Friday, June 29, 2007


CBOT daily corn futures

Today corn futures continued their vertical decent. The chart above portrays major support being broken at the level of $3.70. Since the largest variable cost for ethanol producers is in fact corn, this pricing collapse bodes well for the ethanol sector, specifically those producers such as VSE who neglected to hedge their corn costs.

According to the Scientific American, nearly 93 million aces of corn were planted this spring creating the largest planting since 1944. Their is however, some concern over the possibly of an ethanol glut, which could hurt ethanol producers margins if supply outstrips demand. While this is a real possibility, one must remember that oil is now trading near $70 per/barrel making ethanol as a automotive fuel source all the more appealing.

Ethanol sector 3 month chart

Corn prices and their effects on ethanol producers profits has largely been the catalyst for the sectors multi-month pps collapse. The sentiment however could be changing as several industry leaders such as VSE, PEIX and USBE apparently broke out on above average volume last Friday after the announcement of favorable legislation.

While I am much more bullish on cellulosic ethanol as apposed to its energy intensive corn based cousin, these recent developments make the ethanol industry an attractive buy at their current undervalued levels.

60 minute PEIX chart

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