Now cost prices in production of fertilizer also down as well. Actually, when fertilizer prices become cheaper, cost of corn and sugarcane plantation will also become cheaper. As a result, profit margin of ethanol production will eventually become cheaper too.
Accordingly, we may expect bio-energy booming will come back following drop in gas prices. Obama’s ambition in green energy may be another reason for expecting booming in green energy. But how about IEA prediction that oil prices will exceed $100 in period 2008-2009?
Bio energy as fossil energy substitution, will even benefit from spiking crude oil prices as long as gas prices are still cheap enough. The Following chart shows that Ethanol fixed cost is straightly proportional to gas prices.
co-director AgMRC, Iowa State University Extension
Click the image to enlarge
Potash Corp. of Saskatch-ewan (POT), One of North America's largest fertilizer manufacturers, dramatically cut its production on June 2008 when gas prices reached nearly $6 per mbtu. Meanwhile, POT was selling its 2003 gas future contracts to take advantage from the current high gas prices in the market.
Click the image to enlarge
If you are a long term investor, the current prices of Potash Corp. shares which were discounted by 71% since its peak on June can be considered as very cheap prices for this valuable company.
The rest Agricultures can be looked at the following PowerShares DB Agriculture Fund (DBA) ETF.
Click the image to enlarge
There were several factors that caused Agriculture Sectors dropped dramatically since March 2008:
- Midwest Flood that damaged thousands of acres of cropland
- Spiking gas prices that squeezed fertilizer producer profit margin
- Spiking corn prices after Midwest flood
- Ethanol producer companies got difficult access to credit as banks were tightening credit standard and were not willing to lend. For an example, Verasun, an ethanol producer, has filed for bankruptcy filling after run out of cash was due to hedging corn futures when corn prices were at the recent highest prices. It also caused the company was not able to refinance its debt.
While Archer Daniels Midlands(ADM), get advantages from its diversified business as a major player on the supply side of grain through its Agriculture unit. The company shipped grain to itself and others and benefited from soaring grain prices as there were only a few grain suppliers due to US harvest delayed. When its competitor struggled to remains survive, the company posted earning profit up more than double on November 4, 2008.
The earning number surprised analysts, up 138% compared to the same period on the last year. While the net sales increased 65%. After the company’s shares dropped by 67% since March. The shares start to bounce back in early October up 65% to $25.63 from its record low at $15.5 in late September.
Click the image to enlarge
I think the both companies have proven that they are worth and valuable.
See also my previous posts :
Sources :
- IOWA State University Extension: Economic Model of an Ethanol Production Facility, September 2008
This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.
You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.
No comments:
Post a Comment