On the Way to $4.50 a Gallon!

May 25, 2007

Fillin’ Up At $3.87 A Gallon!

Dear OI Readers:

Greetings from the Cheese Capital of the World! No, not Switzerland… Wisconsin, USA! I am currently on a 3,000-mile odyssey with my wife and newborn from Connecticut through the Midwest and even up into Canada. Along the way, we are visiting numerous farms, feedlots, mines, farm equipment stores, grain silos, rail yards, shipping ports, ethanol plants and forestry operations. Some are formal visits, and others we are just popping into. All and all, so far the trip has been very educational. Nothing like seeing things for yourself firsthand.

As we drove through Pennsylvania and into Ohio, the crops seemed rather poor, actually — nothing at all like the overly positive USDA report. However, as we moved into Indiana, Illinois and, eventually, Wisconsin, things improved markedly. Here I am in a large cornfield in Wisconsin.

The crops here look pretty good and are emerging well, but I still believe much of the nation’s corn crop is not so lucky. Reports I’m getting from other states like Nebraska and Kansas are not as positive. And dry-as-a-bone weather in the South makes already-distant hopes of planting corn in states like Georgia even more unrealistic. Heck, farmers can’t even plant peanuts or cotton, the ground is so dry. How are they going to plant corn?

Meanwhile, gasoline consumption keeps rolling right along. Indiana has a major [tag]refinery outage[/tag], and I forgot about that. As we crossed from Ohio to Indiana, I didn’t stop to fill up, a costly mistake. WOW!

Prices jumped the minute we got into Indiana from $3.29 to $3.87… Ouch, that cost me over $70 to fill up.

All of the gas here is 10% ethanol and in some places that have E85 it’s 85%. All of that demand for ethanol is going to require a lot of corn, so we better hope for a very strong yield this summer. Smithfield Foods’ (the big meats company) stock is rising; after all, the company came out and said up front that it’s not worried about higher input costs (e.g., livestock feed costs) because the company will just pass those costs on to the consumer. The weather, not demand, is the wild card right now for the grains. A long, hot, dry summer could prove to be a major disaster come harvest time. Using call options on corn, we are set to take advantage of any rally in RTA. Why is corn going up? Ethanol is a joke, right? The reason corn is going up is simple… To quote Byron from Wednesday’s update: “There are more buyers than sellers.”

Comments are from Kevin Kerr at Agora Financial� These folks are a good source for real insight.

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