Is Ethanol The Next Bubble On The Rise For Investors?

 by Kevin Burnett
11-12-06

   There is no such thing as a sure investment when it comes to the stocks market. Stock market forecasters are always on the hunt for the next bubble on the rise, and to be the first to catch the latest market trends. Our recent oil crisis was a sure sign to the American citizens as well policy makers that our dependence on oil imports is not good for the economic future. During a national address, the President called for the US to reduce its oil imports from the Middle East 75 percent by the year 2025. The Commander in Chief made an advanced energy initiative call for among other efforts increasing ethanol production, and putting more flexible fuel vehicles on the road. This was a boom for alternative fuel and is a “bright light” for investors.

   Agriculture investors in corn are seeing a steady boom in profit. “The consequently of ethanol are the biggest thing going on in agriculture today” says Keith Collies, Chief Economist for the US Agriculture Department. Corn being a major additive for ethanol and one of the most ubiquities ingredients in American food supply caused the nations No.1 crop prices to jump nearly 55% since mid-September. With the rapid changes and growth, ethanol is imperative in a good investment decision.

   For 2006 automakers will nearly produce 1 million flexible fuel vehicles that run on ethanol. Some will be sold to fleet buyers, while GM and Ford are leading the way to make flexible fuel vehicles available to the public. The 2005 Act mandates that ethanol production will double by 2012 to 7.5 billion gallons, which is estimated to reduce the Unites States oil consumption by 80,000 barrels per day. Considering that our oil consumption in 2004 was 20,731,000 barrels a day, it is clear that fuel alternatives, such as ethanol are in need.

   Despite the rising price of ethanol, investing in ethanol is not always guaranteed as a money making profit. Pacific Ethanol (NASDAQ: PEIX) is the biggest pure play on ethanol production yet not to be profitable until net year. A few months ago, Pacific Ethanol was selling for more then 40 dollars a share. Ethanol production companies such as Pacific Ethanol, is the reason for a higher demand for corn.

   Producers of corn and agriculture product are feeling the positive boost of the ethanol market. Large agriculture company Archer-Daniels-Midland (NYSE: ADM) obtains 25% of its operating profits from ethanol and related by products. Archer-Daniels-Midland is a producer of corn which allows them to make a profit and take advantage of the ethanol boom. Its stock has tripled in the past two years, though it has recently pulled back.

    It may be a good time to buy stock in ethanol producers and ethanol making products. Though if oil prices drop, then the demand for ethanol will drop accordingly. If corn prices climb, the profit margin of some ethanol producer could fall. One thing is for sure, as long as population and the need for fuel increase, there will always be a demand for a fuel alternative, which means young ethanol stands as king.