Thursday, May 08, 2008 Are We Running Out of Food?

Full article

In vintage Mises fashion, Kel Kelly points out that government is the root problem here, not the solution. Amen!


Heem said...

Just had my "come to jesus moment" in the commodities market. I was short rice with 15K profit and managed to lose all of it back this last 3 days. Got caught limit up for two days with 6 contracts. I am so lucky I was able to escape when I did.

I have been looking into sugar lately. Fundamentals are weak, but don't prices bottom when fundamentals are most bearish?

SugarHigh said...

Last time it seemed like they did - a few months back when it dipped below 10 cents, everything I read said there was plenty of sugar on the market and prices were going nowhere.

Then, I think, the funds piled in and drove it up to 15, now back under 12. It has to take off at some point, with oil north of $120, and sugar-based ethanol becoming more attractive by the minute.

Heem said...

Good article about sugar. Basically says that Brazil is going to have a huge harvest, but world will go into a sugar deficit.

SugarHigh said...

Great article man, thanks for posting!

I just checked the longer dated sugar contracts ('10,'11) and they have much stronger charts, also priced in the 14-15 cent range.

This makes me think the near term contract is still the way to play this future rise - any thoughts?

Heem said...

Cheaper ethanol outselling gasoline in Brazil
10:36 AM CDT on Tuesday, April 8, 2008

SÃO PAULO, Brazil – Car owners in this giant city of 11 million people are giving the oil companies fits. Ethanol outsells gasoline here by a large margin. This year, it became the most popular fuel throughout Brazil.

Petróleos Brasileiro SA, or Petróbras, is trying to hold on to its customers. The Brazilian national oil company has held gasoline price increases to just 10 percent in the last three years. Other gasoline retailers, from ExxonMobil to Shell, have held back as well.

"Competition from ethanol is stiff," said Almir Guilhereme Barbassa, Petróbras' chief financial officer. "In the long run, we have to consider ethanol is going to be more and more competitive, so we have to be prepared to sell our gasoline to international markets."

Even with the competition, fuel isn't cheap in São Paulo. Taxes are high. After converting from Brazilian reais to dollars and liters to gallons, regular gasoline goes for about $5.08 a gallon.

Ethanol sells for about $2.65 a gallon.

Ethanol is alcohol distilled from plants. U.S. ethanol is made from corn. In Brazil, sugar cane is the crop of choice.

Alcohol as a fuel is only about two-thirds as efficient as gasoline, which reduces its price advantage in São Paulo to 74 cents a gallon less than gasoline.

Because of the falling value of the U.S. dollar, Petróbras hasn't had to eat a lot of the price increases for oil that shot gasoline up in Dallas by more than 50 percent in the last three years.

After sifting all the variables of currency, fuel efficiency and unit conversions, motorists here recognize that ethanol is the better bargain. That's without even considering the geopolitical consequences of relying on oil.

It's fashionable to trash ethanol these days. Corn prices have skyrocketed as ethanol makers consume a growing share of the U.S. corn crop. That is contributing to higher food prices around the world. A U.N. official has called biofuels a "crime against humanity."

Time magazine, linking higher food prices to more tree clearing for soybean farms, last week blamed ethanol for the destruction of Brazil's Amazon rain forest. The article argued that it makes less sense to produce ethanol than to drill for oil.

While that logic undoubtedly pleases the oil industry, it's not embraced by Petróbras. The company is investing in pipelines to take ethanol to the Brazilian seacoast for exports. It's created a biofuels subsidiary that's investing in ethanol projects and biodiesel plants.

These biofuel investments amount to $1.5 billion – real money, but small change compared to the $112.5 billion Petróbras plans to spend on oil projects over the next five years.

But these renewable energy investments could help Petróbras offset some carbon emissions from its refineries and petrochemical plants.

"We think we may get some carbon credits for that," said José Gabrielli, the company's president.

Brazilian sugar cane crushed and distilled into ethanol occupies a little more than 1 percent of the country's arable land. And it's grown "3,000 kilometers from the Amazon," Mr. Gabrielli said.

As with competitors everywhere, ethanol producers are wary of Petróbras. The oil companies were forced by the Brazilian government to install ethanol tanks and pumps at all gas stations in the country during the 1970s.

While Petróbras is building ethanol pipelines, the sugar companies are looking to build their own to have an alternative if the oil company ever applies the screws.

The 350 members of the Brazilian Sugar Cane Industry Association are pulling in $20 billion a year now. Some are thinking of opening their own retail fuel stations.

"We're more than a flea on their back now," said Jose Velasco, the association's chief Washington representative.

That's a level of competition that doesn't yet exist in the United States.

At the moment, corn-based ethanol loses the price/efficiency test.

And while stations that sell E85 (an 85 percent ethanol/gasoline mix) are spreading, there's a long way to go before U.S. gasoline refiners feel enough heat from alternate fuels to hold back on price hikes.

I am still researching sugar, but I think the back months would be a better investment if the harvest in Brazil right now is going to be a monster.

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