INVESTING: Political shift could turn ethanol boom into bust

If the price of corn keeps going higher, the best investment any of us could make would be to turn our lawns into cornfields.

Before we do that, though, we would need to buy farm equipment and fertilizer to get the field ready. After we grow the stuff, we would have to transport it to a processing plant and turn it into ethanol. Then, we would need to ship the ethanol to the refinery where it would get mixed in with gasoline. This involves a lot of steps, and there is a lot of business happening along the way.

Now, assume all of us just turned our lawns into cornfields and we publicly and privately supported investments into all the other steps described above. Remember, farm equipment is expensive and not useful for anything else in life. All the extra fertilizer is killing our lakes and streams, but, hey, the government told us to do this so it must be right. We bought a lot of extra trucks to move the corn to the ethanol plants. The ethanol plants are sucking our water supplies down (it takes more than 100 gallons of water to process one gallon of ethanol). Ethanol can’t be transported through pipelines, so trucks and trains are getting the business.

OK, we did all this because the government changed the rules and forced everyone to start using more ethanol. Today, we all know some of the headline-grabbing implications of the decision to make all this ethanol. Corn prices have tripled in the last two years. This has stressed the international food supply. Here in America, rising corn prices have added to a rising inflationary environment that has it roots in the stubbornly high oil prices.

The roads have done great with all the business they are getting from moving ethanol. Trucking stocks, which were getting hammered in the fourth quarter, saw some improvement recently as they get business transporting ethanol. Stocks like John Deere and other farm-equipment makers have done great during this run. Fertilizer makers all over the world have gone completely bananas. The stocks of Potash and Monsanto just completed moves that looked like Cisco and Yahoo in 1999.

With all this effort, how are you going to feel when, out of the blue, the government changes the rules again? An announcement from above comes down that the ethanol mandates are being suspended. Corn prices could drop by half. Fertilizer and farmequipment makers will see a huge fall in orders. Truck and rail stocks could suffer 20 percent or more on the sell-off from the news. And brand-spanking-new ethanol plants all over Indiana and the country could shut down.

This exact scenario has the potential of playing out over the next few months. Political leaders in Texas and Oklahoma are asking the federal government to suspend the ethanol mandates. And now John McCain is joining their cause. If the movement catches on, what are we going to do with all that corn growing in our front yards?