Ethanol Waste
Research for Online Investors

by John Dalt

11/19/09

Two years ago, investors couldn’t get enough of ethanol stocks.  Congress passed legislation in 2005, mandating 7.5 billion gallons of ethanol use by 2012  Ethanol was seen as a replacement for MTBE in motor fuels, with the side benefit of replacing imported crude oil and supporting domestic corn prices.

The Energy Independence and Security Act of 2007 increased the requirements for annual renewable fuel use to 15.2 billion gallons by 2012, of which 13.2 is expected to be corn based ethanol.   At present, there is enough existing (or under construction) production capacity to supply 10% fuel ethanol into every gallon of U.S. gasoline.

As corn prices increased during the first half of 2008, many ethanol operators hedged their future purchases to ‘lock in’ the price, fearful of the price continuing to rise.  The price of corn has moved lower since the middle of 2008, punishing the holders of these futures contracts.

By the beginning of 2009, ethanol production was 170 thousand barrels per day greater than demand.  Mix oversupply with ‘locked in’ higher prices for feedstock, lower gasoline prices, and declining gasoline sales volume and the problems for the ethanol industry are obvious.

Many plants have been idled, and some sought bankruptcy.  One of the largest, VeraSun, has been sold by the courts.  Valero purchased seven plants for $477 million, about 30% of the construction cost.   The trustee threw in one plant in development.  Other VeraSun plants were parceled out to different buyers.

Ethanol producers may become an attractive investment in the future.  Producer costs will be lower due to consolidation, and gasoline prices are slowly moving higher as crude oil prices increase.  Write down on your calendar to research ethanol producers next April.  This will be in time to get in front of the summer driving season.  I will make a note, and bring you our best ideas.

The Energy Information Administration (EIA) is the resource used for our coverage on ethanol, you can read more at their weekly report.

I was looking at the crude oil trade yesterday.  We still haven’t hit 52-week highs.   We will shortly, as the calendar works its way down the oil price slide in the fall 2008.  I smiled looking at the chart, because I was on the wrong side of the trade last year.   I kept entering on dips for the next leg up, finally giving up when crude broke below 100, I may be a slow learner, but if you hit me over the head enough it will sink in.

Crude oil inventories declined 900 thousand barrels last week.  This decline was against reduced purchases by refineries, as refinery inputs have been declining for the last four weeks.  Refineries are currently buying 5.2% less crude oil than last year.

Gasoline inventory dropped 1.7 million barrels since last week, but is 5.3% above last year’s levels.  Retail gasoline prices fell 3.7 cents per gallon.  Distillate (diesel fuel & heating oil) inventories shrank 300 thousand barrels.

Except for the continued inventory bulge in distillates, the crude oil market is coming in line with demand.  Imports are averaging 1.36 million barrels per day less than last year.  Domestic production has increased 573 million barrels in the last year, primarily due to off shore platforms in the Gulf of Mexico.

I am thinking about t-shirts. Everybody ought to have a t-shirt that says Maobamo on the front with a nice picture, but I need a good idea for the caption underneath. Can you help me? I am going to put something about galstock.com on the back, maybe with Plato’s quote. What do you think? Put your thinking cap on and come up with a great caption, it should be something that is appropriate in front of small children or grandmothers.  I like this picture:

This or put his face on a Che Guevara pose.
They are all commies, I can't tell 'em apart.

To the Mailbag:
“Maybe they are pumping helium into it (real estate) for all I know. Where does it all go? I wish I could say my govt really had my back but I don’t believe it does. My guess is it all goes down hard and rebounds like some horror creature from the terminator who cannot be killed.”---paid up subscriber S.C.

We will continue to monitor and bring you ideas to protect your assets.---John Dalt

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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