Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 0
I am not sure it is sound to invest in any of the ethanol stocks, as I think there are an additional set of risks that are not yet built into the share price:

One issue is that if we converted all the corn on the United States into ethanol, it really wouldn't put much of a dent in the total fuel needs of the nation. Also, land that could be used for food production is then used to grow corn for fuel, whereas fossil fuel development is already in place and rarely takes up land that has rich soil. Another issue is transpiration; corn uses up really large amounts of water; something on the order of 90% of the water used on to grow corn exits the plant and goes into the air. The cost of watering and maintaining this crop is one of the reasons that the U.S. government subsidizes it so heavily, and of course the tax payer ultimately picks up the tab on that one, so now you'll pay twice for your fuel without even knowing it - at least as first.

Another problem is the carbon footprint of ethanol is not much better than oil, and the other toxic emissions from fossil fuels are replaced by ozone, which is great in the upper atmosphere but dangerous for the lungs at ground level. I am concerned that the GOP party, with such strong ties to big oil, will pull the rug out from under ethanol developers in the not too distant future by plastering these unflattering tidbits allover the news, and then the search for something cleaner will cause the money in ethanol to dry up quickly. It would be really easy to do, and unfortunately, if I were a CEO of Exxon or the like, I would almost owe it to my shareholders to sink this ship. It already appears that wind farms make far more sense, and I find it hard to believe that the government doesn't already know this.

By the way, if this tactic were used and ethanol was then perceived as snake oil, other markets will take an absolute shelling as well. Shorters would have a field day with anyone companies producing corn syrups or sugar cane, because any fields that weren't then quickly comverted to a more useful crop would look for another outlet for their corn, and so the price of natural sweeteners would plummet due to a large surplus.

The only thing that could protect ethanol from such a fate hasn't been done yet, but there are people working on it. Ethanol can be extracted from plant material that often has little use to anyone, like switch grass. Discovering how to break down the tough fibers of switch grass would give you access to fuel without tying up farm land, as it can be grown in pretty tough conditions. Unfortunately, no one has figured out how to break down the fiber without using expensive, highly toxic chemicals. Scientists are looking closely at "jungle rot" to see if they can figure out how it works. If they do, and can use the process on a large scale, ethanol could be fairly successful. Without it, it seems fairly likely that certain conservatives, perhaps with a little prodding from oil lobbyists, would level an industry that many see as part of the environmental movement, and which most would identify with the left in this country, so they could do it both for financial reasons and to derail the goals of their Democratic rivals by damaging their credibility.

Therefore I can understand playing this horse for the moment, but long term just doesn't make much sense. Perhaps a stop loss isn't such a bad idea, since it's legs could be taken out from under it virtually overnight by a swift media blitz using negative studies that already exist.
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.