Expensive Ethanol Eggs The Daily Reckoning Gualfin, Argentina Monday, April 16, 2007 --------------------- *** The Hualfines last stand...Bonner in the Andes...homemade jam and applesauce...a dead cow is hard to move...the cost of a ‘ranch’ in Ocean City, MD? *** The dreaded “R-word” rearing its gnarly head...oil, oil, everywhere...fancy new camouflage...and other reasons to go to war... *** The Great Mogambo Lives...and now you can commune with him directly!...and so much more! --------------------- Our lives have settled into a pleasant routine. We wake up. We admire the scenery from our beds, looking out the windows at the sun rising over the foothills of the Andes. We have breakfast of eggs and bread with jam. Maria, Jorge’s wife makes the jam in an ancient wood-fired stove in a sooty kitchen. And she makes the bread too - either in the old cast-iron oven or in one of the clay ovens outside. The kitchen is the room least touched by our efforts at improvement. Most of the other rooms have new windows - modeled after the old ones - along with electrical outlets...new floors (of local clay tile)...and a fresh coat of paint. But the kitchen remains just as it has been for the last 50 years - dark, smoky, warm. Yesterday afternoon, we looked in on our own Maria, peeling apples. “Oh Dad,” she said, “this is the place to be. Everyone’s in here. Francisco hangs out here, drinking mate,” (the local tea, which tastes as though it were made of hay), “and, of course, Maria and Juanita are here too...chattering as they cook things; it’s a lot of fun. “I’m making some applesauce. The orchard is full of apples. There are thousands of them. I didn’t want them all to go to waste.” After breakfast, we mount our horses and go for a ride. Each time, we explore another part of the ranch. Wednesday, we rode out onto the open range to see the cattle. After about two hours of riding, we came to a streambed...green with grass, with a trickle of water running through it. There were about 50 cows there - many with small calves. There was also a dead cow lying near the running water. (More below, but first the news...) -------------- Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis: “Up until last month, the U.S. had imported more goods from our neighbor to the north than from any other country. But with $48.7 billion worth of goods sold to the U.S. in February, China has overtaken Canada as our biggest shipper.” For the rest of this story, and for more market insights see today’s issue of The Daily Pfennig -------------- Begin your FREE Daily Reckoning subscription today!
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Bill Bonner continuing to grapple with a dead cow... *** “We knew it was sick,” Jorge explained. “We gave it some medicine, but it died anyway.” There is no practical way to gather up the dead animals, so the cow was left to lie where it fell...rotting, then drying...until its bones turned white from the sun. The little stream of water disappeared into a narrow pass, too narrow to enter on horseback. “Where does this stream go?” we asked Jorge. “It goes over to our neighbors at Pucara. You can walk there, but you can’t go on a horse; the pass is too narrow. On foot, it would take you about two hours.” Everywhere else, much of our lives is spent running errands...going here to pick up something, there to meet someone, and over yonder to drop something off. But here, there is no question of running errands. The country is too big. It takes nearly half an hour to get out of the ranch...then, at least an hour to get to a town of any size. Yesterday, after our ride, we decided to drive to Cafayate - about two and a half hours away. And they are a hard two and a half hours. Up and down, bounce, twist and turn. The roads are dirt and stone for about 90% of the way; only the last few miles, coming into Cafayate itself, are paved. From our place you have to cross a range of the sierra hills to get where you are going. By the time we got there, we were too beaten up to enjoy the place. We looked around...got our tires fixed...had lunch...and drove back. Cafayate is a charming place...but the week after Semana Santa most of the shops are closed, anyway. By the time we got back, all we could do was fall out of the truck, crawl up the granite stairs to the house, and drop down on the couch. “Let’s not do that again,” was Elizabeth’s conclusion. “Besides, it is so beautiful here anyway; we have no need.” It’s true - the area is stunning. But there are probably places just as pretty in Colorado or Montana - with purple mountains majestic and a fruited plain. And those places would have paved roads leading to them...and regular airline service to a nearby city. There, as here, we could put on cowboy boots and ride out onto the range. We could just as easily sit around the campfire at night and imagine we were characters invented by Louis Lamour or Zane Grey. And there, too, we could bring out the cowboy lamp given to us in 1958...and our aunt Lillian’s Navajo rugs. Aunt Lillian was a young woman who lived on a Maryland tobacco farm when WWI broke out. A group of doughboys passed through the area on their way to Baltimore...and then Europe. They made camp near the farm, waiting for orders to advance to the North. Aunt Lillian, joined by other local girls, decided to offer the young soldiers a little hospitality. Doing so, she struck up a friendship with a man from Montana. They wrote to each other all through the war...and then married when it was over. Aunt Lillian moved to Montana and spent at least some of her early married life cooking for cowboys on a cattle drive. Of course, they all took their last ride a long time ago; but what we have to remind us of them is a collection of Navajo rugs that we can now use to furnish a ranch house in South America. What is exciting about a new house in a new place is that it gives you the illusion of a new life. You get to redecorate your life - with new clothes, new furniture, a new style, new friends, new scenery. But if you’re going to go through all