Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Food and Fuel Still Bad Combination


Converting foodstuffs into motor fuel is a net energy loser.

One of the bad things about inter-market analysis is it leads you down a blind alley every now and then. You wind up, as they did in the late 1970s and early 1980s, trading silver off of soybeans, or trading Treasury bonds off of soybeans as they did in 1988. Who ever thought stock traders would regard rising crude oil prices as bullish, as happened during much of the 2009 rally?

You need some actual economic relationships or some common factors or substitution points between markets to sidestep what may be spurious correlation. But actual substitution or a process margin relationship doesn't turn a bad economic policy into a good idea. Take the relationship between two foodstuffs used to distill ethanol -- sugar and corn -- and the relationship between the resulting ethanol output and gasoline.

A Bad Idea

If you age bad wine, you get old, bad wine. Let's just stipulate in the interests of time and space converting foodstuffs into motor fuel is a net energy loser. It's simple thermodynamics: Each step of a conversion process requires a net loss of energy. As fossil fuels allow us to "harvest" millions of years of stored sunshine at a time, they spread the conversion costs out and allow us to gain usable energy in the process. Moreover, environmental issues notwithstanding, they don't involve the diversion of food into fuel. The economics of food versus fuel are such that in a rational economic sense, all of the nation's corn crop could be diverted to ethanol production at a higher return that using it for livestock and human food.

The spectacular rise and ongoing collapse of sugar prices in 2009-2010 as the result of poor growing weather in Brazil and India led to higher ethanol prices here in the US after a 91-day lag. That's right: A dry monsoon season in India in 2009 led to more expensive ethanol blendstocks for motor fuel in the US. If the impending growing season for sugar is normal, the opposite -- a drop in global ethanol prices -- will occur.

But Wait, There's More

An American corn farmer deciding whether to plant corn or soybeans has to base that decision partially on distillers' demand for corn. If sugar prices fall and pull ethanol prices down with them, corn prices will fall, too. If we map the rolling six-month correlation of returns of sugar against corn and gasoline -- and as a veteran of the oil industry, I still find the concept of watching corn and sugar prices a tad odd -- we find they peaked about a year ago and have declined steadily thereafter. However, the values are still positive, a situation that didn't prevail prior to March 2008.

The rolling six-month correlation of returns between sugar and ethanol prices led six months remains strongly positive; the recent dual declines in sugar and ethanol only will strengthen this relationship.

What a sad chapter in that whole the-world-is-flat-but-my-heels-are-round story: American farmers and American motorists are dependent on sugar-growing weather in India and Brazil all because of an addle-brained idea we could divert foodstuffs to fuel in the name of energy independence. What's next, chopping down rainforests in Borneo to grow oil palm so European trucks can operate on biodiesel? No, too late: They've been doing that one already.

Distilling corn and sugar into ethanol is a great idea so long as the end products are bourbon and rum, respectively.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos