Record corn prices aren't just squeezing consumers. They're also hurting the ethanol industry -- yes, the very folks whose ravenous appetite for corn drove up prices in the first place.
From Fortune Magazine:
Cargill announces it's scrapping plans for a $200 million ethanol plant near Topeka, Kan. A judge approves the bankruptcy sale of an unfinished ethanol plant in Canton, Ill.. And that was just Tuesday. Indeed, plans for as many as 50 new ethanol plants have been shelved in recent months, as Wall Street pulls back from the sector.
What's up? Didn't the government recently bail out the industry with fat mandates in the 2007 Energy Act? Well, yes, but evidently corn prices have gotten so high that profits for ethanol makers remain in the dumps. Fortune again:
Spurred by an ethanol plant construction binge, corn prices have gone stratospheric, soaring from below $2 a bushel in 2006 to over $5.25 a bushel today. As a result, it's become difficult for ethanol plants to make a healthy profit, even with oil at $100 a barrel.
Don't shed any tears over Archer Daniels Midland -- the company whose political engineering created the ethanol craze.
The ethanol industry isn't going away, of course. The 2007 Energy Act ensures that demand will rise steadily over the next 15 years. But with corn prices high, profit margins will be tight. And that means only the biggest players -- like ADM -- will profit.
Fortune reports that as recently as summer 2006, corn was $2 per bushel, oil prices were high, and gasoline mixers were scrambling to buy ethanol to meet government mandates. At that time, ethanol makers were making more than $1 in profit for every gallon they churned out.
At that time, investors were rushing in to build new plants to cash in on the bonanza. But they brought so much new ethanol production capacity online that they simultaneously drove up corn prices and drove down ethanol prices. That means profits margins plunged.
Advantage: ADM. Here is Fortune:
[T]he industry's new, lower profit margins clearly favor ethanol leader Archer Daniels Midland (ADM, Fortune 500) over all the smaller producers like Verasun, privately-held Poet Energy and the many, many farmer-owned ethanol cooperatives.
The bit about farmer-owned cooperatives is enormously depressing. Starting about 2002, farmers in the midwest got tired of selling their corn for pennies a pound to ADM and watching that company turn it into profitable ethanol with government subsidies.
So they banded together, formed cooperatives and -- using both their own and borrowed money -- started building their own ethanol plants. Because they're so small and underfunded compared to ADM, they're faring much worse in the current climate.
Not only do ADM's massive ethanol plants give it better economies of scale than it's rival, but also get this:
[T]he fact some of ADM's big plants run on coal instead of natural gas makes ADM's cost advantage that much greater.
The Fortune writer notes that since the Energy Act's passage last fall, ADM's stock has jumped 10 percent and smaller rivals Verasun and Pacific Ethanol have dropped nearly 40 percent.
I don't like saying it, but I will, just to show that it was always so obvious: I've been predicting an ethanol shakeout -- with ADM picking up the pieces and running to the bank -- for years. See here, here, and here.
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Biodiversivist Posted 5:52 am
29 Feb 2008
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Ron Steenblik Posted 6:45 pm
29 Feb 2008
By the way, check out Jim Cramer, over at CNBC's web site for investors, Mad Money. Last Tuesday Cramer broadcast an interesting show, "Feast or Famine?", in which he rails against the lunacy of ethanol subsidies but points out its silver lining: big gains in the value of his "Fab Five" agricultural stocks, Mosaic, Potash Corp of Saskatchewan Inc, Agrium Inc, Monsanto, and John Deere.
Personally, Cramer hates subsidies for EtOH, saying that they are "crucifying mankind upon a cross of ethanol". But his job is to help viewers make money in the stock market, so he then dutifully advises investors to be ready to jump into the market (after the dust has cleared following Cargill's announcement) and snap up shares in these companies, which mainly supply inputs (fertilizers, hybrid and GMO seeds, and farm machinery) to industrial agriculture. After all, with grain and oilseed prices at record highs, farmers across the world are going to increase their output, and for that they'll need to buy more inputs.
