Monday, January 29, 2007
Congress' Ethanol FUBAR?
So Congress in its wisdom has put on large ethanol mandates & subsidies & protective tariffs, causing huge corn demand. Corn has run from the lower $2 level to over $4. The all-time high for corn is around $5.50 in the summer of 1996 (some cash markets hit $6). Corn stockpiles are tight as last year's crop was hurt by drought. So a BIG 2007 crop is necessary - farmers are expected to expand acreage significantly. Let's do a "gedanken" experiment. Suppose we get a cold, wet spring and planting of this big crop is delayed, or maybe even some planned acreage expansion doesn't occur. And suppose this late crop gets hit by major heat in the crucial pollination phase in late July (late crop pollination period gets pushed into late July-early August heat) and has trouble. Some good forecasters see a long, hot summer. How high can corn go? Well, $5.50 would be easy - I figure $10 might get hit. What would happen? Corn is a crucial element in the food chain affecting meat, pork, chicken, sweeteners, cereals, etc. Massive press coverage would be shrill, that's for sure. The "blame-sters" would be out in force. [I have long corn & deferred livestock futures positions I am trading around, plus DE common stock I expect to hold awhile.] [PS: Writing this column made me realize I needed a way to make more if this scenario is realized - I bought some December Corn calls way, way out of the money.]