A few weeks ago, amid concerns about Midwest flooding, corn futures exploded. For a brief period, in fact, they nudged over $8 a bushel for May 2009, a four-fold jump over their 2006 prices, and were expected to go higher.
On June 30, however, a report by the Department of Agriculture put things into perspective. While the Midwest floods destroyed roughly 9% of the corn crop, this loss should be largely offset by the fact that farmers planted more corn than expected. Inspired by the rising prices of the grain and the promise of ethanol, farmers cultivated more than a million extra acres, which means that the U.S.'s corn supply should remain relatively steady.
This should be a boon to the ethanol industry, which lost no time in pointing out that the forecasted harvest should be more than sufficient to supply its needs, while leaving a sufficient quantity for food use. Of course, just because we are once again able to make corn ethanol doesn't mean we should. However, it still remains to be seen whether policymakers will ignore this scare or accept it as an indicator of the dangers that we face when we put all our eggs in one basket -- or all our ears in one bushel!
Sometimes during a crisis the United States rushes toward a solution, only to find that the action was not only not a panacea, it was, in fact, ill-conceived and harmful.
The late British Prime Minister Winston Churchill alluded to this when he noted that, "In the end, America will do the right thing . . . after she's exhausted all other possibilities."
That may very well be the case with corn-based ethanol.
Initially heralded as a renewable fuel that reduces foreign oil imports, it now appears that a powerful coalition is building against corn-based ethanol -- a problematic energy source, in economist Glen Langan's interpretation.
A ' tax dollar not well spent'
The U.S. Government (which means you, the taxpayer) heavily subsidies ethanol from corn production via payments to farmers, Langan said. "The tax dollar is not well spent, either from an environmental standpoint or an energy policy standpoint," he said.
While many of us may think that ethanol companies are not a reliable investment, Barron's asks us to reconsider our thoughts, pointing out to a bright futures for those stocks. People's worries about ethanol companies came as a result of soaring crude oil prices. Thus, the general tendency was to use corn-based alcohol as a substitute for gasoline. The negative reaction was an immediate consequence, and a top official of the United Nations has named ethanol as a "crime against a great part of humanity" as it lead to higher food costs.
Barron's points out three ethanol producers, VeraSun Energy Corp. (NYSE: VSE), Aventine Renewable Energy (NYSE: AVR), and Pacific Ethanol Inc. (NASDAQ: PEIX), which faced difficult time over the past year, although they saw a nice rebound recently after reporting first-quarter operating profits, and Congress passed a farm bill.
Looking ahead, the companies showed optimism related to their further production based on projected 2009 capacity. This takes into account the completion of plants under construction when talking about Aventine and VeraSun. Thus, VeraSun has a projected production of 1.6 billion gallons, Aventine came with 433 million, while Pacific Ethanol has a projected production of 220 million.
Corn is used both in food for humans and as cattle feed. It is also the main ingredient of most ethanol-based fuels. There has been real hope that this kind of alternative energy will cut US reliance on gas. But, the price of corn is up 47% this year. That undercuts the value of ethanol as its price rockets.
The corn harvest in the US could be relatively poor this year, putting more pressure on food prices, both here and in countries where large numbers of people are under-nourished. Another run-up in corn could help drive yet another commodity inflation spiral.
According toBloomberg, "Rainstorms sweeping the biggest corn states in the U.S. are damaging a crop that's already failing to keep pace with global demand."
The trouble with corn crops is that they cannot be easily replaced by any other agricultural product. And, there is pressure on wheat and soybean prices already.
The solutions to corn yields, are, unfortunately, long-term. Companies, led by Monsanto (NYSE: MON) are increasing research and production of genetically altered seed which will grow in harsh climates and poor soil.
But, that fix to the problem is several years off, and the acute problem is now.
Douglas A. McIntyre is an editor at 247wallst.com.
In light of oil's rise to triple-digit prices, the United States' inability to pass an energy policy aimed at increased efficiency, renewable energy, and energy independence, represents an opportunity squandered -- on two fronts: transportation and power generation.
True, oil has retreated from the $135 range to the $125-128 range, but the nation now faces record-high gasoline/diesel prices, along with high prices for heating oil, natural gas, and coal. As a result, the broad-based disposable income -- so essential for U.S. economic growth -- has been squeezed, with many economists now arguing adequate GDP growth is not possible, if energy prices remain at current levels.
