Aventine Renewable Energy Holdings, Inc. (AVR)

Let me begin by saying that I actually sort of like Barron's. I get it delivered to my driveway every Saturday morning. Having said this, one has to run everything that they read in it through a HUGE B.S. filter. It's great for data points and for putting ideas on one's radar screen, but don't ever just assume that something is right because it was written in such a "reputable" publication.

Last week's Barron's contained an absurd piece (of trash) which stated "Ethanol Stocks Are Poised to Refuel." Ahhhhh, I don't think so. Corn is the main input that these companies use to produce ethanol. Guess what is happening to the price of corn? It's sitting at its record high. Flooding throughout the Midwestern U.S. has is causing corn yields to drop just when the government's stupid ethanol boondoggle is causing us to need it most. The odds are extremely high that corn production this year will be significantly below the current level of demand. The function of the market will be to ration this smaller than required supply of corn through higher prices.

That's not good for these companies. If ethanol producers are poised to do so well as the article contends, then why is the high cost of corn causing a number of them to shut down (see article: Ethanol plants shut on record corn price). According to a report from Citi, so far five small to mid-sized U.S. ethanol plants have shut down. The funny part about that report is in it, Citi downgraded its ratings on VeraSun (VSE) and BioFuel from "Buy" to "Sell." Whoever pays Citi for such terrible research should have saved themselves some money and just checked CAPS instead. All of the ethanol producers have been one star companies here for a long time.

Just wait until the other shoe drops. In my mind, it's not a question of if...but when the government is forced to admit that it made a mistake and it has to pull the plug on its ethanol mandates, or at least reduce or eliminate the ethanol import tariff. It probably won't happen during the current administration, but I would not be surprised to see a move like this happen some time in 2009. These companies will really be screwed then, unless the government is somehow forced to pay them off.

Back to the Barron's piece for a minute. It says that ethanol producers are good values because many of them are currently trading for less than the replacement cost of their ethanol plants. No ship Sherlock. You know why, because PLANTS THAT WASTE CORN BY TURNING IT INTO ETHANOL ARE WORTHLESS. That is the stupidest argument that I have ever read. Should a company that has a bunch of plants that it used to make 8-Track players be valued what it would cost to build a new ones? Of course not! If a company spends a billion dollars to construct a plant that builds giant replicas of Rodin's Thinker out of elephant crap does it mean that they are automatically worth a billion dollars. No.

Check out the following great article on the absurdity of corn ethanol and what it's doing to our country: Midwest floods may send gas prices up 15%. Make sure to pay close attention to the last section of the piece, called "Reducing the ethanol tariff." I thought of this as a possible solution to the woes that are being caused by the government's current ethanol policy a couple of months ago. Catering to farmers and the ethanol U.S. producers, we currently charge a $0.54 per gallon tax on ethanol that is imported to the U.S. from other countries. Countries like Brazil are able to produce ethanol much more efficiently using sugar cane than we ever will be able to using corn. Guess what company is Brazil's industry leader in ethanol production. Let's see...oh yeah it's also one of my favorite oil companies, Petrobras (PBR & PBR/A). The elimination of the U.S. import tariff would likely be a huge boon to PBR, which already exports ethanol to countries like China. This free call option that the market is not currently pricing in is just one more reason to love Petrobras.

I will continue to be short ethanol companies in CAPS and continue to lament the fact that I never shorted them in real life.

Deej