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Paulo Santos
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Paulo Santos is a Portuguese independent trader, analyst and algorithmic trading expert, having worked for both sell side (brokerage) and buy side (fund management) institutions. Paulo has been trading professionally for about 16 years and also launched www.thinkfn.com in 2004. Thinkfn (Think... More
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  • A Government-Mandated Corn Shortage 9 comments
    Jul 18, 2012 6:58 AM | about stocks: CORN, WEAT

    By now everyone has heard about this year's severe drought, that's hitting corn (CORN) crops left and right in the Midwest. Yesterday, again, USDA lowered its estimate of the condition of the present corn crop.

    Responding to the widely anticipated news, corn shoot up again, taking wheat (WEAT) along with it, even though the wheat crop is either harvested already (winter crop 80% done) or in good condition (smaller spring crop). Anyway, corn went higher as the crop's prospects continued to worsen.

    But is it really necessary for the population to have to pay its food at a higher price? Well, it turns out that it isn't. A single temporary measure could easily cut down the predictable corn shortage. The US Government would just have to open an exception to the ethanol usage mandate, which leads to ethanol consuming around 27% of the entire corn crop.

    It simply makes no sense to mandate ethanol usage during years where the country is undergoing a severe drought.

    Still, the market is not expecting the Government to have any brains, and as such ethanol is rallying along with corn, wheat and soybeans (source for chart: CME).

    (click to enlarge)

    Conclusion

    The effects of this year's drought could be easily brought under control by a simple governmental measure to ease the ethanol mandate. Will such a measure happen, though? It's doubtful. But one can never fully discount the existence of intelligent life in Washington

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: commodities Stocks: CORN, WEAT
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  •  
    Paulo, As a dairy farmer who's going to suffer increased feed costs, I couldn't agree more. Ethonal has been a devastating thing to the diets of people around the world and anyone in the livestock industry, as prices have exploded in the past several years even before the current drought.

    As to the possibility of intelligent lif,e in Washington,,, my fear is that not until they experience "hunger" meaning they find the grocery store shelves bare will they wake up.
    18 Jul 2012, 09:39 AM Reply Like
  •  
    Yes, at the very least in years such as this one the thing could be eased.
    18 Jul 2012, 10:07 AM Reply Like
  •  
    Burning food is not a good idea. Pray for rain.
    18 Jul 2012, 01:43 PM Reply Like
  •  
    Rain has been more or less present since this past Saturday, and should be heavier tomorrow.
    18 Jul 2012, 01:48 PM Reply Like
  •  
    Have you taken a look at XCO (Wilbur Ross's favorite in the nat gas arena)?
    19 Jul 2012, 10:58 AM Reply Like
  •  
    Seems to be a bit heavy on the debt for the environment. But I had no particular insight into it.
    19 Jul 2012, 11:05 AM Reply Like
  •  
    Ross is no fool (he apparently got a board seat). My look at it indicated that the cost of the debt was very low and that they have a lot of gas already developed. I was hoping that you'd confirm that or find some other weakness. I have a small position ~$7 after my research.
    19 Jul 2012, 11:52 AM Reply Like
  •  
    Corn Declines for Fourth Day on Proposal to Curb Ethanol Usage
    http://bloom.bg/QLWVis
    3 Aug 2012, 01:39 PM Reply Like
  •  
    I read a report that corn used for ethanol is not good as food and even the land used to harvest is not good for the high quality corn.
    Based on that report an eventual exception to the ethanol usage mandate will not ave significant effect in curbing corn price.
    9 Sep 2012, 03:21 PM Reply Like
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