OT: Ethanol Investors?

Our area ethanol plant just had another equity drive, and raised 95 million dollars within 3 days by selling shares at $2 each to local investors.

Since their initial startup equity drive in 2001, they report investors have earned 200% in dividends on their money, and shares have split 18 to 1.

From an outsider's viewpoint, this certainly looks like where we should be putting our money. What do you think, can the ethanol boom continue? Or does every boom end in a "poof", as some suggest?

Our county is looking into putting one up - there goes my tax dollars - 2 hours away from the nearest pipeline.

These out-in-the-middle-of-nowhere plants could barely make it when there were only a few of them. Now that everyone and their sister are putting them up, it's best to sit on the sidelines.

Jay

Wil

Some problems with ethanol economics:

1. Currently, ethanol production is heavily subsidized by a 52 cent per gallon tax credit paid to gasoline producers who add it to gasoline. Take away the tax credit and the economics change significantly. And Congress will have a hard time justifying the tax credit when ethanol production is a thousand times what it is today.

2. Ethanol, unlike petroleum, is generally only shipped by truck. This makes it uneconomical to transport large amounts of ethanol long distances, at least until there is enough demand for ethanol to justify building a pipline infrastructure for ethanol.

3. One reason ethanol is reasonably cheap to produce is that corn is, for all intents and purposes, free. However, the same conditions that will increase ethanol demand (namely high fuel prices) will also drive up the price of corn. This is likely to put the squeeze on ethanol producers who will be faced by high grain prices on one side and price competition from other producers on the other side.

Like most other new industries, there will be a few companies who make big profits early on, while in the end most will be absorbed or put out of business by the big producers.

1. I have seen stations that use 10% ethanol use it when they did not have to just to get the kick back. 10% ethanol raises the octane of gas 2 points so if you use 90% straight regular unleaded and 10% ethanol you get 89 octane. I have seen this 89 octane gas sold out of the 87 octane pump just for the kick back.

2. You can include rail with this but still a lot more than if a pipe line was in place.

3. I wonder how much everyone will love ethanol when a can of corn or all the food products made or grown with corn doubles in price. This goes even further because if I can grow field corn and sell to a ethanol plant then I will stop growing beans ect and every food product will go up.

Thanks for your feedback. Yes, you're right: I should have said "truck or rail". And rail transportation is generally cheaper than truck, but still much more expensive than a pipeline.

As far as farmers switching to other crops, it is reasonable to question whether or not growing corn for ethanol is a wise use of our farmland. But that's another argument.