Proven right on ethanol, Gottschalk aims at corporate greed

By Larry Dreiling

One year ago, Andrew Gottschalk predicted that new investment in ethanol plants would sag as corn prices escalated.

Once vilified for those remarks, Gottschalk, a partner in HedgersEdge.com, a Greenwood Village, Colo., market research and risk management firm, now can't help but think he's been vindicated.

Gottschalk spoke during the 30th annual Fort Hays State University Agricultural Outlook Conference, held recently at Hays, Kan.

"A year ago I cautioned you to take your chips and get out," Gottschalk said. "In a perfect world, ethanol should be trading above the price of unleaded gasoline because the blender is being paid a 51-cent a gallon premium to blend unleaded with ethanol.

"We are producing more ethanol than we have demand for. We don't have the infrastructure to deliver it."

The lack of infrastructure necessary to transport and utilize the current level of ethanol production has forced ethanol prices below unleaded gasoline prices, creating a squeeze on ethanol plant operating margins.

"It's ironic that the price of ethanol stocks peaked just before I spoke last year," Gottschalk said. "They're mostly, now, down to about a third of their value from a year ago. I call it misguided politics. It's good for the grain farmers, not so good for the cattlemen, but try telling that to a politician.

"Some people are deferring or slowing construction of new plants. No one believed it could swing so far so fast, but it did," Gottschalk said. "At one time the premium was in excess of $1. Now it's at a 41.5-cent discount."

Consequently, with slowed construction of new plants and overall production of ethanol, there is now a slowdown in the production of dried distillers grains, pushing the price of DDGs higher.

"If you feed dried distillers grains, it does lower your cost, but not as low as if we didn't have this failed political game," Gottschalk said. "About 36 percent of our corn crop will get run through an ethanol plant. You think this doesn't affect the cattle industry?"

"No bigger capitalist"

During this year's address to the more than 125 lenders, producers, students and political officials in attendance, Gottschalk addressed what he called "corporate greed" and how it's negatively affecting the economy.

"There's no one here in this room that is a bigger believer in capitalism than I am, but the corporate heads have run amok," Gottschalk said. "We go through this about once a decade. We watch as these institutions, headquartered mostly in New York, come up with all these new ideas of how to make money and (harm) the customer."

Gottschalk placed most of his disgust on hedge funds and their managers.

"Let me tell you how stupid these things are. A major investment-banking outfit had a broker who was paid $70 million," Gottschalk said. "He up and left because he found out somebody else in the company was being paid more than him.

"What kind of business people, with any common sense, would do a deal where there is so much gravy in it that the underwriters are paying the brokers $70 million and the underwriters are making a multiple of that. That's how insane this is."

"Our situation today is compounded by 'buy only' index commodity funds. How long do you think that strategy is going to last--'buy only'?

"There are tens of billions of dollars caught up in this. It increases every banker's risk and you will have to manage things better than you ever have had to in the past."

Parachutes aren't gold

Financial CEOs who were responsible for large losses and then given large buyouts to leave their companies also weren't spared.

"When Merrill Lynch reports its biggest loss ever, takes an $8 billion write down because of their (structured investment vehicle) investments and then pays the CEO a $161 million golden parachute to leave the company, common sense would say that you suffer an $8 billion loss in stockholder equity; you would throw him out the door, but no. They give him a $161 million golden parachute," Gottschalk said.

"If I have any concerns about the economy, it's this kind of nonsense, because these people who are managing our finances are controlling the finances of everybody. If they don't have any more common sense than this, then we are in big trouble. We are going to have to deal with this environment, whether we like it or not."

Gottschalk said he'd seen market volatility before, but never like the kind seen today. "I've lived through the 70s, when the Russians came buying our grain. I saw what happened when we held cattle off the market in early 1970s--when we built these inventories for years and then had a massive collapse of cattle prices," Gottschalk said.

"I remember when the cattle future market went up or down limit for extended periods of time. Some days they'd trade up or down limit in the same day, sometimes more than once. That's volatility."

Because of the volatility and unpredictability of fund managers today, paying attention to these people and their actions is important, even in rural parts of the country.

"You'll never know on what day you'll wake up and realize the world is changing. We do know, that with all the funny money and chasing commodities, that change will be further and faster than the past. Price moves that used to take months now take weeks," Gottschalk said.

History will repeat

Gottschalk does not approve of what big players do and expects they'll fail, as history repeats itself.

"We just don't want to be on the wrong side with them when it happens," Gottschalk said, "rather, we want to capitalize on their nonsense, in the meantime."

In the end, Gottschalk did go after politicians, specifically those who retained anti-packer ownership provisions in their version of the 2007 farm bill and supporters of the "competition" title.

"Will U.S. Premium beef survive under the Senate version of the new farm bill? Maybe not. Do their members produce better beef today than they ever did before they joined? Absolutely. That's why you need to tell your senators and congressman to trash that competition title to that farm bill," Gottschalk said. "I'm not defending the packer; I'm just telling it like it is. Packers don't lose $75 a head, as they are now, if there isn't competition."

Gottschalk implored those in attendance to seize price opportunities when they appear rather than allow government intervention in the cattle market.

"Manage your business. Figure out how to capitalize on the distortions in the marketplace," Gottschalk said. "We're going to see the highest annual fed cattle prices ever recorded, this year. And we're going to do it with a market that supposedly has no competition," Gottschalk said with a laugh. "Think what we could get, if we had competition."

Added Gottschalk: "I'm saddened to know about people who waste their evenings at meetings, listening to demagogues who preach about conspiracy theories behind every change event.

"You people are successful because you work hard and smart. There is a common thread amongst those who fail. They spend most of their time complaining, rather than finding solutions."

Larry Dreiling can be reached by phone at 785-628-1117 or by e-mail at ldreiling@aol.com.

12/3/07
1 Star WK\5-B

Date: 11/29/07

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