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Top 10 signs of an inflating ethanol bubble


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May 09, 2006

Top 10 signs of an inflating ethanol bubble

Aaron Pressman

With tongue at least partly in cheek, I found it all too easy to come up with the top 10 reasons you know that an investment bubble is inflating around ethanol production. When the VCs who funded the dotcom bubble and telecom bubble hook up with the bankers who funded the independent power generation bubble, watch out.

10. Small cap companies start changing their names to add the word “ethanol” (Mems USA is becoming Convergence Ethanol).

9. Even investment bankers promoting ethanol admit the barriers to entry for building new ethanol plants are “scarily low.”

8. Ethanol company hires guy who helped build too many power plants to help build too many ethanol plants.

7. Hedge funds start adding the word “ethanol” to their name.

6. Dateline NBC says ethanol is going to “put the fossil in fossil fuels.”

5. 60 Minutes says people in Iowa are calling corn “green gold.”

4. Rick Wagoner says GM has been working on ethanol for “a long, long time.”

3. After one company does a hot IPO, two more companies quickly file to go public.

2. Profit margins on ethanol are at an all-time high.

1. George Bush’s lips are moving.

All we need now is a Time magazine cover story and a Paul Allen investment and it's confirmed. For a more serious review of the issue, check out the story that BW colleague Chris Palmeri and I wrote in this week's magazine.

03:50 PM

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It will be interesting to see how far the so called bubble takes us. Thus far, those who bought ethanol related stocks in the last week are already up 10%. Let the bubble keep building. Its got some ways to go.

-- Faisal Laljee

Posted by: stocksandblogs.com at May 11, 2006 05:22 AM

Didn't Bill Gates ALREADY (recently) invest in a ethanol producer?

Posted by: R Olliges at May 11, 2006 04:51 PM

Yes, he did. Pacific Ethanol, I believe.

Posted by: John Lange at May 12, 2006 05:08 AM

yep, Bill Gates was originally mentioned in our magazine story but must have been cut. And he's hardly alone. The point/joke of mentioning Paul Allen is the guy's lead-handed touch for picking dog investments. Here's what the Oracle of Omaha had to say about ethanol investing (via Tom Brown's Bankstocks.com site):

What do you think of investing in ethanol?

WB: Charlie and I don’t know enough to figure out what the return on capital of an ethanol-related investment might be over the next 5 or 10 years. It’s easier to predict how many people will be drinking Coke or eating candy. I don’t know anything about the government regulation of ethanol production and use and how that might change. But I know it’s easy to raise money for ethanol-related investments lately. It’s a hot area. That’s usually not a good sign. My son is the head of the ethanol board for the state of Nebraska. If he starts getting richer than I am, then I’ll be interested. There’s no question interest in ethanol will grow. But ag processing businesses tend to have low returns on capital. I don’t see how you gain a big competitive advantage.

Posted by: Aaron Pressman at May 12, 2006 02:24 PM

America's love for ethanol pre-dates the 1973 Arab oil embargo, but it was that event and others that gave ethanol the fuel it needed to grow into a national political issue. Forecasts of $4/gal. of gasoline in the early 1980s furthered the idea that ethanol made sense — Credit even if it did cost twice as much to make as its fossil-based counterpart

Suisse

Posted by: Gerard Rotonda at May 21, 2006 11:51 AM

Not too fast!

It will get there but there are still a lot of hurdles to surmount to make it full scale.

The oil-producing nations will not make it that easy ...

Posted by: filipino360.wordpress.com at May 28, 2006 09:39 PM

Well I understand that history is usually a good indicator of oil pricing. However the current oil pricing is being driven by war and uncertainty. With the possibility of the oil producing companies switching to the euro is another indicator we have not seen before. I believe if we the USA do not switch over to ethanol, then it become the beginning of our demise. Saddam was going to change his pricing to the Euro. Venezula was about to and now Iran is threatening the same thing. Syria already has already changed over to the Euro. But you heard nothing of this in our news here in America. Face it America does not have the squeaky clean image we think we have in other places in the world. the way the Bush admin. is running we are only becoming more isolated.

Think about it the only countries that were against us going into Iraq were the countries who had arranged huge oil contracts with Saddam I.E. China, Germany and Russia.

So it is time we end our dependence on foriegn oil and grow our own. There are so many benefits to doing this. we create valuable profits for farmers and creation of new plants to process this fuel, that means jobs that would have to stay here in America, wow imagine that.Brazil is making it work so why can't we? That is the indicator we should be looking at when trying to figure if ethanol is a viable alternative.

Posted by: Daniel Carter at June 8, 2006 01:18 AM

While looking at possibilities to invest in ethanol plants I came upon your site. The first thing I realized is that you are a Bush hater and you have no faith in American ingenuity. I'm sick and tired of expert like you who have little faith or trust in America. If you were born 120 hundred years earlier you would have said "you cannot beat the efficiency of my horse". Ethanol is a fuel that can be GROWN EVERY SINGLE YEAR WITH NO END. Another thing you may or may not know is that in South Dakota there are thousands and thousands of acres not being farmed due to a government program called CRP. There are many acres of tillable land for crops. Have faith in America and don't be afraid of change.

Posted by: jim butler at July 9, 2006 08:57 PM

Jim,

Sorry if this item, which was meant to be humorous, offended your sensibilities. I think people across the political spectrum have a few problems with the President's veracity.

I have written previously and more seriously about why ethanol, perhaps a good idea for the environment or energy policy, is not a good investment at this time. Profits based on extremes in two different commodity cycles, an expiring tax break, a trade tarriff also being questioned and a business which has no barriers to entry whatsoever doesn't seem like a good bet to me, but you may have a different view.

You don't have to go back very far to find the exact same situation playing out. In the last 10 years, Congress changed laws related to telecommunications and electrical power making new incentives for new investment. Both industries ended up in huge busts with dozens of bankruptcies and tens of billions of dollars washed down the drain. The losses weren't because the laws or the policy were bad. Simply too many people and too much money overwhelmed the real opportunities. I see the same thing happening again.

Posted by: Aaron Pressman at July 10, 2006 07:45 AM


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