Ethanol Investing, Part 2
Part 2 of The Smart Profits Report Ethanol Forum: Issue #342
Monday, August 14, 2006
Note: Back on May 19, the Smart Profits Report brought you a special Oil Forum, where the editors discussed the state of the market. This time, however, our trading experts give you their take on another hot commodity enjoying plenty of press: ethanol.
In Part 2 of this special edition of the Smart Profits Report, Jim Stanton and Lee Lowell continue what was started by Steve McDonald and Karim Rahemtulla on Friday with more in-depth research into ethanol investing.
Scales Have Finally Tipped in Ethanol’s Favor… Now Let the Government Drive Your Profits
by Jim Stanton, Advisory Panelist, Mt. Vernon Research
In truth, ethanol is nothing new. Back in the early 1980s, I remember checking out a company called American Synfuels. With the 1970s oil crisis still fresh in the memory, the fact that the firm had the ability to produce ethanol from corn was an intriguing idea at the time.
But there was one major problem: It was much more expensive to produce ethanol than regular gasoline. And once crude oil prices softened and traded back at an average of $20 a barrel, the idea simply wasn’t viable. Result? The company went under.
During the Gulf War in 1990 when oil prices shot up to $40 a barrel, the idea of using ethanol fuel bounced back into the headlines again. But again, when oil dropped back below $20 a barrel the following year, those conversations ended quickly.
Fast-forward to today and oil prices are above $70 - a huge jump in price, and one that seems to have finally tipped the scales in ethanol’s favor. While nobody knows for sure where oil prices will be in five years, it’s highly likely that high prices are here to stay - and that bodes very well for ethanol and ethanol investing. Here’s why…
Let the Government Propel Your Ethanol Profits as Fuel Catches Fire
High oil prices and an increased political drive toward alternative fuels are responsible for the current rising ethanol demand. In fact, the Energy Bill of July 2005 requires the annual use of 7.5 billion gallons of ethanol and bio-diesel by 2012. That will approximately double current consumption over the next seven years. Ethanol demand is rising outside the United States, too.
And with the government now involved in a more serious way than ever before, the ethanol business is the new growth industry. For example, June saw two new ethanol producers hit the stock market - Verasun Energy (NYSE: VSE) and Aventine Renewable Energy (NYSE: AVR). Both hit their highs on their first day of trading, but have traded lower since. And despite both companies reporting healthy quarterly earnings recently, this proves that after the initial bout of excitement, investors are still cautious. But it also means that these stocks are now trading at much more reasonable levels.
It will take some time before gas stations install ethanol pumps, but that doesn’t mean the future prospects for the industry aren’t bright. They are. If you’re an experienced commodities trader, the corn market is probably a great way to play this new and growing area. But if not, stick to the companies involved in the production and distribution of ethanol.
Jim Stanton
Look to the Ethanol Futures Market for the Inside Track on This Lucrative Industry
by Lee Lowell, Advisory Panelist, Mt. Vernon Research
Being a commodities trader, I’m always looking out for new trading vehicles that could see huge potential returns. And right now, there’s no question that one of the biggest profit opportunities lies in ethanol becoming an alternative fuel source.
So since my trading area is the futures and futures options markets, I was happy to see the Chicago Mercantile Exchange (CME) launch the trading of ethanol futures contracts.
However, it’s important to note that as much potential as the industry holds, it’s still early and the ethanol boom is not something that will happen overnight. In addition to finding the best companies to invest in, you’re also going to need patience.
As with any new trading product, it will take some time before ethanol becomes a more liquid trading commodity. Right now, there isn’t much volume in this product - but that doesn’t mean it won’t succeed in the future. And when you’re talking about lucrative investment opportunities, the futures and futures options market can give you a great chance to take advantage of such a promising investment like ethanol.
Two Ways to Use Future Options to Profit from Ethanol
There are two other potential ways to use the futures options market to get some exposure to ethanol. Right now, the best means for producing ethanol can come from either sugar or corn. Both these commodities have very liquid markets and trade on the commodities exchanges in New York and Chicago. Since the ethanol boom will take time, I’d look at long-dated call options on either corn or sugar. You can trade options on corn futures stretching as far as the December 2009 expiration period and sugar options stretching as far as the July 2008 expiration period.
As Karim and Jim note here, there are also several publicly-traded companies involved with ethanol production available for you to trade. While these are obviously perfectly viable investments, I prefer to wait for the ethanol futures and options market to come alive before getting involved in the market.
Why? Well, make no mistake… this issue isn’t going away anytime soon. Ethanol will be at the forefront of many investing ideas, and as this particular investment vehicle grows in popularity along with the broader industry, I can assure you it will be a great way to take a long or short-term play in this exciting new fuel alternative.
Lee Lowell
Smart Profits Alert: That’s our whole take on the subject of ethanol investing for now. This is one industry undoubtedly poised for a big future. Savvy investors are already lining up to grab a piece of the investment pie from what promises to be a steadily growing and lucrative market, as the U.S. tries to free itself from the shackles of foreign oil and move toward renewable ethanol.
Good Trading,
The Team at Mt. Vernon Research
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Today’s Smart Profits Cribsheet
- Ethanol isn’t the only new investment on the market, check out Smart Profits #340, Investing in The Water Market: Turn Water Investments Into Profits From This Looming Global Crisis.
- You now have an even greater chance to ride the wave of this heavily government-backed industry. To find out much more about the ethanol market, its prospects and how you can profit from it, click this link to read our brand new report.
Related Articles:
- Ethanol Investments: Two Ways To Profit From the Shift Towards Ethanol
- Natural Gas Prices: The Natural Gas Market is Set to LEAP in the Months Ahead
- The Future of Crude Oil Prices: How a New Saudi Development is Bearish for Oil Prices
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