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Monday, January 29, 2007

Through The Fly's Eyes: Corn


To Invest In Corn Or Not To Invest In Corn, That Is The Question

President Bush in his State of the Union address called for the United States to become less dependent on foreign oil. The solution: corn-based Ethanol?

Every farmer in the US is going to be planting corn this season. Why? Because corn prices are approaching 10-year highs and there is money to be made. The higher prices will incent greater corn production which will be used in the production of more ethanol. Ergo, our reliance on foreign oil would materially diminish. MAYBE.

The first problem with this scenario is that higher prices lead to greater supply which at some point lowers corn prices.

Another problem, which was acutely pointed out in Bill Alpert's Follow-up article in Barron's, is that corn and soy framers would run out of arable land before they could produce the amount of corn or soy needed to provide a viable alternative to foreign energy. If the US did go all out to produce enough alternative fuels, the price of the commodity and underlying land would become so expensive, it would be cheaper to use imported oil or gas. The market will become aware of this reality at some point that corn is not the solution.

Another very important point is that in order to grow things you need a lot of fertilizer which contains nitrogen. Crops cannot grow without nitrogen. Where does nitrogen-based fertilizer come from -- natural gas. To grow all these alternative fuel crops, you would need a lot of natural gas to make the fertilizer. Somewhat of a vicious cycle.

My investment advice: Stay with buy low and sell high. Stay with what we blogged about last week. Invest in cotton whose price is bottoming and stay away from corn whose price is peaking. Alternative fuel crops have very tough economics.


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