Berkshire Hathaway 2006 Annual Meeting Audience Question # 8

The economics of ethanol

Warren Buffett:

Let’s go to Number 8.

Audience Member:

Good morning. I’m Diane Ryan from Kansas City.

My question is, what is your opinion on the economics of ethanol and as… just as a fuel additive?

And, as a potential investor, should I be looking at that industry?

Warren Buffett:

Well, I don’t know enough to answer the latter part. I know we don’t… Charlie and I would not know enough to evaluate ethanol projects.

We’ve been approached on them. And, of course, they’re quite popular now.

But in terms of figuring out what an ethanol plant is going to be earning on capital five or ten years from now, it’s far easier for us to figure out whether people will be drinking Coca-Cola, or even eating See’s Candy, which I highly recommend.

So, you know, it will depend on government policy. It will depend on a lot of variables that we’re not particularly good at predicting.

It’s easy to raise money for it now. I mean, it’s a popular item. You know, it’s hot.

And our general experience is that we don’t look at things very much that are hot at any given time.

I know nothing about the… you know, the biochemistry or anything of the sort.

I have a son who was a head of the ethanol board in Nebraska. And if I notice that he suddenly starts getting richer than I am, you know, I will suspect that I should start looking at ethanol very hard.

But so far, I haven’t seen tangible evidence of that.

There’s no question ethanol usage is going to grow. I mean, that we will see.

Generally speaking, ag processing… agriculture processing… businesses have not earned high returns on capital. I mean, if you look at Cargill, you look at ADM, you look at the big processers, that has not been a great business.

Ethanol could prove an exception, but I’m not sure how you gain a significant competitive advantage over time, you know, with any given ethanol plant.

And if you get too many of them around, you know, it will not be a good thing when you’re turning out a commodity.

Charlie?

Charlie Munger:

Well, my attitude is even more hostile than Warren’s.

I have just enough glimmers of thermodynamics left in me to suspect that it takes more fossil fuel energy to create ethanol than you can get out of the ethanol you’ve created.

If so, that’s a very stupid way to try and solve an energy problem.

Warren Buffett:

Well, considering my family situation, I would say I have friends who like ethanol, and I have friends who don’t like ethanol.

And I want my position to be perfectly clear: I’m for my friends.

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