ADM profits from oilseed, corn processing, and agricultural services hit a record $3.4 billion for the 2008 fiscal year, in part because of strong ethanol sales. However, ethanol has come under fire from meat and dairy producers who argue that the diversion of corn for ethanol production is the principle catalyst for soaring food prices.

The price of corn soared from about $3.50 a bushel to $7 in the last two years, driving up the price of cattle and poultry feed – and causing the prices of many meat and dairy products to skyrocket.

Not everyone subscribes to that theory, as a report from the Council of Economic Advisors in May said only 3% of the 40% increase in food costs worldwide could be attributed to the diversion of corn to ethanol production.

Still, the controversy has gained plenty of political traction. Senator John McCain, the Republican nominee for president, has voiced his opposition to federal subsidies for corn-based ethanol and senators John Warner (R-VA) and Jim Webb (D-VA) have petitioned the Environmental Protection Agency to temporarily waive a congressional mandate that requires the oil industry to blend increasing amounts of ethanol into gasoline.

ADM Chief Executive Officer Patricia Woertz said she is “reasonably optimistic” that Congress would continue to support the current legislation, which mandates annual ethanol usage of 9 billion gallons by 2009.

If the waiver passes, however, that usage would be slashed in half.

With pressures mounting at home ADM is turning more of its attention to Brazil – the world’s second-largest ethanol producer and the leading exporter.

“We have been interested and continue to stay interested in an investment in sugar and ethanol processing in Brazil and we have talked with several potential partners,” Woertz told the Financial Times.

Part of the reason for ADM’s interest growing interest Brazil is the large flow of cash pouring into the country’s thriving ethanol industry. The Inter-American Development Bank, Latin America’s largest development bank, recently provided a $260 million loan to Santa Elisa Vale do Rosario to build three ethanol plants – a project that’s expected to cost more than $1 billion.

The loan, which will sit alongside a $360 million commercial bank credit, is the biggest ever by a multilateral institution for a green fuel initiative, the Financial Times reported.

The Brazilian ethanol industry also enjoys the total support of the government. Brazilian officials have made its ethanol exports a key issue in global trade talks, where they have pressed the United States and Europe to open their markets.

The European Union recently exempted 450 million gallons of Brazilian ethanol from higher tariffs as part of a larger trade deal. Marcos Jank, head of Brazil’s sugarcane industry association, expressed his happiness with the deal but said he was now hoping for a better offer that reflects the rise in ethanol consumption moving forward.

Brazil is also pressing the United States to reduce, if not eliminate, the 54 cents per gallon tax it currently levies on Brazilian ethanol imports. Critics have in the past labeled that tax as a frivolous roadblock designed to protect American corn farmers who cannot produce ethanol as cheaply as Brazil’s sugarcane growers.

Source: U.S. Political Strife Drives ADM Ethanol Business to Brazil

I’m at the annual Biotechnology Industry Organization (aka “BIO”) Conference here in San Diego. The buzzwords I keep hearing are biofuels, green energy, and agribusiness. This year’s tag line is Innovate. Heal, Fuel, Feed the World. And no shortage of businesses are claiming to do just that…

On Tuesday, keynote speaker Arnold Schwarzenegger highlighted several state energy programs that use biotechnology. And before the “governator” took the stage, genomics pioneer Dr. Craig Venter discussed his biofuels research…

As CEO of Celera Genomics, Venter headed efforts to sequence the human genome. Today, he’s launched his own private research institute focused on creating synthetic life forms… Essentially, he’s making creatures that eat carbon and excrete fuel.

Innovators like Venter are about to make a boatload of money in ag-bio, biofuels, and other “green” life-science technologies.

You see, when oil was $30 a barrel and corn still cost $2, biotechs didn’t have a reason to develop alternative energies or agricultural breakthroughs. Now, oil is over $130 and corn is $7.50 – and hitting new highs along with wheat, soybeans, and rice. The biotech industry wants a piece of the action…

Large players like Monsanto (MON) and Syngenta (SYT) dominate the food side of the game. Both companies develop insect-resistant crops and genetically engineered seeds. Over the last year, Monsanto’s shares have doubled, up nearly 110%. Syngenta is up nearly 75%. Both are still in relentless uptrends.

