Corn Ethanol Producers Could See More Profits

Will rising corn prices help corn ethanol producers?

Corn ethanol producers could see increased profits this year. Thanks to greater government subsidies for ethanol producers, and a 2007 energy bill requirement that increases the amount of cars that run on ethanol, demand is rising for corn ethanol. Indeed, demand for corn is one of the key factors behind the rise Archer-Daniels-Midland Co. (ADM) is seeing in its stock price. Bloomberg reports on the increase in demand for corn, along with a rather surprising announcement that supplies are diminishing :

'The decline in supplies was a shock to people that have to use these commodities,' said Jeff Beal a consultant for Strategic Marketing Services Inc. in Rockford, Illinois. 'Exports have yet to slow, livestock producers have not started to liquidate, and demand for ethanol and other biofuels continues to grow with government subsidies.'

As I mention on The Panelist, getting in now with ethanol producers may be a smart move, despite the fact that corn may not be the most efficient source for ethanol. Congress isn't stupid. It's in the interesting position of being able to help one of its most influential lobbying groups (Big Agriculture is up there with Big Oil) and being able to throw a sop to constituents who want to see something done about oil dependence and environmental harm.

But here's where the ethics come in. ADM may be seeing a rather nice stock price boost, and up-and-comers like Pacific Ethanol Inc (PEIX) may be seeing some hope for their own prospects, but corn ethanol may not be the best option. True, it may solve some of the oil dependence problems, but there is most definitely a biodiesel conundrum when it comes to how good corn ethanol is for the environment.

The other question comes in regarding large corn ethanol producers and corn growers like ADM. Most of the government help for agriculture doesn't go to small family farms that struggle. Rather, the government, much in the same way it helps Big Oil, helps Big Ag with subsidies to large companies that already turn a profit. Besides, ADM, along with other large producers often engage in practices that are not particularly environmentally friendly. They are growing the corn for the subsidies and the profits. Everything else is far down the list of priorities.

So, while corn growers and ethanol producers may find themselves enjoying stock increases that are likely to continue, investors should carefully consider the implications of their support of such a company.

Disclosure: I do not invest in corn ethanol producers. I do not invest in Big Ag companies.

Comments

[Novista]

I don't have an authoritative source to refer you to, Shorty. I have however read a number of articles by people who conclude the entire cycle yields a net-loss.

Oil products for farm machinery, petrochemicals for fertilizer and pesticides. Fuel for delivery. Increased costs of modifying refinery with stainless steel pipes, as the ethanol is corrosive. And, in the end, less power per quantity than gasoline.

And yes, corn is thirsty. Very. Which creates another problem. And since 20% of production was shunted from food for livestock and people, more hidden inflation in grocery bills.

As far as Brazil, who knows what loss factor from cutting down carbon sinks (trees!) to make room for more ethanol crop growth area?!

[nomoredead]

Patricia Woertz is now CEO of ADM after a 30 year career in Big Oil. Connect the dots.

[cylindar]

Anyone who invests in ethanol production companies is going to get their britches burned. Ethanol and biodiesel are ok for small production outputs but for any fool to think that the market is not going to go bust on these products is smoking loco-weed. It is a short term gambit by ADM and a few other companies who will clean up for a while and then desert the market leaving behind higher food prices and lots of senators railing against both ethanol and biodiesel. By-by subsidies and ADM will be on to other scams.

[Shortyfuse]

Profits Profits yes
No one wants to curb the power of the oil company more than I do, however, have we researched the effects of ethanol at all.
I worry that it causes drought. I know we used it here in central Texas and we had a two year drought. Now there is a drought in the east. And maybe most telling of all is that Brazil, the country that uses ethonal the most, has had a drought in their rain forrest. A DROUGHT IN THE RAIN FORREST.
Heck, it may be perfectly fine to use ethanol, but what sience backs it up.