The 13:33-minute video of the show makes compelling viewing. Cramer's madcap style is itself entertaining, but his logic is at the same time as frightening as it is incontrovertible: biofuels are here to stay, at least for the time being, so you punters out there might as well make some money from it. "If your conscience is still weighing on you after you cash in," Cramer concludes, "you can always donate the profits to the United Nations World Food Program."
Remember, Cramer is only the messenger. But the message reminds us that in today's political economy we should not look to those who provide capital to worry too much about the socialization of particular industries. As far as they are concerned, if there is money to be made, what's the problem?
These are only my personal opinions.
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bookerly Posted 7:54 pm
29 Feb 2008
The Washington Post reports today that higher prices are forcing food programs for starving people to cut back.
http://www.washingtonpost.com/wp-dyn/content/article/2008 ...
The poor will suffer first and most. I only hope someone teaches them how to use AK-47's before it is too late. (smile)
patrick in Beijing
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Pangolin Posted 9:33 pm
29 Feb 2008
Where people are subject to economic boom/bust cycles that include real hunger in the bust cycle they will use the next boom to improve their long term economic security. In most of the third world if you are economically busted your access to food becomes sporadic. It may take months or years before meals become regular and sufficient. It doesn't take a genius to notice that the men with the guns eat better than everyone else. A smart man gets a gun.
What I believe we will see this summer is widespread civil unrest as a result of inflated food prices. The guns will come out as men try to secure food for themselves and their families. The people they will attack will be the middle classes of their area and local minorities.
The truly wealthy will hire private security forces that will work as long as the cash flows and then turn to banditry also. The resulting economic disruption will lead to localized collapses of trade and further famine.
In short Archer-Daniels Midland and George Bush looked out over the world and said: "let a thousand Rwandas bloom" and made it so.
Grain prices have gone through the roof while the buying power of the worlds urban poor has stagnated. People now hungry will starve and the starving will breed disease.
Don't say nobody warned you.
Put the Carbon Back
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Pompey Road Posted 12:46 am
01 Mar 2008
I never understood the use of corn for ethanol when the brazilian model using sugar cane was an obvious choice. I understood the power of the corn lobby and the subsidy. The obvious effiency of sugar cane and the obvious future strain on the grain market should have canceled out the corn lobby for a patriot. Then again when you have the best government money can buy it will always be easy to second guess the decision making process.
To be practical the AK-47 theory would be of little concern to us if we ever learned how to keep an army at home. You reap a double savings, shutting down most of the 730 military bases we have in 130 countries would put a large dent in the deficit. Stop the food give away program and price wheat and corn for export much like the Saudi's charge for a barrel of oil and give the American consumer a break at the grocery store.
It may sound cruel but if you think you are ever going to wean Sub-Sahara Africa off our grain stocks you don't know anything about the Malthus Theory. Political solutions can't over ride nature. The pain threashold of the American consumer will force some changes. Modified AR-15's and AK-47's in the United States can induce some behavior modifications on world grain markets also.
Pain at the pump causes irratability, pain in the stomach causes revolution. I will never become so liberal as not to begin with charity at home. Especially when the problems we are trying to solve throwing grain at are insurmountable.
I remember cases where the U.S. insigna has to be taken off the grain bags and it is destributed in some cases by the factions that have destroying America in their incorporation papers. We get little or no credit for half the grain that is distributed and in most cases it comes back by biting the hand that feeds you.
Let the free market that the neocons tout work in this situation. Lets see how the House of Saud likes buying wheat and corn at $100 dollars a bushel.
Whether your sensitivity or conscious allows this kind of thinking or not, the above scenario is inevitable.
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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Pompey Road Posted 1:01 am
01 Mar 2008
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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Delay And Deny Posted 2:44 am
01 Mar 2008
1973.
Energy Crisis.
1976.
Jimmy Carter.
Syngas.
Solar.
1980.
The spigots open again.
Alternatives go poof.
Hello Mercedes Benz
http://en.wikiquote.org/wiki/George_Santayana
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ddrew Posted 12:42 am
09 Mar 2008
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