At minimum, the U.S. faces a period of economic and social adjustment -- corporate, public, personal -- as it copes with the brave new world of $4 gasoline ... and that's if gasoline remains in the $4 per gallon range. A variety of scenarios could quickly send gasoline over $5 per gallon and higher in 2009.
Monsanto (NYSE: MON) shares are trading higher after oil and gasoline prices jumped to record levels yet again today. With oil so expensive, alternative bio-fuels are pushing agricultural futures higher as well, which is good for Monsanto. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on MON.
After hitting a one-year low of $58.50 in August, the stock rose to hit its one-year high of $132.36 in April. MON opened this morning at $121.60. So far today the stock has hit a low of $121.23 and a high of $124.91. As of 11:05, MON is trading at $124.34, up 4.44 (3.7%). The chart for MON looks neutral but deteriorating slightly, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $105 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just four weeks as long as MON is above $105 at June expiration. Monsanto would have to fall by more than 15% before we would start to lose money. Learn more about this type of trade here.
MON hasn't been below $105 since March and has shown support around $110 recently. This trade could be risky if the price of oil starts to relax, but even if that happens, this position could be protected by the support the stock might find at its 200-day moving average, which is currently around $102 and rising.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in MON.
While Al Gore is busy preaching about global warming and environmentalists around the world hail ethanol as a solution to the "global warming" problem, the less fortunate, poorer countries in the world are in the midst of political turmoil as citizens riot and protest over soaring food prices.
As reported by Marketwatch: "In Egypt, headline inflation jumped to 14.4% in March, with the pace of food price rises soaring to 20.5% year-on-year from 16.8% in February. In addition, the country is suffering from shortages of bread, which is heavily subsidized by the government."
As global demand for soft commodities soars, Egypt, like many other countries, is confronting surging food prices, which have stirred popular discontent and demonstrations." We have seen demonstrations as well in Haiti, and we all know about surging food inflation in China. Countries like India, Vietnam and Cambodia, have limited rice exports as well. Why? Because farmers, heavily subsidized, have turned over crops in order to grow corn for ethanol production. Funny how environmentalists say climate change is a problem that in 25-30 years could cause significant destruction to the earth. Of course global hunger and starvation could cause more havoc, in the very near term, but they don't mention that.
Pacific Ethanol (NASDAQ: PEIX) has announced the completion of a $40 million equity investment by Lyles United, LLC. The investment included 2,051,282 shares of class B stock convertible to 6,153,846 shares of common stock and a warrant to purchase another 3,076,923 shares of common stock at $7.00 per share. The original Securities Purchase Agreement was dated March 18, 2008.
Normally we do not cover such small financings, nor do we cover financing being completed from part of a prior pact. Ethanol stocks in the U.S. have been in trouble, and Pacific Ethanol is no exception as shares have traded north of $17.00 over the last year.
If any company needed the funding in the ethanol sector, it was Pacific Ethanol. Gone are the days that Bill Gates owned a large portion of the company, and gone are the days that everyone believes that the current method of domestic ethanol will act to help the energy issues today if subsidies didn't exist.
As grain prices continue to rise, fueled in part by increasing demand worldwide, as well as farmers turning over their fields to grow corn for ethanol, earnings out from General Mills, Inc. (NYSE: GIS), while good, were weighed down by those soaring grain prices.
According to an AP report: "The cost of grain has affected a number of companies, especially those that make cereals. Grain prices have skyrocketed largely due to demand for corn used to make the alternative fuel ethanol."
So now my Cheerios and Wheaties cost substantially more, partly in order to produce ethanol, which is a suspect alternative fuel that's being used to fight a suspect phenomenon, global warming. Legislators, together with environmentalists, have created global inflation, to fight a problem that some scientists don't think exists. Does that make sense?
Grain costs not withstanding, General Mills had a very strong quarter. Sales were up across the board and international sales grew by more than 20%. Could it be that the weak dollar, is starting to help the bottom line of U.S. multinationals?
Look for other consumer staples companies to potentially post strong earnings in upcoming quarters as they profit from the sagging greenback.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 3/19/08.
With all the hysteria about global warming and the impact that it will have on the globe, I found it quite funny that the National Oceanic and Atmospheric Administration (NOAA) reported yesterday that we just experienced the coldest winter since 2001. Hey Al Gore -- how can that be? I remember when I was growing up, in the mid- 1970's, Newsweek magazine had a cover story about the beginning of the ice age. Amazing what can happen in 25 years. We can go from an ice age, to global warming. Not bad.
