GreenCarCongress noted a CIBC report with some harsh words about the ethanol industry. As I’ve noted before in previous blogs, most of their claims are either not significant or consistent with the broader political agenda. The strange thing, though, is that CIBC claims to be a credible source of information for investors. But this report is just crap – not rigorous and makes claims without any context to their real significance.
Let’s take a look:
“Not Energy Efficient”
The key reason is the huge amount of energy that is required in first growing and harvesting the corn, transporting it to the distiller, distilling the ground cornmeal into ethanol and then transporting it by truck and train to users across the country. These more costly transportation methods are required because ethanol cannot be transported in conventional pipelines.
I’ve already argued against this point in previous posts. But I’ll just re-iterate. If this data point is true, then the market should force these companies out of business. If the transportation costs were really that high, you couldn’t run these businesses profitably. If you look at their financial statements, many of them are profitable, even net of government subsidies (and if the government wants to give subsidies to these companies so be it; the people run the government, not financial markets). If this company really believes in the market forces winning out over time, then this point wouldn’t apply. Which gives the impression that there’ s another agenda behind this press release.
Energy efficiency doesn’t matter. This argument could be used for, say, Sony Playstations or iPhones. Again, if the high price of energy was significant, these companies wouldn’t be profitable (and wouldn’t survive).
What this point is really saying is that ethanol is a carrier for natural gas and the small amount of diesel needed to transport it to blending locations. So instead of using foreign gasoline, we’re using domestic natural gas. I’m fine with that.
Gasoline with a small % of ethanol can go in pipelines; so their transportation impact points aren’t reflective of the overall transportation network. It’s not as expensive or difficult as they’re insinuating.
And lastly, we don’t make much ethanol in this company – only enough to be a replacement for MTBE. So their “the sky is falling” message seems foolish. There isn’t enough ethanol being produced for it to be a real problem for our markets. The real concern is managing how it will grow and change in the future. And I don’t think the finance guys can think 4th dimensionally (meaning what we do now is not what we will do in the future; the market is very aware of this reality and is planning accordingly).
Corn prices hurt food prices?
“In the last two years corn prices have jumped by 60 per cent. Soaring corn prices not only pass directly into animal feed costs and corn-based food prices like tortillas, but they are spilling over to other grain prices as farmers scramble to expand corn production at the expense of other crops. Grain prices are the strongest they have been in memory while global inventories continue to shrink to record lows.”
This is true, but not importance. Or in other words, it’s fear-mongering.
Last time I checked, high tortilla costs aren’t going to bring down the U.S. economy. And the cost of corn flakes, even at sky-high corn prices, aren’t nearly as expensive as the plastic bag or the printing on the box. So the point is true, but moot.
Hurts Poor People?
He notes that while accounting for less than 15 per cent of the consumer price index, food represents one of the least substitutable areas of consumer demand. For low income Americans, food costs represent nearly 40 per cent of monthly budgets.
Food doesn’t cost more than gas or rent in most areas. So if their math is right, poor people very modest transportation, energy, or housing expenses. The only way that math works out is if people are too poor to afford transportation or decent housing (let alone home ownership). These are *real* social problems – not noticably higher prices for tortilla and corn flakes.
This argument really pisses me off. I grew in and around poor neighborhoods. And last time I checked, there were no CIBC checks showing up in people’s mailboxes trying to help make ends me. So the notion of using “it hurts poor people” is a abhorrent and inexcusable. It’s garbage and CIBC should be publically admonished for making such a claim.
So the tone of this press release is very strange. It’s all innuendo and hearsay. There’s no real rigorousness or context behind its claims. It seems to reiterate the bad press that ethanol gets (all from people who I’m sure never passed high school chemistry, let alone be competent enough to evaluate the energy industry). It’s a big disappointment and reflects negatively on their company.
