CSX (CSX) Benefiting from Grains, Ethanol, and Export Coal

As we mentioned earlier a lot of people are misreading the strength in the railroads for an imminent uptick in the economy and/or that the economy is far better than the "media" portrays. In fact, the reality is the few things we have left to export are a boon to CSX (grains, coal), and the boondoggle that is ethanol is providing the rest of the upside. Tonight's report confirms this. I usually don't focus on the rails but it simply is a confirmation of all the themes we've been behind.... and thank god for export markets or this economy would be imploding...

• U.S. railroad CSX Corp (CSX) reported a better-than-expected profit on Tuesday, citing strong pricing, fuel surcharges and growth in shipments of coal for export and ethanol, despite a slowdown in the automotive and housing sectors.
• Like the other U.S. railroads, CSX has managed to maintain strong profits, despite falling freight volumes over the past few quarters, thanks to strong pricing. The question posed by some analysts is how long the railroads can continue to deliver such strong results in the face of a possible U.S. recession.
• Apart from coal and ethanol shipments, CSX said grain shipments were up and described the industrial economy as "stable."

I do have to say for the first time I am wondering out loud, despite the incredibly powerful farm lobby, if potential scenes of social unrest and rioting and reports of deaths from starvation will shake the US and Europeans insistence on "food for fuel" instead of "food for food". If it does change, it won't come easy but if things degrade over a period of months into even worse shape than they are now, I would imagine the public pressure worldwide would be immense. Granted, maybe Iowa voters are even more powerful heading into this November but "Iowa voters" versus "poor worldwide perishing" is an easy call if you take out the politics of it all. This could be a potential risk to the fertilizer story, if not in reality (ethanol is only a minor part of the story) but simply in perception. However, I doubt any changes would happen unless widespread deaths were being reported and multiple 3rd world governments fell... lining the pockets of politicians is job #1 so it will take cataclysmic events for that to change. So any changes to our boondoggle policy would be a long time coming, but the first fingers are being pointed as we speak as the Western world wakes up to the problems I've been typing about for quite a while.

• The idea of turning farms into fuel plants seemed, for a time, like one of the answers to high global oil prices and supply worries. That strategy seemed to reach a high point last year when Congress mandated a fivefold increase in the use of biofuels.
• But now a reaction is building against policies in the United States and Europe to promote ethanol and similar fuels, with political leaders from poor countries contending that these fuels are driving up food prices and starving poor people. Biofuels are fast becoming a new flash point in global diplomacy, putting pressure on Western politicians to reconsider their policies, even as they argue that biofuels are only one factor in the seemingly inexorable rise in food prices.
• Many specialists in food policy consider government mandates for biofuels to be ill advised, agreeing that the diversion of crops like corn into fuel production has contributed to the higher prices. But other factors have played big roles, including droughts that have limited output and rapid global economic growth that has created higher demand for food.
• Ethanol supporters maintain that any increase caused by biofuels is relatively small and that energy costs and soaring demand for meat in developing countries have had a greater impact. “There’s no question that they are a factor, but they are really a smaller factor than other things that are driving up prices,” said Ron Litterer, an Iowa farmer who is president of the National Corn Growers Association. (no bias of course) :)
• Senator Charles E. Grassley, Republican of Iowa, called the recent criticism of ethanol by foreign officials “a big joke.” (again, no bias whatsoever) He questioned why they were not also blaming a drought in Australia that reduced the wheat crop and the growing demand for meat in China and India.
• The senator’s comments reflect a political reality in Washington that despite the criticism from abroad, support for ethanol remains solid
• Representative Jim McGovern says “If there was a secret vote, there is a pretty large number of people who would like to reassess what we are doing,” he said. (see, when it's secret there is no political backlash from voters... it's all about the votes...)
• Bush's spokeswoman, Dana M. Perino, said the president had urged officials to look for additional ways to help poor nations combat food insecurity and to come up with a long-term plan “that helps take care of the world’s poor and hungry.”
• A fifth of the nation’s corn crop is now used to brew ethanol for motor fuel, and as farmers have planted more corn, they have cut acreage of other crops, particularly soybeans. That, in turn, has contributed to a global shortfall of cooking oil. (unintended consequences strikes again - but definitely an investing theme)
• Europe’s well-meaning rush to biofuels, the scientists concluded, had created a variety of harmful ripple effects, including deforestation in Southeast Asia and higher prices for grain.
• “Ethanol is the one thing we can do something about,” he said. “It’s about the only lever we have to pull, but none of the politicians have the courage to pull the lever.”

So much like the Federal Reserve with its policy of "crossing our fingers and hoping" that inflation will dissipate as the US economy slows, let's do the same "hope" policy in regards to this summer's weather in the US and Russian (and satellite states), so the two main exporters of crops don't suffer supply disruptions - because instead of action, hope & finger crossing is usually the best solution!

As an aside, Intel (INTC) reported "in line" which in this skittish market is enough to drive the whole stock market up. Again, the mood swings will switch daily as we absorb one set of numbers versus another. I assume the fictional CPI inflation report tomorrow morning will be tossed aside (hey if you don't eat or use energy, inflation is nil!) and the Intel news will be what the bulls will cling to. Again, it was nothing special and Intel is yet another multinational who can use international strength to offset US weakness but any shred of good news will be enough of an excuse to tell us everything is fine, and just look out 6 months when the economy is back to boom times. And then the bears will come out 24 hours later, and then the bulls... and then... well it's going to be like a ping pong game.

Long Powershares DB Agriculture Fund in fund; no personal position