the trouble of doing that, you might as well get a new language and culture, too...which is one reason Argentina might be more interesting than, say, Colorado. Another major reason is cost. Our ranch here costs no more than, say, a nice condominium in Ocean City, Maryland...or an ordinary house in Aspen. On the other hand, it is much more expensive to get to. But, after going over the accounts with Francisco, it still looks as though the revenues from the ranch will pay for our travel to and from the place. *** Meanwhile, back in the ‘real world’... “No one wants to say it,” Chris Mayer reports, “preferring to call it a slowdown. But I’ll say it: “The United States is in recession now. “Last week, MarineMax - the largest recreational boat dealer in the United States - said earnings would come in at 45 to 65 cents. In January... January, mind you... it said it would earn $1.40 to $1.50. Last November - only five months ago - it forecast $2.05 to $2.15. “The reason: Call it fallout from the housing boom. CEO Bill McGill made no effort to hide behind any fig leaves in his conference call: ‘While most of our customers [have] the ability to purchase a boat, they have lost their appetite to pull the trigger when uncertainty enters the equation.’ “What uncertainty? ‘Perceived loss in value of their home, the loss in the investment-property value, or the perceived or actual trickle-down effect that the housing market may have on their own business or their financial picture.’ “Note to sellers of big-ticket items: Batten down the hatches, boys! “Last month, I met with John Williams, the sharp economist behind Shadow Government Statistics. Williams is one of the few economists to call the old hag that is the U.S. economy an old hag. “‘We are in an inflationary recession now,’ he says. “Williams ticks off the data that confirm a recession in progress: Much weaker-than-expected housing starts, retail sales and industrial production. “Also, a weak manufacturing survey, sluggish annual growth in durable goods orders, rising new claims for unemployment insurance, and anemic employment growth. “There is a playbook for dealing with this kind of environment, based on old highlight reels from the 1970s. I can sum it up thusly: Buy tangible things; sell paper.” For more, see the latest: Mayer’s Special Situations *** “The rapid production decline under way at the Cantarell oil field off the coast of Mexico highlights a fact central to the Peak Oil theory,” writes Dan Amoss, “much of the world’s 85 million barrels per day of oil production comes from very old giant fields long past their peaks. Pemex, the Mexican state oil company, is having trouble managing what the industry calls a ‘water cut’... “‘Pemex’s lack of money and technology is a handicap in managing the decline. The company didn’t have any machinery on its Cantarell platforms to separate water from oil - standard equipment for most of the rest of the industry. So when water from an underground aquifer began to creep into wells, a common occurrence in an older field, Pemex had to shut down the wells. The company closed any well where the water content rose to between 3-5% of the oil. “By contrast, there are wells in Texas that are able to produce with 99% water.’” [Ed note: You can catch Amoss’ daily insights for free, right here: Economics and Politics at Agora Financial... *** “Long gone are the days when troops relied on steel helmets as their only protection from enemy fire,” writes Craig Walters, with some randome thoughts on new military camouflage. “Also gone are the days when everything in the military was olive drab. Desert fighting has ushered in a need for new camouflage, with a color called ‘dark earth’ now getting a lot of use... But the Pentagon has even grander plans for U.S. troops in the near future. “The government is reportedly developing color-altering materials that will allow troop armor to blend in automatically to changing environments. Future armor promises also to boost the strength of soldiers, allowing them to carry hundreds of pounds more gear than they could normally. This future armor could also possess other reactive properties, like being able to sense the kinds of munitions fired at it and to react with an appropriate amount of protective counterforce. [Ed note: “The interesting thing for Daily Reckoning readers is that it’s possible to profit from these developments today. In the February issue of Small-Cap Strategy Report, I recommended a leader in military body armor production that was not only selling at a deep discount to the rest of the public armor companies, but also had at least 15% higher still to run. This is one of my top picks in Small-Cap Strategy Report, and it’s still priced very attractively to buy today.” Small Cap-Strategy Report --------------------- The Daily Reckoning PRESENTS: It’s true; eggs are both incredible, and edible. But lately, they’re also very pricey. This week, the Mogambo discovers why ethanol is the reason you might soon be spending $19.95 on a Denver Omelet. (Last week, we had a Real Mogambo Scare (RMS). In an effort to make it easier for readers to commune with the Guru directly, we set up an RSS news feed. That, however, meant his wisdom was not immediately available on the sites to which some readers had become accustomed to reading him. Never fear, the Mogambo is alive and well...and being published in his regular spot: The Mogambo Guru And if you’re interested in signing up for the Mogambo feed, it’s easy. Follow these directions: The Mogambo Guru News Feed... EXPENSIVE ETHANOL EGGS