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But today, the stocks are too rich for my taste: Monsanto sells for 45 times earnings and Syngenta for 30.

One company I like better is Denmark-based Novozymes. Novozymes works on food, energy, and… oh yeah… drugs. The company makes specialty enzymes. Its products are used in dishwashing detergents, food and alcohol production, oil and ethanol processing, livestock feed, and pharmaceuticals. Novozymes netted $1.5 billion in sales last year. And the $5 billion company is trading at reasonable levels today.

The one catch is that the stock trades on the OMX Nordic Exchange in Copenhagen. That makes it more difficult for U.S. investors to buy.

The same is true of a couple of other interesting companies I found at BIO…

Take Danish company Danisco, for example. Danisco is one of Europe’s largest producers of sugar. Its technology also transforms raw materials into livestock feed, biofuel, and plastics. Last year, it brought in $4 billion in sales from customers in close to 50 different countries.

And Euronext-traded DSM sells plastics, polymers, and chemicals used in human health and animal feed. And half of its $13 billion in sales last year came from industrial materials. The $10 billion company also has a manufacturing relationship with one of my favorite Phase 1 picks, Dutch biotech Crucell (CRXL).

I’m not suggesting you buy any of these stocks, not without putting in some solid research. But these companies are all cashing in on a trend I expect to track for some time. The agriculture and energy sectors are minting money right now… As the biotech industry is figuring out, there’s plenty to go around.

Good investing,

Rob Fannon

P.S. Analyst George Huang and I are busy seeking out the trend’s smallest and most innovative newcomers. Phase 1 readers can expect recommendations focused on cleaner fuels, sustainable food production, and agricultural technologies.

Source: A Strange New Way to Invest

According to The Guardian newspaper, there’s growing confidence that so-called “grid parity”, the holy grail of the industry — whereby solar power can be produced as cheaply as it bought from the grid — is close at hand.

“The [US]  government recently incentivized production of ethanol, biofuel, and solar technology,” says Charles Delvalle in Investor’s Daily Edge.

If a Democrat gets into office, these incentives should grow. Congress even pushed up the Corporate Average Fuel Economy (CAFÉ) guidelines for the first time since 1975. And the idea of carbon credits is beginning to gain traction in Congress.

So the government is helping fuel the creation of cleaner energy. Step one is complete.

What about step two?

If I talk to any of my friends and tell them I love the things oil does to the earth, they’ll slap me (yes, I know oil is bad for the earth). If I told them that I didn’t recycle, they’d yell at me (yes, I recycle). My friends are already convinced that the green movement is the way to go.

If you type in the word ‘green’ in Google, you’ll see thousands of new websites that all talk about how great it is to be green.

Look at corporate trends, and you see more commercials with companies talking about going green. Wal-Mart, IBM, Intel, Google, and even ExxonMobil is getting into the act. The idea of going green is spreading like wildfire. And it will only increase as gas prices move higher.

The green market is definitely seeing the second step. But how about the third?

Have you seen solar stocks lately? In the past two years, these companies have popped by 100% – 300%. And it seems like a new solar company pops up every other day touting a ‘breakthrough’ technology that allows amazing conversion of light to electricity. Many have no profits to speak of and don’t plan on entering production for years.

Ethanol stocks were moving higher for a while, but have gone down since the middle of last year (maybe investors are catching on to how ‘not green’ ethanol really is). Geothermal producers are shooting higher. And those who sell wind turbines are making great money on increasing orders.

By 2030, Morgan Stanley expects green sales across the globe to total over $1 trillion (that’s bigger than the Gross Domestic Product of 169 of the 181 member countries of the International Monetary Fund!).

Most people I speak to see green technology as the wave of the future. It’ll only be a matter of time until they think that investing in green companies is a no-brainer.

In the end, this whole green movement we see today could very well be the start of yet another massive bubble. And considering the riches that were made during the two previous bubbles, catching the green investment mania early on would be a great way to make a lot of coin in the next few years.

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!

Thomson Reuters reports that, according to the National Venture Capital Association, the alternative energy investments sector boasts the highest growth in venture capital investments in the last five years.

Big bucks are also flowing in from US pension funds into an array of alternative energy investments, stoking concerns of a possible bubble. Reuters says that the “exposure of pension funds and other institutional investors to alternative energy projects is small but growing with investments in geothermal to hydro, wind, solar, biomass, tidal energy and landfill gas.”

