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Global Supply Chains To Support Ethanol Margins

Summary

Using global supply network indicators it is possible to find the most favourable markets.

Structural changes in commodity prices suggest that the ideal industry is positioned as a supplier of energy-related products and consumer of agricultural commodities.

Ethanol producers are the best match; with a six-moth view these companies are likely to experience continuously improving margins.

Not all who wander are lost.

-JRR Tolkien

We all have to wander

Over the years I have known a great many analysts - field experts, whose in-depth knowledge of the dozen companies that they covered was surpassed only by the amount of detail in their quarterly earnings forecast models. Awesome as their knowledge was, they were as useful to me as the high-end fondue set I bought a decade ago: two out of three days that I felt like having fondue in those ten years I could not remember where I had shoved the set.

Money is made in trading and investment alike when things change - companies surprise with products, markets change requirements or tastes. Since chances that large changes can happen to a small set of companies that one specializes in are slim, one is forced to "wander" the universe of companies. But as Tolkien put it, not all who wander are lost. Especially, if we have a reliable "map" - industrial supply chains.

What the "map" tell us

Armed with supply chain knowledge we begin with price changes in various markets; commodity prices are a good indication of the direction the global fortunes are shifting. When we look at the extreme three-month commodity price changes, an interesting picture emerges: coal, nickel, silver and zinc - all industrial commodities have appreciated significantly (sugar, which was the starting point of the investment thesis in my previous article is a different subject matter), while the negative end of the spectrum is populated by agricultural commodities: wheat, other grains, rice, hogs (source: Indexmundi):

Commodity

3-month price change

Coal price, Australia

22.5%

Nickel price

18.5%

Silver price

18.0%

Zinc price

16.8%

Sugar price

15.2%

Rice

-4.2%

Grains index

-4.3%

Wheat price

-11.8%

Hogs

-13.1%

Click to enlarge

The set of prices gives us a place to start, or more specifically several supply chains where we can look for good opportunities. Better still, if we...


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