Soon time to get contrarian on ethanol

Posted by: Aaron Pressman on October 1, 2007

We tried to tell you last year, we really did. Ethanol plants may or may not be an important piece of our future energy policy but they’re a rotten investment. I even gave you my best David Letterman impersonation with a top 10 signs that an ethanol bubble was inflating.

Since then, the S&P 500 has gained 17% while hot shot ethanol producers have dropped like a drought-ravaged corn cropin the Kansas sun. Pacific Ethanol (Symbol: PEIX) is down 70% since the end of last April and Green Plains Renewable Energy (GPRE) has dropped 76%, according to Google Finance. The Andersons (ANDE), a more diversified biz, is up 4%. And now suddenly, it’s front page news in the New York Times and the Wall Street Journal.

“Ethanol’s frenzied growth over the past year is coming to a halt — at least for now,” the Journal says at the opening of today’s story. “The price of ethanol has fallen by 30% over the past few months as a glut of the corn-based fuel looms, while the price of ethanol’s primary component, corn, had risen. That is squeezing ethanol companies’ profits and pushing some ethanol plants to the brink of bankruptcy.”

“The end of the ethanol boom is possibly in sight and may already be here,” Neil E. Harl, tells the Times in yesterday’s paper. “This is a dangerous time for people who are making investments,” says the economics professor emeritus at Iowa State University who lectures on ethanol and is a consultant for producers.

In the past, I’ve compared this to the telecom and power generation investing bubbles at the turn of the century. When both of those bubbles popped, most investors ran. Savvy folk, like mutual fund manager John Schneider, picked up the strongest survivors at super-discount prices. When the major media finally gets on to a story like the ethanol bubble, it’s time to start thinking about making contrarian investments. As both of the stories I mentioned above allude to, there could be a winnowing out process now that would put the industry on a healthier foundation. That means it’s a good time to start monitoring the new buy lists of successful fund managers to see who thinks the ethanol cycle has bottomed. After all, what could be a better target for piggyback investing than down on the farm?

Reader Comments

Walter Thatcher

October 2, 2007 8:09 PM

I agree that the ethanol boom is just about over. Most likely it isn't dead alltogether. Cellulosic ethanol still has tremendous potential and could become viable in the next decade. Furthermore, biofuel is still very much alive. Keep an eye of butanol.

Michael Oren

October 3, 2007 6:17 PM

It should be gratifying that thermodynamics might be vindicated. Using more energy to produce less energy duh! There is no perpetual motion in the chemistry realm either!

I suppose that there will be lots of extra feed for hog production. Now that would be makin' bacon.

Sarah

October 3, 2007 10:01 PM

If this Ethanol plant is built in the town of Mayfield, I believe that you should buy a home right next to the proposed plant, and live there!!! .... OK, maybe a bit unrealistic, but... Why would u honestly want to place an Ethanol plant in our town, right across the street from our Elementary School!! Have you no heart, is it all for the money? I am not against the Ethanol plant, but very opposed to the plants future site, located right across the street from the school and in the populated area. Come on now, you have lots of land, why cant you put it up in the country, someplace were it is not populated. Why must u do this to us????????


Thank you for your time....
Sarah
a concerned Mayfield Resident and Mother!

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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