Charles Delvalle in Investor’s Daily Edge says it’s a great time for alternative energy investments…

The government recently incentivized production of ethanol, biofuel, and solar technology. If a Democrat gets into office, these incentives should grow. Congress even pushed up the Corporate Average Fuel Economy (CAFÉ) guidelines for the first time since 1975. And the idea of carbon credits is beginning to gain traction in Congress.

So the government is helping fuel the creation of cleaner energy. Step one is complete.

What about step two?

If I talk to any of my friends and tell them I love the things oil does to the earth, they’ll slap me (yes, I know oil is bad for the earth). If I told them that I didn’t recycle, they’d yell at me (yes, I recycle). My friends are already convinced that the green movement is the way to go.

If you type in the word ‘green’ in Google, you’ll see thousands of new websites that all talk about how great it is to be green.

Look at corporate trends, and you see more commercials with companies talking about going green. Wal-Mart, IBM, Intel, Google, and even ExxonMobil is getting into the act. The idea of going green is spreading like wildfire. And it will only increase as gas prices move higher.

The green market is definitely seeing the second step. But how about the third?

Have you seen solar stocks lately? In the past two years, these companies have popped by 100% – 300%. And it seems like a new solar company pops up every other day touting a ‘breakthrough’ technology that allows amazing conversion of light to electricity. Many have no profits to speak of and don’t plan on entering production for years.

Ethanol stocks were moving higher for a while, but have gone down since the middle of last year (maybe investors are catching on to how ‘not green’ ethanol really is). Geothermal producers are shooting higher. And those who sell wind turbines are making great money on increasing orders.

By 2030, Morgan Stanley expects green sales across the globe to total over $1 trillion (that’s bigger than the Gross Domestic Product of 169 of the 181 member countries of the International Monetary Fund!).

Most people I speak to see green technology as the wave of the future. It’ll only be a matter of time until they think that investing in green companies is a no-brainer.

In the end, this whole green movement we see today could very well be the start of yet another massive bubble. And considering the riches that were made during the two previous bubbles, catching the green investment mania early on would be a great way to make a lot of coin in the next few years.

Jason Simpkins in Money Morning reckons one of the best alternative energy investments is in uranium and uranium mining stocks:

Uranium has become one of the most coveted and volatile commodities on the planet. Overall, uranium gained 28% in 2007, but that seemingly simple statistic masks a much-more-complex story.

At one point in June, uranium prices were up 84% for the year. But then a mass sell-off – accelerated by the U.S. Department of Energy’s decision to auction off as much as 200 tons of uranium from its own inventory – drove prices from $138 a pound down to $75 a pound in just three months.

So far this year uranium has skidded even more, reaching its current trading price of about $65 a pound. Despite the dip, however, the underlying fundamentals remain strong, meaning it’s probably the perfect time to start stocking back up on the yellow cake providers.

In a recent research note, analysts with the RBC Capital Markets Group of the Royal Bank of Canada (RY) said that the current spot price of uranium has been “driven to excessively low levels due to intense selling pressure and lack of buying demand, coupled with the typical illiquidity of the spot market.”

The RBC analysts also said that “the long-term price, on the other hand, has not changed since May 2007 and we think this better reflects the market’s view of longer-term supply-demand fundamentals.”

So where should you look for profit opportunities? If you look at the charts, some uranium mining company stocks appear to move up and down in virtual lockstep with spot prices.
If you want a pure play on an increase in the price of uranium itself, Cameco Corp. (CCJ) is your best shot. It’s the largest producer of uranium in North America and – despite flooding at its Cigar Lake site last year – Cameco remains the world’s largest and most liquid uranium miner, making it vital to the global supply.

The company’s profit more than doubled in the first three months of 2008, surging 125% on its uranium and gold mining operations. RBC also likes Cameco’s potential.

Read more here for Jason’s tips on maximising profit from blue-chip uranium mining stocks.

Fitch raised Brazil’s foreign-currency debt rating to BBB-, the lowest investment-grade level, from BB+, matching a move made by S&P on April 30. The increase will give the South American country better access to capital markets because some institutional investors can only buy securities issued by countries with at least two investment-grade ratings. [...]

