HardAssetsInvestor

Roy Nersesian, professor at the Center for Energy, Marine Transportation and Public Policy, Columbia University (Nersesian): Well, this is irony of the situation. They have planted tens of thousands of acres of palm trees, in Indonesia and Malaysia primarily.

Norman: I love palm trees.

Nersesian: I’m not sure that those are the same ones that have berries on them for vegetable oil. But anyway, be that as it may, the whole idea of all this planting is to increase the supply of biodiesel. It takes eight years for these trees to mature, but some of them have been planted a couple of years.

When these plants mature, they will become vegetable oil for the people, not necessarily biodiesel. Biodiesel plants that feed off palm oil are all idle, mostly in Asia. All that palm oil is going into the diets of people.

Norman: So there’s a tremendous amount of spare capacity in terms of the potential to produce this biodiesel and the ability to grow it in crops. So there is not necessarily a direct impact on the food supply as we’re seeing now, for example, with the corn. That’s what you’re saying, right?

Nersesian: Yes, that the planting of the palm trees can go either way, and if there’s a shortage of vegetable oil, that’s where it’s going to go.

Norman: Now Roy, let me ask you something, because clearly high oil prices are behind at least part of the impetus or the desire to develop biofuels.

Nersesian: How about one hundred percent.

Norman: One hundred percent? Well, how about the political element? Because we saw here in the Energy Bill that the United States mandated a certain amount of production of biofuels. Now here’s my question, because a lot of people are thinking along the lines that this is creating food price increases. What if this were to be stopped? What if suddenly we had a new administration that said, “This is a crazy idea. It’s causing people to have to pay more money for food. We’re going to end the whole thing.” What would then happen in terms of the momentum to produce biofuels?

Nersesian: Well, first off, regarding corn, you have to remember that the nutritional value of the corn [used in ethanol production] is actually preserved and becomes feed for cattle, so corn is not one hundred percent lost. Maybe one-third of the corn crop is lost, so to speak, by the starch component going away. The other thing is that a lot of the problems today have nothing to do with agricultural [issues]; they have to do with the fact that we have more people eating. We have a billion and a half people in China whose diet is improving, and as you go from rice to meat, [it takes] two pounds of grain for a pound of chicken, two pounds of grain for a pound of pork, ten pounds of grain for a pound of beef. If you can have a billion people starting to eat beef, you can well imagine what’s going to happen to grain prices.

Shipping prices, by the way, are at all-time peaks because of Chinese imports, and on top of that, you have the massive failure of agricultural output in Australia due to the drought. There’s one plant in Australia that processes rice that can feed 20 million people. That plant is idle. No rice, no water.

Norman: Finally, let me ask you about the element of speculation. We see now the agricultural markets and all commodity markets have become the interest of very large investors - pension funds, endowments, commodity funds - who look to own these resources as an asset class. Don’t you believe that’s a contributor to the price rise as well?

Nersesian: Yes it is, and frankly, I can’t wait until there’s a big break and these people have to start liquidating their positions.

Norman: Do you think that will happen since a lot of these are these passive, long-only investors? They have to allocate up to a certain amount and they’re in there.

Nersesian: Just a couple of weeks ago, gold was over $1,000/ounce and it fell by a hundred dollars, and if you own gold futures, this might make you a little bit nervous. Oil is off its peak. I think it’s a possibility. Someone starts to play a game of chicken and maybe starts a panic. Because these are futures, you can’t stay with a future once there’s a 10% decline in the price. They have to be rolled over.

Norman: So from a fundamental standpoint, getting back to I think your real arguments for this long term - growing population, the need for alternative energy, high oil prices, people looking for competitive sources of energy - those fundamentals are going to stick around.

Nersesian: For a while, for the perfect storm.

Norman: It is the perfect storm.

Nersesian: If you are a poor person, this is the perfect storm.

Norman: Oh boy. All right, well you heard it folks, the perfect storm. Keep your eyes focused on biodiesel and keep your eyes focused right here at this Web site, HardAssetsInvestor.com, for a lot more interviews to come. I’m Mike Norman; see you next time.