The Rude Awakening
Laguna Beach, California
Thursday, August 10, 2006 ------------------------- - Ethanol has bolted...but what about her fat,
lethargic sister?
- The ethanol play that's not exactly an ethanol play,
- No news on the surf, plenty on the markets, 3 events
to avoid and more...
------------------------- [Joel's Note: Whenever I get an email from your senior Rude
editor, now stationed in the blissful Laguna Beach, I hope
to read about the enviable surf conditions, a recounting of
the last volleyball point won or a report on the throngs of
thongs parading the beach. So when I opened my last email from Eric and saw the words,
"high fructose corn syrup," and "expanding American
waistline," I was a tad disappointed. It was only after reading the whole column that I realized
what he was on about... --- Investment Alert ---
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By Eric J. Fry Ethanol is hot; corn is not...but it is getting warmer.
Archer Daniels Midland's stock is hot; Corn Products
International's is not...but it is getting warmer. If
ethanol remains a hot commodity, corn should not remain a
lukewarm commodity...and Corn Products International (NYSE:
CPO) should not remain a lukewarm stock. CPO is "a leading global producer of corn-refined and
starch-based ingredients," according to the company's Web
site. In other words, it is the number-one worldwide
producer of dextrose and a leading regional manufacturer of
starch, high fructose corn syrup and glucose. As such, CPO is not exactly an ethanol play, but neither is
it NOT an ethanol play. Let's call the company an unwitting
beneficiary of the ethanol boom. Corn Products does not
operate a single ethanol plant, nor does it derive any
revenue from ethanol production. And yet, the nascent
ethanol boom may shower unanticipated prosperity upon CPO. "This, of course, is a speculation," admits James Grant,
editor of Grant's Interest Rate Observer. "Corn Products'
existing, non-speculative business is corn refining, 'a
capital-intensive, two-step business that involves the wet
milling and processing of corn,' in the company's own
words. 'During the front-end process, corn is steeped in a
water-based solution and separated into starch and other
co-products such as animal feed and germ. The starch is
then either dried for sale or further processed to make
sweeteners and other ingredients that serve the particular
needs of various industries.'" In particular, corn sweeteners find their way into sodas
and processed foods. Although these industries provide a
steady demand for corn sweeteners, they are very mature and
slow-growing. Not surprisingly, therefore, the price of
HFCS has remained very constant until recently. Over the
last few months, the price of HFCS has broken out of its
years-long slumber. Blame ethanol. As demand for ethanol
has boomed, demand for sugar has boomed, thereby boosting
its price. And as the price of sugar has boomed, the price
of sugar substitutes like HFCS has advanced a little at
least...But only a little As the nearby chart illustrates, a tripling of the ethanol
price over the last four years has produced a doubling of
the sugar price. But corn sweeteners have barely budged
over the same time frame. Perhaps they will begin to budge
now. 
"HFCS, Corn Products' mainstay, is a product you wouldn't
even have supposed would ever get a break, price-wise or
otherwise," writes Grant. "As an ubiquitous additive to
processed foods and carbonated drinks, it's a direct
contributor to the expansion of the American waistline. And
it has a near-substitute in sugar. The price of world
sugar...had been in a 20-year bear market. But rising oil
prices set off a scramble for alternative fuels. Ethanol is
one of those alternatives. Brazilian ethanol is made from
sugar. So the rally in ethanol produced a spike in world
sugar prices. Suddenly, HFCS became an invitingly
affordable sweetener. Under cover of the new sugar bull
market, Corn Products may be able to turn a page in its not
recently glorious history." The page may be turning already. Second quarter
profitability surpassed Wall Street estimates. Thanks
largely to the rising price of HFCS, Corn Products posted a
14% jump in earnings. The company predicts earnings will
continue growing nicely throughout the rest of this year.
The upbeat forecast relies mostly upon marginal
improvements in the company's core businesses. That's good
news, but hardly worth the 18 times earnings that the
company's share price commands. The sex appeal of this stock, if there is to be any,
derives from the impact of ethanol on HFCS pricing. "CPO is
a businessman's risk," as Grant explains. "[It is] a not
obviously undervalued stock for the business as it
currently stands. What makes us bullish is the possibility
that the business will not stand as it currently does, but
be transformed by the opportunities afforded by
persistently high energy prices (and, by extension,
persistently high sugar prices)...If events fall out just
right in 2006, the company might eventually come to be seen
as a kind of energy stock – or more exactly, a net
beneficiary of rising energy prices." [Joel's Note: If you waited to hear about the ethanol bull
in George W's State of the Union address, you were already
too late. Sugar prices had already soared and profits had
already been made. By then, it was time to get out. If you
were a Resource Trader Alert reader, it was your time to
cash in...to the tune of some 379%. Find out how the Maniac
Trader did it and learn how to jump in on the next
gangbuster trade right here: An Amazing Sugar High
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