The yield on the government’s zero-coupon bonds due January 2010 fell 19 basis points, or 0.19 percentage point, today to 14.31 percent, according to Banco Bradesco SA. The extra yield investors demand to own Brazil’s dollar bonds rather than Treasuries shrank 16 basis points to 1.91 percentage points, the narrowest since Nov. 7, according to JPMorgan Chase & Co.’s EMBI Plus index.

The Fitch move “is potentially the door opening to some investors who now can buy Brazil in the fixed-income market,” said Geoffrey Pazzanese, who helps manage $44 billion in global stocks at Federated Investors Inc. in New York.

The risk of owning Brazilian bonds fell to the lowest since May 19, according to Bloomberg data. Five-year credit default swaps based on the country’s debt dropped 6 basis points to 0.895 percentage point. That means it costs $89,500 to protect $10 million of the country’s debt from default.

“Brazilian companies have become global leaders in key industries,” says Manraaj Singh in Profit Watch.

“Companhia Vale do Rio Doce is now the world’s biggest iron-ore producer. State-owned oil company, Petrobras, overtook Mircrosoft to become the world’s sixth-biggest company by market capitalisation last week. Petrobras is sitting on the Western Hemisphere’s largest oil discovery in three decades. Possibly even the third-biggest oil field in the world!

“These are names that are going to become much more familiar to us in the decades ahead.

“Brazil isn’t just an emerging oil giant… it’s also the biggest producer of the only truly commercially viable alternative to oil – sugar-based ethanol.”

As the world’s lowest cost ethanol producer, Brazil has a big advantage over other countries, says Mike Burnick in The Offshore A-Letter:

“Neither U.S. corn-based ethanol, nor wheat-based ethanol from Europe, can come close to matching the Brazilians on a production cost basis.

“The sugarcane plant, which flourishes in Brazil’s tropical climate, produces a ‘yield’ of 6,000 liters of ethanol per hectare of land. That’s about twice the yield of corn-based ethanol!

In fact, Brazilian ethanol is about 40% cheaper to make than in the US – and costs less than half the price of European ethanol.”

A few days later, I read about Mosaic, a fertilizer company – about how the rising cost of sulfuric acid could impact its profit margins. Then last week, I came across a piece about how the cost of treating water is “going through the roof.” The main culprit is, once again, the rising price of sulfuric acid.

As one water utility rep said: “As sulfuric acid prices increase, so do the products that contain this ingredient. The U.S. has also seen a shortage in supply of sulfuric acid. The U.S. has imported the majority of sulfuric acid from China in the past, but recently, China has slowed the trade of sulfuric acid to the U.S. because its own demand is greater than what China can produce for both the U.S. and itself.” In short, demand is swamping supply. Sulfuric acid prices in March hit a record high of $329 per ton, according to Purchasingdata.com, after trading at $90 per ton as recently as October. Sulfuric acid shortages?

Hmmm… Well, time to take a look at this, think I.

“Sulfuric acid is one of those unheralded lubricants that keep the gears of the industrial economy spinning,” says Chemical and Engineering News. “Although less in the limelight than petrochemicals such as ethylene or polyethylene, it is, in fact, the largest-volume chemical in the world.”

We use sulfuric acid in mining to extract copper, nickel and uranium. We use it in steel production and in making fertilizers. We use it to refine oil and to treat wastewater. It goes into the plastics we make, and a bunch of other things. The biofuel boom has kicked off a big increase in the demand for sulfuric acid. In fact, some 60% of the sulfuric acid ends up in agriculture. The surge in ethanol production is a doublewhammy on sulfuric acid. First, all that corn needs fertilizers. And second, the ethanol facilities themselves also use sulfuric acid in their own processing. A typical ethanol facility requires 2,000 4,000 tons of sulfuric acid per year.

Then there is that great demand pull from China and India. Traditionally, these two countries produced what they needed. But now their own rapid industrialization has turned the tables. They’ve switched from being exporters to importers of sulfuric acid.

The boom in metals such as copper and nickel also drives the demand for sulfuric acid. Smelting operations typically throw off sulfuric acid as a byproduct. But even here, metals companies need more than they can produce.

