Side Effects of Ethanol Dependency

The Daily Reckoning – Weekend Edition
June 16-17, 2007
Baltimore, Maryland
by Kate "Short Fuse" Incontrera

VIEWS FROM THE FUSE: SIDE EFFECTS OF ETHANOL DEPENDENCY

At the recent Berkshire Hathaway annual meeting, Charlie Munger said, "The idea of cars running on corn has got to be the dumbest idea I’ve ever heard." Dedicated DR readers know that we are of that belief as well…but no matter how we feel about the nation’s misguided reverence for ethanol, the demand for the corn-based fuel is here to stay.

In fact, Congress has been looking over legislation that would require a "36 billion-gallon renewable fuel standard, nearly four times higher than the 7.5 billion-gallon standard required to be met by 2012," reports the Chicago Tribune. And you can bet that the standard will be met with increased production of ethanol.

One of the obvious side effects of the ethanol craze is that the price of corn has risen 73 percent in the past year – but that isn’t the only food whose price is on the rise. Milk is likely to cost over $5 a gallon in some parts of the country, because dairy farmers have to pay more to feed their cows. And because animal feed with corn in it is more expensive, that cost trickles down to chicken, beef, eggs, cheese and – making soda-chugging Americans cringe – high fructose corn syrup.

Consumers are definitely starting to notice that their grocery bill is a bit pricier. Carl Weinberg, chief economist for High Frequency Economics, has warned that higher food prices could spell trouble for the U.S. economy.

"The trend in food prices did not go well in the 1970’s, and we fear that a repeat of that squeeze is in progress now," he wrote last week.

The amplified demand for corn has also caused farmers to shift their fields to make room for corn, decreasing the supply of other grains, such as soybeans and wheat.

"Wheat is one of those commodities that isn’t sexy," our commodities guru Kevin Kerr told us. "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."

Short Fuse
The Daily Reckoning

P.S. So, instead of letting the rising demand for ethanol wreak havoc on your finances, you can balance out your grocery bill – and make some extra money – in the commodities markets. Kevin has been letting his Resource Trader Alert and Outstanding Investments readers in on some of the most overlooked areas of these markets to invest in…and with great results.

— The Daily Reckoning Book of the Week —

A Maniac Commodity Trader’s Guide to Making a Fortune
by Kevin Kerr

In A Maniac Commodity Trader’s Guide to Making a Fortune, Kerr dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls "the last bastion of pure capitalism on Earth." Whether you’re a novice or an experienced trader, Kerr’s down-to-earth, clear-cut guidance will make you more savvy, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you.

Kerr shares the pitfalls and successes of his long career, showing you how to take huge profits from movements in markets you’ve only heard of, but were afraid to trade, and succeed beyond your wildest dreams. Kerr-proudly known to many as "The Maniac Trader"-demystifies the language and ritual of the commodity markets, shows the basics of fundamental analysis, explains how market makers create pricing, and much more. Read this book and you’ll agree that adding commodities to your portfolio is a sure way to capitalize on some of the most rewarding, exciting investment opportunities available today.

——————–

THIS WEEK in THE DAILY RECKONING: Did you miss an issue of The Daily Reckoning this week? Never fear, we have them all for you, below…

Economic Olympians                                        06/15/07
by Bill Bonner

"These days, a chart of practically anything is surging. Watches, executive aircraft, stamps, stocks in Zimbabwe, stocks in India – you name it. If asset prices are a measure of health, almost all the worlds’ economies are Olympic athletes."

Whatever Putin Wants, Putin Gets                     06/14/07
by Bill Bonner

"Yesterday, the Dow rose like it meant business. The dollar went up too. And over in China, born-yesterday investors still expect prices to rise today, tomorrow, and the day after tomorrow."

Dark Cloud Looms Over Low Society 06/13/07
by Bill Bonner

"People on the lower rungs of society don’t own shares in financial companies, they don’t go to Harvard Business School, and they don’t have million-dollar stamp collections. What they do have is debt – and they have a lot of it."

The Million-Eyed Market                                  06/12/07
by Bill Bonner

"The billions the Chinese spend on Blackstone is chicken feed to them. They’ve got a trillion more where that came from. They can write it off as cheap tuition – part of the cost of learning how the market system works."

The Best Kind of Wealth                                  06/11/07
by Bill Bonner

"See how easy it is to get rich, dear reader? Just buy something. Then, you wait a respectable interval, and then you sell it to someone. It’s so easy an idiot could to it. In fact, many of the people who are doing it are idiots."