Monday, April 28, 2008

States, CEO's Beginning to Snap Back at Ethanol - the "Administration" Holds Firm

This is going to shape up to be a heck of a battle - I've outlined in the past that I do believe *if* a scenario of rampant inflation overtakes the globe and my "World of Shortages" scenarios continue to play on (which it will; it's just a matter of how quickly and to what degree), the ethanol subsidy boondoggle will be at risk. [Potash Hits $1000 on the Spot Market]

If Western governments have any moral backbone they will at least jawbone pulling biofuel subsidies... this would cause backlash reaction in fertilizer even though biofuels are just a small piece of the puzzle. (again this is a minor risk at this point, especially with US elections coming but maybe Europe will react first?) While the biofuel situation is not the major driving factor of agflation that does not matter - perception is everything and go back to point (b) a lot of new investors to a hot sector who know little about the long term situation and just are going by sound bites "rice riots" "fertilizer is hot" "Neil Cavuto even likes fertilizer" - they will panic.

But, it appears it's going to take a lot to get politicians away from the trough that is Midwestern farmer votes. Perhaps I am a cynic, but I think it's going to have to take months upon months of widespread death (via starvation) reported in the 2nd/3rd world and a 5+ governments to fall.... Haiti was just the first but they've been unstable since the dawn of the country. Anything less than this type of catastrophe and I believe Western governments will go along their merry way, ignoring the global pleas for help. (and of course biofuels are not the sole cause but it is the most easily reversed cause for this food crisis). Specific to the US, at least for the term of this presidency, I expect a similar situation as it happening in solar - individual states taking up the reigns and trying to be progressive as the Federal government lives in its own universe. Another trigger will be the working poor in the US revolting - that will hit state governments first since they are in direct line of fire of said people. As I outlined in January (before food inflation was sexy), food banks are being completely crushed [Jan 18: One Lonely Voice Agrees with me on Food Inflation] so the only 'corrective action' most likely will appear from the grassroots up. Missouri & Texas seems to have jumped on the bandwagon already.....Tyson Food's (TSN) CEO is also quite peeved. A McCain presidency would also be a fast track to this retraction as he has been the only candidate to walk into Iowa and say "this is ludicrous" (maybe Ron Paul did as well, but I have not read about it)

Again, I have 3 themes for the food crisis: agflation, social strife, and "food protectionism" between countries. Social strife is the last step and we are now entering that stage. If food prices, after a "strong dollar" pullback, do rebound later this year ....and simply repeat 50% of this year's inflation next year - it's going to make the current global strife look like a walk in the park.
  • Missouri is considering rolling back a mandate supporting ethanol production amid growing outrage over rising prices for food and livestock feed. It was less than four months ago that ethanol supporters were celebrating the implementation of a Missouri law requiring gasoline sold throughout the state contain 10 percent ethanol. The law, passed in 2006, took effect January 1.
  • But now, in the face of growing criticism of the nation's ethanol-friendly policies, Missouri may be among the first to back away from ethanol supports.
  • Critics say federal subsidies and programs such as Missouri's, which encourage corn-based ethanol production, have reduced corn stocks available for food and livestock feed and contributed to skyrocketing prices that are hurting consumers.
  • "There certainly are some questions on the ethanol issue that I believe we didn't delve into deep enough," said Neal St. Onge, a Republican Missouri state representative who chairs the house transportation committee. (shocker, politicians not thinking of long term implications ... stop the presses)
  • The moves in Missouri come as Texas Gov. Rick Perry is asking the U.S. Environmental Protection Agency for a 50 percent waiver of the mandate for grain-based ethanol production.
  • Missouri Corn Growers Association Chief Executive Gary Marshall said ethanol production was only a small factor in food price increases, and the corporate oil industry was to blame for the scare tying ethanol production to rising food prices. "It is a nice use of smoke and mirrors. The major oil companies see ethanol as a threat to their profits," Marshall said. "They can put as much oil money as they want to into this and create a big fight ... we're fighting it tooth and nail." (blame big oil, Uncle Ben skates free)
  • Last week, Agriculture Secretary Ed Schafer said about 25 percent of the nation's corn went into ethanol and said that the forces driving rising prices in corn and other commodities had more to do with high energy costs, increased consumption around the world and weather-related production problems. He said aside from some small reductions in subsidies in a new farm bill, the administration was not planning to alter its support for ethanol production. (Federal government response -> What's all the fuss about?)
Tyson's CEO...
  • The call from the head of Tyson Foods Inc. (TSN) for most ethanol subsidies to be swept away promises to re-ignite the food-versus-fuel debate among U.S. agribusiness companies. Dick Bond, Tyson's president and chief executive, said on an earnings call Monday that Congress should reduce or drop a federal tax subsidy and end import tariffs on sugar-based ethanol.
  • His stance has been rejected by the major players in the renewable fuel sector, such as Archer Daniels Midland Co. (ADM), the largest U.S. ethanol producer by volume
  • "Diverting corn to make ethanol doesn't make sense," said Bond on a conference call with analysts Monday as the company reported a quarterly loss. He warned that upward pressure on food prices "would get much worse," with 30% of U.S. corn production this year expected to be used for ethanol production.
  • The Renewable Fuel Association (not a biased organization at all), or RFA, the industry's main lobby group, has said efforts to blame ethanol production for rising food prices are "flat-out wrong". "The production and use of ethanol, while increasing demand for corn, is not contributing significantly to food price escalation," said RFA President Bob Dineen in a statement responding to Perry's remarks. "It is, however, helping to keep and oil prices lower than they might otherwise be." (oh excellent! So oil would be $150 if not for ethanol. Gee thanks. The scary thing is I bet they really believe it - meanwhile one of the main culprits Uncle Ben gets off easy again)
This corporate on corporate warfare - how intriguing. May he who has the biggest lobbyist arm win.

Now we await the smoke and mirrors CNBC commentary at 2:15 PM Wednesday about how the Fed is now moving into inflation fighting mode because it put "strong" language in it's statement (laughable). So as the Fed keeps rates at these ultra low levels through November 2008... that's how they are going to "fight inflation". Luckily for all of us, in "6 months" the economy will be booming so when the Federal Reserve begins increasing rates it will be fine - I mean it would cause havoc to raise rates in a stagnant economy, right Mr 1979, Mr 1980, Mr 1981?

No position other than shaking head sadly watching all the hyperbole and misinformation being passed around

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