William Larsen

Buy puts on ethanol plants

Senator Lugar, Congressman Souder and Govenor Danials all need a course in physics, math and economics when it comes to energy. All of them support ethanol, yet I doubt they have the slightest idea what is actually involved.

Corn prices have risen dramatically this year. As of today, they were $3.90 a bushel. Does not sound like much, but considering you get 1.5 to 2.0 gallons of ethanol from a bushel, it means a great deal. At 1.5 gallons per bushel the raw material cost excluding energy is $2.60 a gallon; at 2 gallons per bushel the cost drops to $1.95. This excludes the nearly 100,000 Btu’s per gallon needed to grow, transport and distill the ethanol.

On top of this ethanol has 73,000 Btu’s v. unleaded gas’s 123,000 Btu energy content. In simple terms, gas milage drops dramatically. Have you noticed how other farm crop prices are rising as more acerage is converted to corn? We are being hosed. We subsidize each gallon of ethanol at the tune of 52 cents! We then pay more for meat, vegetables as down stream users pay more for corn or supply v demand causes prices to increase.

Car companies would be foolish to convert to E-85 as would building more ethanol plants. What happens when the price of corn reaches $5 a bushel? Who is going to be willing to pay $3.50 for E-85 when gas is under $3? As I understand it, famers have sold long term options to buy their corn. The farmer who has done this is not getting $3.90, but closer to $2.25. When all these options expire, be prepared for a huge price increase in E-85.

The markets should be allowed to dictate price, not government. We need to eliminate all tax subsidies in the production of Ethanol and let it survive or die based on its merits, not the wims of politicians. Eliminate the tax subsidy and restore the economic balance. Maybe the only way to make money in Ethanol is to buy ethanol puts?

posted by William Larsen @ 6:36 PM