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.

But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically.  That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.

It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.

The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.

But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.

Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.

And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros.  The sooner the better.


Congressman Ron Paul
for The Daily Reckoning

Editor’s Note: You can read the first part of Dr. Paul’s speech in Thursday’s issue of The Daily Reckoning

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535” on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

The Daily Reckoning