Wednesday, January 24, 2007

Full speed ahead...

President Bush seemingly set in stone America's commitment to immense amounts of ethanol and hence immense amounts of corn. This is good news for farmers, but really good news for ethanol investors.

"All the buzz in Washington surrounding ethanol indicates that it's going to survive," says David Lehman, managing director of the Chicago Board of Trade's commodities group.

Ethanol makers need the help. Corn prices, 75% of the cost of ethanol production, have doubled in the past six months, to more than $4 a bushel. At the same time, the price of ethanol has followed the price of gasoline downward.

Absent a rescue from Capitol Hill, the glut is going to get worse. AgResource's Basse estimates the blending demand for ethanol at 10 billion gallons, 7% of the 150 billion gallons of blended fuel burned each year. Current nationwide ethanol capacity is 5.4 billion gallons. But 6.1 billion gallons' worth of capacity is now under construction, according to the Renewable Fuels Association. That would push supply right past demand and destroy ethanol prices. Unless mandates are tightened. At the moment the motor fuel industry is meeting environmental minimums and exceeding the energy independence ones. [More]

If we in agriculture think this whopping injection of income will not attract competitors and predators we are fooling ourselves. In fact, there may be efforts to capture the income stream at the farm level. In other words, massive (on our scale, not theirs) investments in farms may be one obvious way to see a return on money. And farm suppliers are cashing in as well.
Shares of seed producers like DuPont and Monsanto and fertilizer makers like Potash and Terra Industries are soaring. The gains have further to run, even though the stock prices exceed their five-year averages relative to earnings, said Frank Husic, chief investment officer at Husic Capital Management in San Francisco. [More]
I have opined before that while investing in ethanol may still be a reasonable venture, land could be the next rush. Owners can capture significant profits with custom farming leasing or getting into the business themselves. Besides it is not rocket finance to see what doubling gross profits (and that is what it looks like to my computer) could mean to asset values.

The interesting thing will be to track trends like farm size, farmer numbers, off-farm income, young farmer cohort numbers, etc. to see if higher prices are indeed the answers to these "problems".

My bet is these trends will accelerate, not decline with increased revenue. And the ERS will give us the answers just a few years after the fact.

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