Ethanol with a Comparative Advantage

The father of modern economics (Adam Smith) in his writings elaborated on comparative advantage and competitive advantage. Competitive advantage would occur if I could make a product at a lower hourly wage than you could. Quite likely I would end up getting more business than you. Comparative advantage comes about if I can grow something or produce something more easily than you can. For example, who could produce lamb chops easier – New Zealand or Alaska? Obviously New Zealand because they have the climate, the pasture land etc... to support herds of sheep. I think you get the point.

Another example would be to ask who can produce ethanol easier – Brazil or the USA? Answer is Brazil because their climate naturally is supportive of massive amounts of easily grown sugar cane which lends itself very well to ethanol production. But don't tell that to Mr. Bush, for you see he has showered the US ethanol industry with a ~ 50 cent per gallon subsidy on all ethanol made. This has caused wild gyrations in Corn prices and by default Wheat and Soybean prices too as these grains have found their way from the food table to the ethanol plant. This has then caused dislocations across the whole food spectrum, not just in the USA but around the world. Small wonder then that the recent WTO talks failed on the issue of agricultural subsidies. Developing nations want to maintain control over their agriculture rather than lower their tariffs to allow subsidized goods in from the USA. By nurturing a strong domestic agriculture sector, these nations are hoping to insulate themselves from future wild gyrations on global grain futures markets. I must admit, I can see their point.

Now, getting back to ethanol and getting back to Economics basics, to me it makes sense to invest in the corporation that has a comparative advantage. I invite you to take a look at a Brazilian firm called Cosan which trades in the USA under the symbol CZZ. Cosan this year expects to export 5 billion liters of ethanol – most of it to the US.

What you have to ask your politicians is, why does Washington continue to subsidize American ethanol makers? If there is a country with a comparative advantage in ethanol (like Brazil), then why not use the output from that country to the greatest extent possible? Instead of spending taxpayer dollars to support inefficient ethanol makers here at home, why not spend those tax dollars on roads, bridges and other badly needed infrastructure?

Cosan looks like a good trading candidate. Buy the oversold dips when the RSI and MACD I indicators suggest to do so and then sell into strength to take profits.