The global energy space has been dominated by discussions about fossil fuel alternatives in recent years, as there are a number of solutions to our addiction to these commodities. One of the most popular options has been the use of corn-based ethanol in crude oil, which decreases the amount of crude oil needed when the ethanol is mixed in. While it is not a one-stop solution, many see it as a sign of weening ourselves off of crude oil and working towards a more renewable resource [for more ethanol news and analysis subscribe to our free newsletter].
Ethanol Making a Comeback?
The production of this corn-based product peaked around late 2011 as government incentives and subsidies expired. From there, the energy source took a tumble as producers used cheaper alternatives to salvage bottom line returns. However, 2013 has seen ethanol production begin to make a comeback as the U.S. recently hit a 10-month high of 857,000 barrels per day according to the Department of Energy.
Inventories have declined by 16% since the beginning of the year and a number of major producers, like Archer Daniels Midland (ADM) and Valero Energy (VLE), are hopping on the trend. For the time being, ethanol prices have risen and corn prices have yet to rise in tandem, which may leave the door open for a good investing opportunity.
Corn: Ethanol’s Beneficiary
The ethanol industry “consumes more than 40 per cent of the US corn crop and competes with oil companies for a share of motor fuel supplies” writes Gregory Meyer. With that in mind, what’s good for the ethanol industry is great for corn prices. As demand picks up for this energy source, more corn will be needed to satisfy producers’ needs [see also 13 Ways Corn Is Used In Our Everyday Lives].
It is also important to note that corn prices have not seen the same rise that ethanol has, suggesting that there is room to run for this commodity. Below, we outline several options for investors to make an allocation to corn and the ethanol industry as a whole:
- Teucrium Corn Fund (CORN): This product uses a contango-fighting strategy to invest in corn futures. Rather than rolling into the next month contract, CORN holds multiple maturities at a time and executes a monthly roll that aims to minimize the impact that contango can have on a futures product.
- MLCX Biofuels Index TR ETN (FUE): This niche ETN is comprised of futures contracts on physical commodities that are either biofuels themselves or feedstock commonly used in the production of biofuels. Note that FUE is relatively small, so its liquidity will not be as high as other options out there.
- Archer Daniels Midland (ADM): As mentioned above, this agriculture firm has its hands in the ethanol production business. This stock will also represent somewhat of a diversified play as ADM’s profits will not be entirely tied to corn or the fate of the ethanol industry.
Disclosure: No positions at time of writing.