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Mad Hedge Fund Trader

Mad Hedge Fund Trader

John Thomas, The Mad Hedge Fund Trader is one of today's most successful Hedge Fund Managers and a 40 year veteran of the financial markets.…

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The Future Looks Great for the Ethanol Boondoggle

The Future Looks Great for the Ethanol Boondoggle

One of my biggest disappointments with President Obama so far is his continued support of the ethanol boondoggle.

The program was ramped up by the Bush administration to achieve energy independence by subsidizing the production of alcohol from domestically grown corn. Add clean burning moonshine (yes, it’s the same alcohol—C2H5OH), whose combustion products are carbon dioxide (CO2) and water (H2O), to gasoline and emissions also go down.

The irony is that if you include all the upstream and downstream inputs, the process consumes far more energy than it produces. It also demands massive quantities of fresh water, which someday will become more valuable than the oil the ethanol is supposed to replace, turning it into toxic waste.

Few consumers are aware of how big the ethanol industry has grown in such a short period. Ethanol consumption of corn (CORN) has soared from 1.6 billion bushels in 2006 to an anticipated 4.3 billion bushels this year. Ethanol’s share of our total corn crop has skyrocketed from 14% to 33% during the same period. Corn grown for ethanol now occupies 10% of the total arable land in the US!

Ethanol’s impact on food prices has been huge. It is the sole reason why corn is trading at the $3 handle, instead of $2, and soybeans is trading at $10, instead of $4. You also have to add in the inflationary effects on downstream grain consumers, like the food manufacturers and the cattle industry. While spendthrift, obese Americans burn food so they can drive chrome wheeled black Hummers to Wal-Mart, much of Africa and Asia starve. A global food crisis will be the major international political issue of the next decade.

This ignores the reality that Brazil, the world’s largest ethanol producer, can ferment all the ethanol it wants at one third our cost because they make it from much more efficient sugarcane, which has five times the caloric content of corn. They also have ideal weather. However, protective import quotas and tariffs prevent meaningful quantities of foreign ethanol imports.

Bush financed all of this wasteful pork, because Iowa has an early primary, giving it an outsized influence in selecting presidential candidates, and has two crucial Senate seats as well. Well, it turns out that Obama needs Iowa even more than Bush, where the Democrats are ahead 3-2 in the House, and have a tie in the Senate (1-1), so the ethanol program not only lives on, it is prospering.

Ethanol has become such of big industry that it now commands a fairly large footprint in Washington, fielding armies of lobbyists to keep the subsidies and tax breaks flowing from the appropriate agricultural committees. When you hear people complain about corruption in Washington, this is a classic example. The problem for the rest of this is that once these lobbies become entrenched they are almost impossible to get rid of. Think of an advanced case of scabies. Remember the tobacco lobby?

Shame, and double shame. I say better to drink ethanol than burn it, and damn the hangovers!

By. Mad Hedge Fund Trader




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Leave a comment
  • Anonymous on August 01 2010 said:
    Personally I have no doubt that some ethanol production makes sense in e.g. the U.S. The question is how much. And if it doesn't make sense now it might in the future when more suitable inputs are available. Some difficult but important economics needs to be done here, because when the international macro economy is put in order, the price of conventional motor fuel could make motorists very sad.
  • Anonymous on August 02 2010 said:
    Has anyone done any fact checking about generalized statements like this?Let's start on the consumption of corn for the production of ethanol. Corn isn't actually used to make ethanol, just some of the starches from the corn is. It's used to grow the yeast which makes the ethanol. The corn which is used was never intended for human consumption and for all purposes is inedible. Every ounce of corn that passes through an ethanol plant is then taken back out again and sold back to farmers to feed cattle and other live stock at a reduced price, compared to normal feed corn. It's actually healthier for cattle too.Ethanol plants use a lot of water in their process, but nearly all of it is recycled countless times through their system. the only water byproduct i have seen from any plant is steam. It goes through an incredible process of filtering before it is released. I really have to question where you have got your information for this article. General news rumor mill?
  • Anonymous on August 07 2010 said:
    Personally, I'd rather subsidize corn growers than drill oil in the gulf or fight wars in the middle east anyday.

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