A crime against humanity

A Heartland Boondoggle: The World's Most Hated Commodity
By Tom Dyson

The people at the plant were so busy, they didn't have time to show me around.

I was simply told to sign myself in, grab a helmet, and look around on my own...

One year ago, I flew to Iowa and toured a large ethanol plant. It was harvest time, and farmers were bringing in the corn crop.

Ethanol plants buy millions and millions of bushels of corn at harvest time every year. They clean, thresh, dust, and store the corn in a sandbox the size of a football field. Here's a picture I took of the corn pile:

You can only see one fifth of the pile. The plants had already packed most of the corn under plastic tarpaulins to the right of the picture.

Ethanol plants turn this corn into fuel for automobiles.

At the time of my visit, ethanol was a darling. Investors loved it, farmers loved it, politicians loved it, and conservationists loved it. When people find out what I do for a living, they always ask me what I think of the current investment fad. Last year, the question was always, "So what do you think of ethanol, Tom?"

It's amazing how fast public sentiment can change:

• Last month, Jean Zigler, an expert at the United Nations, called ethanol a "crime against humanity."
• The Organization for Economic Cooperation and Development (OECD) released a report in September that asked if ethanol "offers a cure that is worse than the disease."
• An October 2007 report from the National Research Council says "the harm to water quality [from ethanol production] could be considerable, and water supply problems at the regional and local levels could also arise."
• A spring 2007 report from the Environmental Protection Agency says an increase in corn-based ethanol use will raise the level of ozone, especially in midwestern states.
• Nobel Prize for Chemistry winner Paul Crutzen said ethanol "might exacerbate climate change."
• Some foreign countries have slammed ethanol in the press. Mexico blames ethanol for contributing to the price of corn tortillas. China has banned new biofuel plants from using corn. Cuban President Fidel Castro says using food crops for fuel is a "sinister idea."
• Stock prices of ethanol producers have collapsed.

Here's the thing. Yesterday I received an e-mail from my Iowa farmland contact. He grows corn and raises hogs in Sioux County. He says the time is right to start investing in ethanol again. He gives four reasons:

1. No new plants are going up and producers have postponed or cancelled all their planned projects in the past few months due to the dearth of financing. The ones that are up and running are making money, even with high-priced corn.
2. Stock prices are down 50%-60% from the highs and the market has already baked in all the bad news. To make money, all things have to do is go from bad to less bad.
3. Even though petrol companies are reluctant to provide ethanol at gas stations, with e-100 "rack price" under $1.90 per gallon, someone will see the profit potential and get the product out to the consumer. Right now, consumers pay more than $3 for gasoline.
4. Average cost to produce e-100 is $1.50 per gallon, and that's before the 51-cent subsidy. Ethanol plants are profitable at current prices.

In sum, ethanol was a darling. Now the crowd hates it. Contrarian investors can take advantage of the negative sentiment and buy stock in ethanol producers.

The biggest ethanol company in the Midwest is VeraSun Energy, and you have many other candidates for this trade as well.

To be honest, I'd rather keep my money in safer, more stable industries than ethanol. But I can tell you many people who have everyday dealings with this industry are buying ethanol shares. If you choose to speculate with them, just remember: Fortunes in this industry can change very quickly.

the question is do you want cheap food or expensive energy? QJ