Don't Bet the Farm on the Ethanol Bull - Barron's

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 |  Includes: ADM, AVR, GEX, MON, PBW, PEIX, POT, VSUNQ
by: SA Eli Hoffmann

A farmland bull market that has seen prices jump 50% over the past three years, and will likely fuel growth of 22% in 2007, is largely predicated on perceived booming ethanol demand. Barron's cover story says the ethanol bull may be stampeding on shaky earth.

Steve Leuthold, who predicted the last agricultural bust in 1982, foresees a 3-5 year pullback of 15-20%. He argues government ethanol subsidies, critical to the industry's success, could disappear if high grain prices and massive water demand create a backlash, or if Big Oil reaches deep enough into its pockets to lobby Congress successfully. One scholar says a sudden drop in oil prices could also burst ethanol's bubble.

Barron's says the feared 'ethanol glut' may already be here: The U.S. now boasts more than 130 ethanol plants, up from 80 three years ago; ethanol inventories climbed 12% in September; and average prices slid from $1.91/gallon to $1.67. Smart money may already be making its move: From 2000-2005, 56% of Iowa farmland was owned by farmers and 44% by investors; the ratio today is 60:40.

Look for implications in farmland stocks like Monsanto (NYSE:MON) and Potash (NYSE:POT), ethanol stocks like Aventine (AVR), Pacific Ethanol (NASDAQ:PEIX), Verasun (VSE), Archer Daniels Midland (NYSE:ADM), and alternative energy ETFs such as (NYSEARCA:GEX) and (NYSEARCA:PBW). See also The Top 10 Ethanol Related Stocks and Ethanol Going From Panacea to Pariah.