Sponsored Link:
Ethanol Fuel
The Smart Profits Report: Issue #478
Wednesday, December 5, 2007
Ethanol Fuel: How To Combat Rising Food Prices Due To Ethanol’s Costly Production
By Martin Denholm, Managing Editor, Mt. Vernon Research
Ethanol fuel seemed like such a good idea at the time.
In response to America’s “addiction to oil” (the U.S. spends more than $450 million every day on oil imports and 97% of the transportation system relies on oil) and rapidly increasing prices, it became imperative to beef up alternative energy sources. The U.S. Congress passed the Energy Policy Act of 2005, which called for an 87% jump in renewable fuel usage by 2012, in order to reduce U.S. oil imports 75% by 2025.
Ethanol fuel, derived from corn, immediately leapt to the front of the line, with politicians falling over themselves to offer incentives and promote growth. Because the bill calls for the production of 35 billion gallons of ethanol by 2017 and for ethanol to replace MTBE, the toxic additive in gasoline, the industry kicked into high gear. New plants popped up all over the place and fuel production surged.
As a result, ethanol stocks took off. And as the clamor grew, farmers couldn’t plant corn fast enough. Prices jumped to a record around $4.30 a bushel in June.
Ethanol Fuel Production’s Fall From Grace
Today, however, ethanol fuel has experienced a harsh fall from grace - a Cinderella-to-ugly duckling turnaround. More folks have realized how much it costs to produce ethanol - so costly, in fact, that the industry relies on a 51 cents per gallon federal subsidy. In addition, because ethanol yields one-third less energy than gasoline, you can’t travel as far on a gallon of ethanol as you can on a gallon of gasoline. So you’d need to buy more. Basically, ethanol fuel needs to be cheaper than gasoline to offset its weaker fuel efficiency.
And as this reality has killed the rampant speculation, ethanol stocks have tumbled and corn prices are back under $4 a bushel. But for you and I, the clamor for corn has already resulted in a nasty side effect. And we see it every day…
The key ingredient here is corn.
And just because ethanol fever has cooled doesn’t mean production has stopped entirely. Nor does it mean the speculation won’t kick back up again in future…
America’s Corn Craze Contributes To Higher Food Prices
In fact, the U.S. Department of Agriculture (USDA) says ethanol will suck up 25% of the U.S. corn crop by next year. Demand from the ethanol industry, coupled with demands from an increasing global population (set to grow from 6.5 billion today to 9 billion by 2025), means corn prices have risen - up from around $2.80 a bushel in September 2006 to $3.94 today.
In addition, as farmers have set aside vast areas of land to satisfy ethanol fuel demand, they’ve done so to the detriment of other crops such as wheat and soybeans, sending those prices soaring, due to lower supply. That’s pushed food prices up across the board. The latest USDA figures forecast a 3.5% to 4.5% price increase in all food this year. Eggs, poultry, beef and pork are seeing the biggest increases, due to the animals’ heavy corn diet.
And there might not be much relief in sight. Ethanol plants are still churning away, with new plant construction underway in order to meet the government’s renewable energy targets. That’s going to keep corn demand humming.
So what started as a nice idea - easing America’s dependence on foreign oil and boosting national security through a subsidized ethanol initiative - isn’t really working as planned. We’re still a long way from independence. Oil prices are close to a record, gasoline prices are over $3 a gallon, home energy costs are rising. And food prices are rising, due to the high amount of corn needed to (expensively) produce ethanol and lower crop yields from other foods. So far, the ethanol campaign is leaving Americans’ wallets stretched at the grocery store, in addition to the gas pump and the home.
Ethanol Fuels: Friend Or Foe?
In a grim report released yesterday, the International Food Policy Research Institute said the switch to alternative energy like ethanol fuel and other biofuels is reducing the amount of food available and driving prices higher.
This is a worldwide trend, too:
- In addition, the group stated that global population growth and climate change is also to blame for rising food prices across the world, with global agriculture production set to slump 16% by 2020.
- Output in developing countries could fall by 20%, while Africa could see wheat-growing land disappear completely, because of its heavy dependence on rainfall.
- To compensate, some countries will be forced to import more food. In fact, the Food and Agriculture Organization says global expenditures on imported food will race past $400 billion this year - 5% higher than 2006.
- Poorer developing nations face a 9% hike, putting them under increased strain.
In addition to not easing America’s energy problems, all this supposed environmentally friendlier ethanol might actually be worse for the environment.
Last month, the National Research Council said ethanol production could cause “considerable harm” to water quality and supply. Earlier this year, the Environmental Protection Agency said ethanol use raises ozone levels.
And if you want to drink to ease the strain… well, that’s getting more expensive, too…
As Beer Brewing Prices Skyrocket, Here’s Two Companies To Consider
Having enjoyed a 16% jump in sales in 2006, microbrewers are now feeling the effects of rising grain costs. With fields full of corn, wheat and barley prices have soared. And after years of oversupply, even hops prices are now rising, due to a 30% loss in U.S. hops acreage between 1995 and 2006. Quoted in the Associated Press, Terry Butler, brewmaster of Washington-based Snipes Mountain, says hops prices have jumped more than 100% over last year, while barley has risen 10%-15%.
Tack on advancing fuel and glass costs and you’ve got a recipe for higher retail prices, as these brewers don’t have the same ability as their bigger rivals to hedge against rising costs. So what can you do to combat these rising food and alcohol prices?
You could consider companies like Tyson Foods (NYSE: TSN) and British firm Diageo (NYSE: DEO). Tyson has little choice but to pass on rising food costs to consumers at the store, while Diageo’s strong diversification among both beer and spirits (the firm’s many brands include Smirnoff vodka, Johnnie Walker whisky, Captain Morgan rum, Gordons and Tanqueray gin, Baileys Irish Cream and the ever-popular Guinness) should see it offset higher costs in some brewing areas.
Cheers,
Martin Denholm
|
Today’s Smart Profits Action Center
- December corn futures rose 8 cents on Tuesday to end the day at a five-and-a-half month high of $3.94 a bushel - and they are expected to rise again today. While technical buying and an announcement from the USDA that it exported 545,084 metric tons of corn to Mexico drove most of Tuesday’s gains, traders are also betting on further ethanol industry expansion. Proof of this is seen in the March 2008 corn futures, which rose to $4.11 - the highest price since June 21.
- Supply and demand: That’s the driving force behind the world’s major commodities. No shady executives… no giddy analysts… less Wall Street spin. If you know where to look, it can be an extremely lucrative investment area - and the Mt. Vernon Research has one of the best in the business. Having spent six years as a market maker on the floor of the New York Mercantile Exchange (NYMEX) actually setting the prices for commodities, Lee Lowell is now passing on his expertise to lucky subscribers in his Triple-Zone Profits Trader commodities investment service and in his bestselling book, Get Rich With Options: Four Strategies Straight From The Exchange Floor. For more information, click here to continue.
Related Articles:
- Corn Commodity: Cashing In With Sales Up 170% On The Government’s Best-Laid Ethanol Plan
- Global Agriculture: Key Factors That Could Spark An Agri-Business Investing Boom
- Ethanol Production: Turn Waste Into Wealth With The Resource Revolution Poised To Take The Energy World By Storm
Comments
One Response to “Ethanol Fuel”
[...] Ethanol Fuel: How To Combat Rising Food Prices Due To Ethanol’s Costly Production [...]