A Contrarian Take on the Ethanol Boom (ADM)

We have been closely following the concept that ethanol could make a meaningful dent in the energy needs of the U.S. Indeed the most recent report from agricultural giant, and ethanol producer, Archer Daniels Midland (ADM) highlighted the current and potential impact ethanol could have on its earnings.

Alex Halperin at BusinessWeek.com analyzes the blowout earnings at the ag giant. While ethanol (and biodiesel) are not as of yet a substantial part of ADM's earnings it seems that future growth hinges in part on the expansion of their ethanol business. Current ethanol prices are strong and expected to stay strong.

And price strength looks like it will continue. In its conference call, ADM said it expects the rise in ethanol prices to continue in the current quarter.

Because ethanol is becoming more prevalent in gasoline, "I think a lot of people don't realize that there are two ways to [interrupt] our gasoline supply" Routt says. "The one is the one everyone thinks of: [oil supply]; the other is ethanol."

Robert Cyran at breakingviews.com thinks the currently high prices for oil and ethanol have seduced investors (and producers) alike in thinking that the good times will continue. This has lead to an ethanol bubble, where investors are confusing the current market with the long term potential for cellulosic ethanol.

It's unlikely the current ethanol boom will last a decade. Over-investment in distilling plants looks likely. Gas prices could fall and drag ethanol along. And higher ethanol production will raise the price a corn. There will surely be a better time to invest in cellulose ethanol in the coming decade.

The dollar and ethanol have generated a great deal of attention because they represent seemingly unassailable cases. However a little contrary thinking can help put the future into perspective. It may very well be the case that the future holds for us a markedly weaker dollar and abundant ethanol supplies, but then again, maybe not.

Comments

[Sam Goodwin:]

I'm sure everyone has noticed all the press ethanol has been getting this year. Corn ethanol stocks have been soaring. However, it seems this frenzy is only the opening act for a much, MUCH bigger energy revolution: (drum roll) ...CELLULOSE ETHANOL! Articles like this one, announcing advances in cellulose ethanol, are now appearing almost daily. In 2007, scores of cellulosic ethanol plants will begin construction. Even Alan Greenspan is bullish about cellulose ethanol. Do the research, you'll be amazed. Here is one of the few sites I've found that seem to have a good pulse on this promising industry: InvestInCelluloseEthan....

2006 Sep 15 10:45 PM