Wednesday, January 31, 2007

Taking an L on Corn Ethanol

G'day, all.

So I ran across this article on the other day which had me seriously thinking about the near term future of corn ethanol, and the long term prospects for cellulosic ethanol.

Basically, the corn folks may have it all wrong in the long term. Of course, I couldn't help but be frustrated that I don't live in the Caribbean, where there are ample supplies of sugarcane. But I digress.

The economics don't even make sense, in the intermediate term. While in the short term I would expect to continue seeing a bid, corn ethanol looks to be the natural gas of biofuels due to the volatility of the market. Corn demand up due to ethanol production (nevermind feeding people and animals), then substitution kicks in (yes, it can work both ways!) OR demand destruction. So the price drops again, until the ethanol producers back off, and the yo yo continues. (Market forces at work, baby!) Then there is the Sanford Bernstein estimate that corn ethanol is only profitable with oil above $70 per barrel!?!? Add to that the fact that, right now, a gallon of corn ethanol costs almost as much as as gallon of gasoline, with only 70% of the energy density of gasoline, and you have a pipe dream.

"To limit supplies and bolster prices, a 54 cent-a-gallon U.S. tariff on imports blocks shipments from countries outside the Caribbean and Central America."

One day, the market will be allowed to work instead of being manipulated in such daft ways. Clearly the American consumer isn't being protected here. Who thinks this shite up?

We can choose between corn for energy (which it doesn't appear to be good at) or corn for food (which it is good at). Hmmm. I wonder which use will win. On second thought, maybe I know already, unfortunately.

My question becomes "who is doing the research on making cellulosic ethanol viable?" Find that gem and, well, I think you can add some nice alpha to your portfolio. I think I'll start looking now.

After my con call...and after I check my commodities account.

Goodnight. Maybe.

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