Supply is also tight. As with many commodities, there was a long period when sulfuric acid prices went nowhere. This led to a decrease in production facilities. I found one example of a closure as late as November 2006, when GenTek shut down a sulfuric acid facility due to “adverse market conditions.”

There also seems to be little new capacity on tap. Industrial Info Resources, in Sugar Land, Texas, tracks this sort of thing. According to IIR, of the $89 million invested in sulfuric projects in the U.S. in 2007, most of the funds went toward planned maintenance, rather than expanded capacity. It also turns out that not only is supply tight, but there are all kinds of transportation bottlenecks in delivery – such as a shortage of rail cars. Key Compton, president of a sulfuric acid producer in Texas, said toward the end of last year that customers soon “may be paying prices for sulfuric acid that they’ve never seen before.”

So how can you play it? Well, there are a number of producers of sulfuric acid. Most are big chemical companies that you wouldn’t own because you want exposure to sulfuric acid. Owning them is like buying Home Depot because you think it sells a great lawn mower. The only “pure play” on the idea I could find is a little company called Chemtrade Logistics in Canada, one of the world’s largest suppliers of sulfuric acid. It trades in Toronto under the ticker symbol CHE. You can find a quote on Yahoo using CHE-UN.TO.

It’s a Canadian income trust and pays a monthly distribution of about 10 cents. Based on a price of $11.44, that’s a yield of 10.5%. The company appears to be in good financial condition and throws off a lot of cash flow, much of which investors pocket in the distribution. It’s not a sexy business, but it looks like an interesting play on what seems to be at least a temporary scarcity of a key chemical. Chemtrade is not a one-trick pony. It also produces liquid sulfur dioxide and sodium hydrosulfite. The company also sells into a wide range of end markets, so you’re not tied to the fortunes of any single sector. The company has an excellent presentation of its business, complete with slides, on its Web site.

Since I have not completed my research on either Chemtrade or the overall sulfuric acid industry, I do not recommend Chemtrade. But since this sector is red-hot at the moment and appealing on many levels, I decided to share the insights I’ve gleaned so far. I plan to do more research on the idea. I would advise all investors do the same.

Chris Mayer
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Skyrocketing Costs of Sulfuric Acid

Washington will be asked this week to answer allegations that subsidies amounting to 11p a litre on B99 [biodiesel with up to 1% petroleum added] exports from the US, plus “splash-and-dash” operations being conducted through the US, represent unfair competition.

The European Biodiesel Board lodged a formal complaint against the US with [the European commissioner] at the end of last month after a disastrous period for British, German and other biodiesel producers.

D1, one of the leading UK firms, announced in April that it would be closing its newly built refineries and laying off all its staff there because it could not compete against cheap US imports. Elliott Mannis, D1’s chief executive, said it was an “unbelievable situation” that Europe had sat on its hands so long and let B99 cause turmoil in a market that has opened up to huge new demand.

The case against the US will not be one-sided. Manning Feraci, of the US National Biodiesel Board, has said: “It is hypocritical for the EBB to cry foul while they benefit from a blatant trade barrier.”

Byron King in Energy and Oil is bullish on another alternative energy source: coal to liquid or CTL.

“The US will adopt CTL, because it has to do so,” says Byron. “There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for CTL.

“It is not a question of if the US will adopt CTL. It is a question of when. And looking ahead, every month is precious. As I said above, we are running out of time. So it will matter greatly how much will we as a nation fool around with our national obsession of navel-gazing over ancillary issues before we get around to making a decision to bend steel.”

“The biofuels debate is interesting from a number of angles,” says Merryn Somerset Webb in Money Week. “Firstly, it is not absolutely true to say that the commitment of land to the production of biofuels automatically reduces food production everywhere (although that hardly makes the European Union’s full-on encouragement of plant-derived fuel right).

“Supporters of biofuels tend to use the Brazilian experience as justification for the dash to plant-derived fuel alternatives, not that that country’s success should detract from the fact that there are a lot of other places where land which would otherwise have been used to grow food for human consumption has now been given over to the production of biofuel to feed machinery!

“The EU could, for example, call a halt to its pre-announced intention to derive 5.75% of petrol and diesel to be manufactured from plants, although we understand the EU’s difficulties given growing stresses in the oil market too.”

Food prices have undergone a paradigm shift and will not drop back to pre-crisis levels for at least the next 10 years, putting long-term pressure on governments facing the food crisis, according to a forthcoming report.

