Corn-Based Ethanol: The Free Market Speaks

January 20, 2007

This is not a stock blog. If I were savvy enough to develop winning investment ideas, I would be writing from my personal island resort in the Caribbean and not from the Energtech capital of the world. Nonetheless, about 6 months ago, oil was hovering above $70/barrel, and corn ethanol companies were a hot investment. Today, oil is a touch above $50/barrel. I’ve shared my feelings on corn ethanol, but does the market agree? Did corn ethanol stocks prove to be winners, even against a backdrop of falling oil prices?

To find out, I compared the closing price of two indicator ethanol stocks between Friday, July 14, 2006 (when oil peaked) and Friday, January 19, roughly 6 months later (with oil at its cheapest in recent memory).

To make the fairest comparison I needed pure corn ethanol stocks, not companies tried to several sectors. I also avoided the cornucopia of ethanol-tech companies developing all manner of non-corn fuel technologies. In April 2006, before the ethanol boom, Joanna Glasner and Michael Brush posted articles on the Wired Magazine and MSN Money sites respectively suggesting a few ethanol picks. Both named Archer Daniels Midland (stock ticker: ADM), a big corporate player pinning its future to corn ethanol, and Pacific Ethanol (stock ticker: PEIX), an up-and-coming focused corn ethanol producer.

Had one invested in ADM and PEIX on July 14 when the analysts were screaming ethanol, what would those positions be worth today? After hitting $44.50, an all-time high, in mid-May, PEIX closed at $22.15 on July 14. Yesterday, PEIX closed at $15.63, for a loss of $6.52/share (a drop of 29.4%). On July 14, ADM closed at $41.98. Yesterday, the stock was at $31.42. Accounting for $0.20 picked up in dividends along the way, ADM lost $10.76/share (a drop of 25.6%). By contrast, the Dow was up over 14.5% during the same period.

It is hard being right all the time.

The market’s invisible hand seems to be telling us something. Corn-based ethanol and the companies that stake their future on producing it do not have economic traction – especially as the price of fossil fuel comes back to Earth.

Posted by Matthew Traum on January 20, 2007 | Comments (0)

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