The Coming 2008 Headline News - Long ADM (Archer-Daniels-Midland)
Posted by Frugal on January 31st, 2007
If you don’t know what is an inflation spiral, read this news about corn. A higher oil price creates demand for alternative energy. Demand for alternative energy creates ethanol demand. Ethanol demand creates higher price for corns. Higher price for corns creates bigger acreage of corns and less acreage for anything else. Therefore, you end up getting not only higher prices in corns, but also higher prices in wheat, soybeans. Since higher prices in corn result in higher costs for meat producers (chicken, hogs, cows), eventually higher prices of meat must come, not to mention a higher transporation cost for all foods (meat & vegetables) due to higher oil price.
Which stage are we at? Higher prices of corns are already here. Meat producers will need to eat up the higher costs temporarily. If you can be in sync with the wave of inflation, you can maximize your profit potential. The best bets on this inflation front I believe is in agricultural producers. The worst bets will be in the agricultural consumers (probably including ethanol producing plants).
Therefore, I suggest long in Archer-Daniels-Midland (ADM) which is one of the largest agricultural producer. Doubling up your bets to make it stock market neutral, you could also short meat producers from Yahoo’s list. Do watch out for possible acquisition due to low valuation in this meat industry. The industry was plagued by Avian Flu, and all kinds of animal diseases (Mad Cow, etc). I invested in GKIS once due to the recommendation from my newsletter Capital & Crisis, but sold out in less than 2 months because I don’t want to be the shareholder/owner of an animal killing machine (I am a 1/3-vegetarian, hopefully eating fully vegan food one day). GKIS was acquired by PPC at ~40% premium, so if you will be shorting, pay attention to valuation.
P.S. For disclosure purpose, I have an existing tiny long position (< 1%) in ADM. Please do your own due diligence because I may increase or decrease my position without notice. By the way, agricultural industry is not a like high-tech. An above-average return is not going to be up 100% or even 50% in a year. Please have a reasonable expectation.
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January 31st, 2007 at 3:27 pm
Energy Independence? Corn, More Corn by Jeff Miller
http://oldprof.typepad.com/a_dash_of_insight/2007/01/energy_independ.html
February 1st, 2007 at 11:07 am
I hope whoever wants to buy has bought ADM already. I was going to buy more today, but just 1 day after my post, it went up by a whopping 10%! I guess I will wait for it to come down a bit, or I will not add more stake to this position.
Good luck.
February 1st, 2007 at 2:58 pm
Hi Frugal,
I read your post yesterday and did my bit of analysis on ADM. Result, I bought into the stock yesterday and wow, did the earnings surprise. I am up 11% in a day. Thanks for bringing ADM to my radar screen. What do you think it’s topside could be?
Regards,
February 1st, 2007 at 8:57 pm
Wow, what a move.
Heh, how ’bout next time you post a pick you give us a little more time to move on it.
February 1st, 2007 at 9:08 pm
Yeah, man was that a GREAT call.
February 1st, 2007 at 9:45 pm
I myself missed this up move too. This week I am extra busy at work and also at preparing real estate carnival. My post always come out before the market open, but that was just one day.
If I knew that ADM is announcing its earning the next day, I would have posted this earlier. I don’t follow every of my stocks that much. Always buy them with a longer term view.
IMO, there should still be more upside from this price (well, at least I’m still holding my tiny stake). But I don’t know whether it will pull back temporarily.
Hope you guys also bought into NAT too. It has risen up by 8% too since ML recommended it two weeks ago.
Please do your due diligence always. I want to say that ML & I just got “lucky” this time. Not sure if luck will be there next time.
February 12th, 2007 at 8:20 pm
Festival of Stocks #23…
This is my first time hosting or participating in a Blog Carnival (Festival of Stocks).. I just thank God there are no clowns involved. I’m terrified of them. Anyway, on to this week’s interesting submissions from around the blogosphere. Frugal…
February 10th, 2008 at 7:10 pm
Corn ethanol will not go.
Submitted by Adrian Akau on June 9, 2007 - 11:14pm.
Corn ethanol will not only be unprofitable but impractical and downright harmful.
If E85 is used, then at 85% ethanol, the amount of energy contained is 0.85 x .67 + .15 = .57 + .15 = .72 or about 72% of the amount of energy of regular gasoline. For every 10 gallons, this means you will be getting 7.2 gallons worth of 100% gasoline energy. You end up paying more, (10 x cost)/7.2 = 1.39 or 139% the amount you would be paying for an equal amount of gasoline. Where I live, the present cost of gasoline is $3.41/gallon (regular) so if I were to use E85, I would be actually paying $3.41 x 1.39 = $4.74/gallon. If regular gasoline should go up to $5/gallon, my actual cost of E85 gallon equivalent would then be $6.95/gallon. It is a very impractical way for me the consumer to look at fuel prices.
Then, because the actual fuel costs are higher, the cost of all store items must be raised to pay for the increased transport costs. These increased food costs will be in addition to those from the cost of corn and grain being driven due to competition for agricultural land.
E85 makes no sense at all except to those who will be profiting from its sale.
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