Children of the Corn
Profit from the Ethanol Boondoggle
Yesterday, for George Washington's birthday, I cooked up a chuck roast for my family.
The trick is to season the roast with a dry rub before rolling it in flour, and then sear it in a very hot pan. Next, you lay your meat on a bed of carrots, onions, and garlic before putting it in the oven at 350 for about five hours.
This makes for a great meal your kids can complain about as they pick at it with their forks.
That's not a big deal — my children complain about everything except the latest Hunger Games story (Lions Gate, NYSE: LGF)...
The big deal was that I paid $15 for a seven-pound roast. I seem to remember paying half that for this type of meat just a few years ago.
Children of the Corn
The United States has been suffering a drought since last spring. This has pushed the price of corn up to record levels, which in turn caused breeders of livestock to cull their herds in the fall of 2012 knowing they couldn't afford to feed their beef stock over the winter.
It also crushed the corn export market. Corn futures were $5.51 a bushel in May, before the drought's impact took hold. Prices rose to a peak of $8.34 per bushel in August and were $7.46 per bushel last week. Back in 2005 you could have bought corn for $2.30 a bushel. That's a 262% gain in seven years for a basic food stuff.
Pretty soon you'll be seeing nachos with “market prices” on the menu at your local taco stand...
It is no coincidence that 2005 was the year Congress mandated that gasoline contain ethanol. The policy was aimed at reducing the country’s dependence on foreign oil and at improving the environment.
And in 2007, corn acreage soared by a fourth after Congress passed the Energy Independence and Security Act of 2007, which required gasoline producers blend 15 billion gallons of ethanol into the nation’s gasoline supply by 2015.
In true Pravda fashion, the name of a Congressional bill will produce the exact opposite results: The act made Americans less independent and less secure.
It also put more land under cultivation, increasing nitrogen fertilizer use, which creates dead zones in our waterways.
But the worst effects seems to be on the economy and security...
Five years ago, the U.S. commanded 60% of the global corn market. Today the U.S. market share has fallen to less than 30%. And as a reminder, gas prices are at $4.00/gallon.
The high price of food has led to serious shortages in emerging markets. Egypt is on the verge of a counterrevolution. Millions will starve to death around the world because of senators in Iowa and 27 other states who want ethanol boondoggles.
At the same time, the U.S. will have less leverage to influence the ongoing political transformation because the global corn market is being over taken by Brazil, Argentina, and the Ukraine — countries that don't stick their food in their cars, and thus have it available for export.
Furthermore, the U.S. will be blamed for high food prices and staving children. The United Nations has warned, “World grain reserves are so dangerously low that severe weather in the United States or other food-exporting countries could trigger a major hunger crisis next year.”
Emerging market food shortages will increase Al-Qaeda membership, which in turn will lead to more attacks on Americans.
Back at home, the middle class is paying more for food and gas. This has a direct impact on disposable income and will delay the economic recovery.
Those Ethanol Plants Are Failing
But wait, there's more...
From USA Today:
The persistent U.S. drought is taking a toll on producers of ethanol, with corn becoming so scarce that nearly two dozen ethanol plants have been forced to halt production.
The Renewable Fuels Association, an ethanol industry trade group, provided data to The Associated Press showing that 20 of the nation's 211 ethanol plants have ceased production over the past year, including five in January. Most remain open, with workers spending time performing maintenance-type tasks. But ethanol production won't likely resume until after 2013 corn is harvested in late August or September.
Industry experts don't expect a shortage — millions of barrels are stockpiled and the remaining 191 plants are still producing. Still, there is growing concern about what happens if the drought lingers through another corn-growing season.
"There's a lot of anxiety in the industry right now about the drought and a lot of folks watching the weather and hoping and praying this drought is going to break," said Geoff Cooper, vice president for research and analysis for the Renewable Fuels Association.
It Doesn't Even Work!
It is well documented that ethanol does not produce more energy than it consumes — nor is it good for engines. The whole thing is a dangerous bipartisan pork-based disaster. Some day, it will crash from its own weight because it is simply unsustainable.
But until then, there are ways to profit...
Many retail investors don't have the cash or expertise to open a CBOE account and trade corn futures. The Teucrium Corn ETF (NYSE: CORN) makes it easy. It tracks an average of three futures trades and allows you to buy them on the NYSE. That way, you get to trade the price movements of corn without having 10,000 bushels dropped on your front porch.
On the other hand, if you think the price of corn is going to drop, you may want to buy Pacific Ethanol Inc. (NASDAQ: PEIX). The company trades at $0.42, down from $250.00 in 2006. Don't get me wrong; it's a crap company with a lot of debt and no earnings... but the EPA just proposed to raise the renewable fuels mandate (again).
PEIX is a play on bad government and just might be worth a flier. It tends to ramp on news with big spikes, and right now it is coming off the bottom of its range. It's more of a speculative trade than a serious investment, so don't blame me if it goes bad.
Another way to play the great ethanol fiasco is to flip it on its head and go the other way. The government is stuck for the foreseeable future. This means gasoline prices will remain sky-high. In turn it means companies will look to move away from gasoline and convert to low-cost, environmentally-safe natural gas for their energy needs.
The great thing is that America has a bunch of natural gas — and the government hasn't figured out a way to “save” it yet...
All the best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.