Ethanol: What Falling Corn Sounds Like

Scratch the shiny surface of the ethanol "boom", and you get something just beneath that's far less attractive. Don't believe me? Ask Goldman Sachs analyst Arjun N. Murti: he just released a report lowering his stance on biofuels from "Neutral" to "Cautious".

(You might remember Mr. Murti's assertion in the summer of 2005 that we were headed for a "super-spike" in oil prices, potentially as high as $105. At the time oil was trading at ~$45/barrel, and would soon reach over $70 a barrel. No, it didn't reach the lofty heights he predicted, but that's a pretty significant spike nonetheless.)

Why the caution? Pretty simple: dropping ethanol prices and record prices for corn. Not exactly a recipe for success.

The impact of this new caution was pretty quick, and probably best exemplified by VeraSun Energy (VSE). The company announced it is building a sixth processing plant that will raise the company's total output capability to 670 million gallons. Their shares responded by losing 3.6% of their value.

It's pretty apparent , at least to those outside the Midwest, that the future of ethanol does not lie with corn but instead with other, non-feedstock sources. Hopefully the rush by those seeking to curry political favor from the Farm Belt will not trample innovation in developing ethanol from other, technically superior sources.