by The Mogambo Guru From Junior Mogambo Ranger (JMR) Ajit V. we get the link to NationalPriorities.org where we find the essay “Where Do Your Tax Dollars Go?” Well, as it turns out, this is not a rhetorical question, and we immediately learn where it goes: Military ($558 billion), Health ($428.5 billion), Interest on the Debt ($398.6 billion), Income Security ($123.5 billion), which, “includes federal funds outlays on the function area income security with the exception of housing assistance, and food and nutrition assistance.” What?!? Well, before I could work up a good hissy-fit of confusion and indignation at the fact that the government is just giving people so much cash that it equals $1,000 for every non-government worker in the whole country, the list continues with Education ($93.2 billion), Veterans’ Benefits and Services ($68.9 billion), Nutrition ($53.9 billion), Housing ($38.3 billion), Natural Resources and the Environment ($31.3 billion), and Job Training ($6 billion). And if that’s not enough, the category labeled “Other” was larded with $254.8 billion in spending, including “everything else not listed above and is comprised of the following function and subfunction areas: international affairs outside of international security assistance (included above in military); general science, space and technology; energy; agriculture; commerce and housing credit; transportation; community and regional development; labor and social services outside of training and employment services; justice; general government; and undistributed offsetting receipts.” I get a creepy, lost feeling, like I am in some kind of bizarre-world of strange, new laws of physics when I contemplate that the government is spending so much money on all this stuff that is mentioned nowhere, or even hinted at, in the Constitution, and then made even more horrifying by the brain-busting proposition that “undistributed offsetting receipts” is listed as “spending.” USA Today, citing the American Farm Bureau Federation, reports, “Easter eggs will cost U.S. consumers about 25% more than last year,” as “The average U.S. retail price for a dozen large eggs was $1.51 in the first quarter, 43 cents more than a year earlier.” The explanation offered for this staggering increase in the price of eggs was that “The increase stemmed mostly from higher corn and soybean prices,” which are used in the production of chickens, as “ethanol demand drives up feed prices.” I sense that you are asking, “How can eggs be up by 25%, and yet the lying government, and the lying Federal Reserve, and their lying collaborators in the lying Congress, the nations’ lying universities, and the lying newspapers all say that there is no inflation in prices? What am I, some kind of stupid poopie-head that is supposed to believe that silly crap?” By way of explanation, let me first say (with all due respect) that you are a stupid, ignorant boob and you don’t know squat about how to calculate inflation these days. The answer is, obviously, that the Federal Reserve, the government and their ignorant lackeys all say that inflation in egg prices is zero (although the price of eggs is up 25%) because the hedonically-adjusted increase in price (43 cents) is not the price of the egg going up, but is the additional cost of additional benefits that you now receive! As just one example, part of the additional 43 cents is to pay for the benefit of happier chickens, thanks to free-range chickens and less crowding. And if the chickens are happier, see, then the eggs are not affected by, for example, stress hormones, and thus they are, somehow healthier! So, the eggs are of higher quality! So THAT’S the benefit for which you are paying more. It has NOTHING to do with the price of the basic egg, which is, when the price of these benefits is stripped out, completely unchanged in price! Thus, inflation in egg prices is proved to be, after applying officially-sanctioned hedonic adjustments, zero! See how I am doing this? It’s easy! I don’t know why government wonks get paid so much to do this stuff! Anyway, the result is that you, as the consumer, get a big benefit from knowing that chickens are happier, and you and your family are healthier from eating higher-quality eggs, for which you paid another lousy 43 cents instead of having to eat unhealthy eggs from stressed-out chickens. But it’s not just the eggs that are affected by the ethanol-from-corn fiasco, or all the other things that are higher in price because of it. So merely choosing corn doesn’t seem to show a whole lot of smarts to start with. As proof of that snide and disrespectful statement, I refer you to a chart sent to me by good ol’ Phil S. It comes from Goldman Sachs, apparently using data from the U.S. Department of Agriculture, which shows the “[percent] of final energy output consumed in production of ethanol” of some “selected crops”. The sad-but-funny part is that turning corn into ethanol requires as much as 70% of the energy that comes from the ethanol itself! Hahaha! The only worse choice would have been wheat, which needs about 90%. It would have been much, much better (and seemingly a lot smarter) to get ethanol from sugar cane (10%), or cellulose (25%), or soybeans (37%) or even rapeseed (40%)! But we chose corn at 70%? We’re idiots! I am again running for President on the Mogambo Raving Lunatic Party (MRLP) ticket, and one of my campaign promises is to immediately legalize marijuana. Reefer is now reported to be the biggest cash crop for 15 states! Fifteen! In 30% of the states, it is their biggest cash crop! And of this agricultural bounty, the states themselves receive not a freaking dime in revenue, and in fact suffer a net loss, as they must pay to apprehend, prosecute and lock up the potheads! Hahaha! What a weird country! And this does not include the revenue the government would receive from the tons and tons of pot smuggled into the country if it was taxed. You want money? Here is it, dudes! Until next week, The Mogambo Guru
for The Daily Reckoning P.S. Mogambo sez: I’ll say it again, as if I haven’t said it enough already: The dollar is going down because we acted like idiots, and so load up on gold, silver and the shares of oil companies to save yourself. This Mindless Mogambo Strategy (MMS) has worked like a charm for quite awhile now, and so it IS “the trend.” And as everyone knows, “the trend is your friend!” Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. If you’re inclined to read more, you’ll find the whole Mogambo here: Inflation Induced Brouhaha | 
