Ethanol Views

I have posted a bunch of comments over at a blog called The Baseline Scenario . The blog was started by former IMF economist Simon Johnson and a grad school partner, so it's not exactly a leftist political blog-- more a centrist economic blog. Anyway, ethanol was mentioned in passing and I posted some comments on the relative merits of ethanol use versus imported crude oil...turns out it's a hot-button issue on any blog.

My impression from the comments there, along with past opinion pieces by economists like Paul Krugman, is that most people see ethanol use as "burning food" and contributing to world hunger. That's about as bad an image as a commodity can get.

Conservatives say they hate ethanol subsidies and Liberals say they hate them just as much. That leaves the Center and the Center isn't too crazy about ethanol either. While the blender credit will be renewed this time around, it may not survive a big, sustained rally in corn.

This is the "wall of worry" that ethanol will climb. With relatively low margins and precious little glamor, the business of ethanol production will struggle to find investors. Production growth will be slow. Producers will cut back quickly if margins turn negative, so prices will, at worst, follow corn.

This is a situation where two commodities are fairly tightly linked, but one is far more popular than the other. I believe that, in general, investor will do better buying the market where there not 500,000 other longs.