INVESTING: How ethanol mania is making a mess of the corn market

For the last 30 years, politicians from farm-heavy states like Indiana have been pushing for a massive increase in the production of ethanol. As oil prices began to kick up earlier this decade, their long lobbying efforts started to make some sense.

Eighteen months
ago, I highlighted Archer Daniels Midland as a company to play this move, and the stock went from $21 to $44 in a little more than a year. In the last 12 months, there have been a slew of announcements about new ethanol plants being built in Indiana and other parts of the country. It’s a fullcourt press to bring ethanol to the masses.

True to form, when politicians try to trump the free market, things get out of whack.

People all over Mexico are struggling to pay for the corn tortillas that make up a huge portion of their daily diet. The main ingredient, corn, is being bought up at higher prices to fill those ethanol plants.

In three years, when all the ethanol plants are completed, Indiana farmers may not have enough corn to support those plants, and we grow a lot of corn here! We have other uses here that will need to be addressed. What, for example, are we going to feed the pigs?

When I wrote about Archer Daniels, I liked the idea of ethanol. (I was probably just enamored with the idea of making good money on a stock!) But the science is not bearing out the promised benefits. Oil would have to go well above $100 a
barrel for it to possibly make sense, and with the black gold sitting slightly over $53, the ethanol pitch really falls apart. But this is now a government-backed movement, which means the problem will only get worse.

In a Bloomberg article I recently read on the tortilla problem, I learned that the Mexican government is on the path to making the problem worse through direct market interference.

There is a price cap for retailers on tortillas, with retailers agreeing to sell them for 8.5 pesos a kilo, which is 2 pesos below current market rates. Of course, it won’t be long before the entire country runs out of tortillas, because the international corn market simply won’t go along with Mexico’s price controls. Farmers are getting higher prices selling to ethanol plants in Indiana, so that’s exactly where the corn will end up.

In the spirit of this column, I did come
up with a slam-dunk investment idea in the midst of this corn situation. The Mexican government owns 22,000 stores that sell tortillas, and they are selling them for 3.5 pesos a kilo. The largest baker in the country is selling them for 8.5. We should pay people to wait in lines at the government stores (if there are not lines now, there will be soon) and buy as many kilos as they are allowed. Then we can pay them to stand outside the private bakery stores and resell them for 7 pesos. We double our money!

By the way, American investors will soon be able to buy investment baskets of ag-based products like corn and soybeans. These exchange-traded funds will be appearing on a number of exchanges in a few months.