Oil prices are rising. Unrest in the Middle East has everyone, including the president, looking for alternative fuel sources. Sounds like a perfect storm for the ethanol industry, right?
Sort of, but there are plenty of challenges ahead in turning Midwest farmland into a major source of fuel. As Pacific Ethanol's
Food vs. fuel
This has been the battle cry of ethanol opponents since ethanol was invented, but there are market factors at work that will sort this out for us. Assuming food demand is relatively constant, if ethanol demand rises, so does the price of corn, leading to lower margins on ethanol and a higher cost of food. So the average consumer feels a pinch at the grocery store and what looks like a bonanza of good news for ethanol producers ends up being a squeeze on margins.
So when Bloomberg reported this week that the second-largest area of corn planting since World War II wouldn't be enough to meet demand for feed and ethanol, I saw this as bad news for the industry. If supply won't meet demand, higher corn prices will be bad news for ethanol producers' margins.
In the long term, ethanol will encounter these problems over and over again as food demand worldwide increases. I would much rather stick with fertilizer companies that benefit whether agriculture products are turned into food or fuel. Mosaic
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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.
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