The report, by the Organisation for Economic Co-operation and Development and the UN’s Food and Agriculture Organisation, will say food prices have moved to a “higher plateau” because of rising demand from the biofuels industry and developing countries such as China.

Bill Bonner in The Daily Reckoning says, “Capitalism had already pronounced its verdict on corn-based fuel: it was a bad idea. Later, environmentalists came to the same conclusion; it actually caused more damage than petroleum. But the US Congress, in its majestic wisdom, saw something in ethanol that capitalists and environmentalists had missed – campaign contributions and votes!

“And so it came to be that a large portion of the US corn crop is diverted into fuel tanks. And so it comes to be that a large number of the world’s people – including Americans themselves – find their food much more expensive than it used to be.”

In this week’s Outside the Box we continue with what I mentioned a few weeks ago: agricultural needs are going to be a new and important force in the world and when coupled with energy may shift the balance of power in the world in strange a different ways.

When, as Niels points out, Afghanistan poppy farmers are shifting to wheat farming, the world is truly a different place. I think you will find the research he has done to be truly worth a few minutes of your thinking time.

And as a preface, I was reminded a little while ago that a Financial Times headline story last Friday mentioned that China is buying African farmland and building massive amounts of railroads and infrastructure to get grains to the market. I have long been bullish on African farmland. This week’s OTB will tell you why.

“There is nothing so disastrous as a rational investment policy in an irrational world,” John Maynard Keynes. You just know that something is astray when Afghan poppy growers begin to switch from opium to wheat.

According to the Independent newspaper here in the UK, that’s exactly what is now happening. I have no desire to enter into a pound for pound risk/reward analysis of producing wheat versus opium. However, the consequences of the rapid rise in energy and agricultural commodity prices are far reaching and perhaps not as well understood as they should be. That is the content of this month’s letter.

The Silent Tsunami

My story begins with Al Gore. While most of us lulled ourselves into the belief that he was onto something when he tried to convince us that global warming (or climate change, as I prefer to call it) was the most formidable challenge facing this planet, a silent tsunami¹, also known as the global food crisis, began to develop and is now threatening to undermine global political and economic stability, the latter of which has been key to the benign financial markets we have all benefited from in recent years.

According to the World Bank, just over 1 billion people live on one dollar or less per day. People in the poorest countries in the world spend 80% of their income on food. So when you and I have hardly noticed that the bread we pick up from the local bakery has doubled in price over the past year, it is because only 10-15% of our budget is spent on food items². In many emerging economies the number is much higher. Chinese consumers spend 28% of their income on food. In India it is 33%. If you want to know how much it is in your country, go to:

http://www.ers.usda.gov/briefing/cpifoodandexpenditures/data/2006table97.htm.

There are three food staples in the world today which dwarf all other food ingredients in terms of importance. They are (in alphabetical order) corn, rice and wheat. As you can see from chart 1 below, they have all experienced rapid price appreciation since last summer. What is it that has driven this price explosion and what does it mean to financial markets? As with most things in life, there is no simple explanation; a number of factors have conspired to create a situation which is exceptional but also destabilising and hence dangerous.

It Is The Bio-Fuel Policy Stupid!

The explanation given by most commentators is the bio-fuel policy currently being pursued by the Bush administration in Washington. The policy is driven by a desire to unlock the United States from its rising dependence on imported crude oil. The problem, as Bush and his government have been slow to recognise, is the stupidity of the policy in its current form. Let’s back that claim up with some hard facts.

In the United States, corn (better known as maize over there) is the primary ingredient in ethanol production although wheat and soybeans are also used. According to a recent UN report, it takes 232 kg of corn to fill an average 50 litre car tank with ethanol – enough corn to feed a child for an entire year. It is estimated that almost 20% of total US corn production will go towards ethanol this year and the number is set to rise to 45% by 2015³.

The problem with corn is that it is low on carbon hydrates, which is where the energy comes from. Instead, American ethanol producers rely heavily on fertilisers with the energy being extracted from the nitrogen in the fertiliser. This is an inefficient and very costly approach – in particular in an environment of rising energy prices because crude oil and/or natural gas are major ingredients in fertiliser production. 33,000 cubic feet of natural gas are required to produce just 1 ton of ammonia!

So what does all this mean? According to estimates from Goldman Sachs, the cost of ethanol from corn is now over $80 per barrel, it is about $145 from wheat and over $230 from soybeans. Other countries recognised this problem a long time ago and use crops with higher carbon hydrate content. In the Philippines they use coconut oil and the Brazilians use sugar cane. Goldman reckons that the cost of one barrel of ethanol based on sugar cane is about $35. So why not import sugar cane from Brazil instead of using corn? One simple answer: Brazilian farmers do not vote at American elections. Idaho farmers do.

Are Investors To Blame?

There is no question that the US bio-fuel policy which, by the way, is now being copied in other parts of the world including the EU, has to take its share of the blame. But it is by no means the only reason for the food crisis. The next culprit on my list is our very own industry – investors of all kinds. In recent years there has been rising demand for commodity-linked investment products from investors all over the world. Pension funds, hedge funds, mutual funds and private investors have all allocated more and more to commodities and, in recent months, demand growth has been explosive, as is evident from chart 2 below. It is estimated that the aggregate value of commodity-linked index funds now exceeds $200 billion, a very significant number in a not very large market.

It was the spare ribs last night… a favourite, but demanding in terms of mastication. So there I was happily munching away when suddenly… crunch! Perhaps ‘crack’ would be more accurate, as an upper molar succumbed to the pressure. At times like these it’s fortunate to have the necessary help close at hand, which is why I’m grateful my dentist lives three doors down.

Talking of dentists makes me think of something I was reading by Nassim Nicholas Taleb (a personal hero now, after only a few pages!) in his book The Black Swan. He recounts begin advised at Wharton Business School to do something scalable in his work. ‘Scalable’ meaning you could generate more income without commensurately more effort unlike, say, some professions such as dentistry. Their earnings are limited by the amount of people they can see who have broken teeth. He dismissed the advice, but wound up in an investment bank on Wall Street anyway. An investment bank must be hard to beat as a scalable business. As Taleb says, it takes as little effort to buy 100,000 shares as it does to buy 100.

But I digress. What happened this week? Well, it was something of a week where ‘past performance is not necessarily an accurate guide to future results’. UK employment levels have never been higher, yet job cuts in retail and the City are starting to mount. In the City 1,300 jobs will go from UBS and Merrill Lynch, and late on Friday Citigroup announced cuts of 9,000 staff worldwide. Home catalogue and educational supplies business Findel plc had a record year last year, but dished out a profits warning on Thursday and duly saw its shares punished.

Prime Minister Gordon Brown has been in the US. His visit coincided unfortunately with that of the Pope and he’s not Tony Blair, so he was ignored to some degree according to press reports. He’s been talking to the investment banks and asking for transparency so we can all know the worst and get on with our financially-squeezed lives. Around $250bn in subprime related losses has been disclosed, to date, from a total estimated by the IMF and others to be in the region of $1trn.

The unfolding impact of the credit squeeze has seen three-quarters of the mortgage deals available last summer withdrawn, according to the Daily Mail, though mortgage lending rose 5% in March over February. It is also expected to see a huge rights issue announced next week from Britain’s second largest bank, RBS. It is thought £10bn will be asked of shareholders. A sum approaching a third of its market value.

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Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

Gold remains popular as a hedge against bubbling global cost-push inflation driven by ever higher commodity prices and dollar weakness. It traded at $935 late on Friday. Food shortages continue amid panic breaking out among importing nations such as the Philippines and Bangladesh who are struggling to secure necessary supplies. One in the eye for Ricardian economics of specialisation and competitive advantage. These nations if they have any sense will want to be self-sufficient in future. Rice hit a record $1,000 a tonne. Wheat, maize (corn), soybean etc. are similar stories of higher prices. With maize (corn) it has US biofuel demand helping it along.

On the currency markets, the dollar is weak and so is the pound, except against the dollar. The euro continues to strengthen and inflation ticking up to 3.6% will dampen hopes for an interest rate cut and do little to weaken it in the short term.

Finally, there is no sermon from Peter this week as he is away on a well-earned break. Okay, gotta run. The dentist’s chair awaits. Oh joy.

Enjoy your week-end.

Regards,

Rob Mackrill
The Daily Reckoning