Friday, July 28, 2006

Doing the math - Chapter 23...

As corn farmers drool expectantly over the any-minute-now windfalls from the huge new biofuels market, we may lose sight on what is happening in the rest of the world.

Yesterday, Exxon Mobil announced second quarter profits of $10,360,000,000 (I think all the zeroes add drama, don't you?). Corn farmers need to keep this number in perspective. (Plus - this is PROFIT - not revenue)

For example: Exxon Mobil could overnight buy a major share of the alternative energy market with a few months' gravy. Even ADM, the 900 lb. gorilla of ethanol could be a target. Its market capitalization is significant - around $27B, but compare that with the profit stream above. Now factor in new ADM CEO Patricia Woertz - a gifted former oil company executive.

Hmmm - what could possibly happen here?


The moral to this story: wild amounts of profit are not going to rain down on the cornfields of the US. The value in ethanol is almost completely generated at the processor level. The corn is still just corn, right?

Moreover, the profits from producing ethanol are a revenue stream that can be bought on the NYSE or over a boardroom table. (Admittedly, ADM could go private, like many other companies are considering.) And the price is certainly no budget problem for the petroleum industry.

2 comments:

Bill McClure said...

John
You just hit the nail on the head with your comments on biofuels and oil companies.Another point we all seem to miss. All these farmers owned plants represent a very fragemented production source.Read lack of market power. Selling to a mature market with more concentrated power. When push comes to shove who are you going to bet on.

John Phipps said...

We have seen this cycle before, and I think the only difference in outcome will be farmer-owners may hold out for higher sellouts than before.

While ethanol plant values could still crash and burn, I think it more likely we will simply create new winners in the farm consolidation process, like the 1031 winners whose farms were in the right place.

Don't get me wrong, I defend their gains. But let's not fool ourselves that the farmers of the future will be the ones who produce the best.