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Ethanol Companies are In BIG Trouble

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September 10, 2008 – Comments (5) | RELATED TICKERS: VSE , PEIX

If you own shares in companies that produce ethanol, either in CAPS or in real life (yikes), you should pay very close attention to this post.  If McCain becomes the next president of the United States, these companies are in BIG trouble. 

Earlier this week the U.S. Secretary of Agriculture, Ed Schafer, said that a reduction in ethanol subsidies is needed and that the ethanol industry must become self sustaining. Further, he was reported to have said that ethanol companies have made subsidies a part of their business models and this is a mistake.

This statement reflects a shift in Republican policy regarding ethanol from George Bush who was a strong proponent of ethanol to the new Republican leader John McCain who opposes federal ethanol subsidies. The Secretary of Agriculture apparently has received the message, “it is no longer business as usual” concerning unlimited support for the ethanol industry.

Warning signs are flashing that there is a major shift underway concerning the position of the Republican Party with respect to ethanol as the leadership of the party passes from George Bush to John McCain.

Just the threat a new Republican Administration could bring a halt to the current policy of subsidizing U.S. ethanol production is likely to further the crush ethanol companies and put a cap over corn prices for at least the next two months.  While lower corn prices are not great news for companies in the ag sector, in the long run I strongly believe that companies like Monsanto, Sygenta, and Deere will be fine...though anyone looking to buy them may get a better entry point.  This is good news for inflation, in the short run, because it means that food prices may fall, or at least stabilize. 

This, combined with the recent drop in the price of oil, should help to ease inflation.  Furthermore, the government wants mortgage rates to drop so that the housing market will stabilize.  A hike in the Fed Finds rate, while it is not directly tied to mortgage rates, will make that goal difficult to achieve.  Both of these factors make it extremely unlikely that the Federal Reserve will raise interest rates any time soon...as I have been saying for months.  One would think that at some point people will realize this and the U.S. dollars rise should slow, if not stop completely.

Deej

5 Comments – Post Your Own

#1) On September 10, 2008 at 12:26 PM, awallejr (79.37) wrote:

I pretty much take what politicians say during campaigns with a grain of salt.  Like it or not I think we are stuck with ethanol.  It basically will make-up about 10% of our gasoline supply.  So stop ethanol and you WILL see gas prices spike up accordingly.  Only way to deal with getting rid of this product is by slowly replacing it with something else less expensive, which I don't see short term.

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#2) On September 10, 2008 at 1:37 PM, FleaBagger (28.18) wrote:

The 10% thing hasn't been fully phased in yet, and could easily be reversed if we have a president pushing for sanity on that front.

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#3) On September 10, 2008 at 1:50 PM, cwlawrence (< 20) wrote:

What about VRNM? It produces ethanol, but not from corn; rather it is from wood chips and sugar cane waste. The stock is down (I do own quite a bit - ouch) but I believe that once the market realizes a) the John McCain will not be the next prez and b) VRNM's ethanol does not come from corn and c) VRNM already has a successful production facility and $90 mil. from BP the stock should pop nicely.

I may buy more at these levels. Any thoughts?

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#4) On September 10, 2008 at 1:50 PM, cwlawrence (< 20) wrote:

What about VRNM? It produces ethanol, but not from corn; rather it is from wood chips and sugar cane waste. The stock is down (I do own quite a bit - ouch) but I believe that once the market realizes a) the John McCain will not be the next prez and b) VRNM's ethanol does not come from corn and c) VRNM already has a successful production facility and $90 mil. from BP the stock should pop nicely.

I may buy more at these levels. Any thoughts?

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#5) On September 12, 2008 at 2:53 AM, GreenMycon (< 20) wrote:

cwlawrence: I think if you are going to invest in ethanol companies, then it is absolutely necessary to stay away from traditional sugar-based fermentation companies (VSE, etc.).  However, unless I saw significant R&D efforts, including combining thermochemical conversion w/ traditional fermentation, I'd stay away from ethanol.

Even the most promising technologies out there still have their problems, and many top researchers currently believe that cellulosic ethanol is not going to be the next "energy economy."  I'd rather throw my money @ biodiesel companies dealing with glycerol byproducts (Gushan is wicked cheap right now -- although I am slighlty concerned about some things.)  Go read my blog posts on Ethanol -- I think they give a pretty reasonable overview of the technology.

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