"In the contiguous United States, the average winter temperature was 33.2°F (0.6°C), which was 0.2°F (0.1°C) above the 20th century average – yet still ranks as the coolest since 2001. It was the 54th coolest winter since national records began in 1895. "
Why not ask the Chinese about global warming? They just experience a horribly snowy winter which has been a major cause of inflation. Extreme cold temperatures were the norm this winter. Over the last 150 years or so the global mean temperature has increased by 0.7 degrees Celsius. This small amount of warming is not unusual, and falls well within the range of variation for both warming a cooling.
The idea behind switching energy usage from fossil-based fuel like gas to ethanol is that it is better for the environment. Much of the push to create alternative energy companies has been based on this premise and it has also helped the American farmer get more for crops like corn.
Now it appears that ethanol may not be so "green." According toThe Wall Street Journal (subscription required), "a study published in the latest issue of Science finds that corn-based ethanol, a type of biofuel pushed heavily in the U.S., will nearly double the output of greenhouse-gas emissions." A second study appears to support those findings. Part of the CO2 increase created by biofuels is due to changing land from forest to farmland. The process causes large amounts of greenhouse-gas emissions to be sent into the atmosphere.
The news is hardly good for the hundreds of biofuel companies that have been created around the drive for "green" fuel, and it may not be good for farmers who are getting higher yield from the crops they plant to create alternative energy.
But it may be very good news indeed for Big Oil.
Douglas A. McIntyre is an editor at 247wallst.com.
General Motors (NYSE: GM) plans to have 50% of its cars in the US running on ethanol by 2012. Reuters says that "GM will have 11 ethanol-capable vehicles on the market this year and 15 in 2009."
The move may help keep oil and gas prices down and it may cut dangerous emissions, but it also may not save the consumer a dime. CNN Money reports that "corn and soybean prices soared in 2007 due largely to demand for the alternative fuel ethanol." That means the fuel is likely to get much more expensive.
At this point, the cost of an alternative energy car is several thousand dollars higher than the price of a gas-powered car. Increased production volume may solve that over time, but those savings may not hit the consumer for several years.
Being "green" may come with a high cost. If the economy stays weak, that may not sell.
Douglas A. McIntyre is an editor at 247wallst.com.
A quick look at freight traffic via railroads indicates no surprising changes in our economic landscape. However, the numbers do reaffirm some interesting trends. Total rail freight volume for the fourth week of January 2008 was estimated at 32.4 billion ton-miles, a decrease of 1.2% from one year ago. Some of the decline is attributed to severe weather conditions early in the month, especially in the eastern states.
What bears special concern in the Association of American Railroads rail freight traffic report are the few categories of freight that are showing significant reductions in rail freight loading volume when compared to 2007. Coal coke, which is used mainly as an industrial fuel showed a major decline in loading volume of 36.8%. This could be due in part to a shifting away from hydrocarbon fuels. Lumber and wood products loadings declined by a significant 22.35%, which does not bode well for the construction and furnishing trades. Primary forest product loadings dropped by 19.9% which further indicates a slow start to the coming building season.
A few weeks ago, amid concerns about Midwest flooding, corn futures exploded. For a brief period, in fact, they nudged over $8 a bushel for May 2009, a four-fold jump over their 2006 prices, and were expected to go higher.
Sometimes during a crisis the United States rushes toward a solution, only to find that the action was not only not a panacea, it was, in fact, ill-conceived and harmful. 
While many of us may think that ethanol companies are not a reliable investment, Barron's asks us to reconsider our thoughts, 
In light of oil's rise to triple-digit prices, the United States' inability to pass an energy policy aimed at increased efficiency, renewable energy, and energy independence, represents an opportunity squandered -- on two fronts: transportation and power generation.
Here are some highlights from this past week's 
While Al Gore is busy preaching about global warming and environmentalists around the world hail ethanol as a solution to the "global warming" problem, the less fortunate, poorer countries in the world are in the midst of political turmoil as citizens riot and protest over soaring food prices. 
A quick look at freight traffic via railroads indicates no surprising changes in our economic landscape. However, the numbers do reaffirm some interesting trends. 
The week in preview: New quarter earnings kick-off
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
