What to do if you own shares of Cosan (CZZ in New York or CSAN3.BZ in Sao Paulo)? Brazil’s big sugar and ethanol producer is getting hit with a double whammy of drought and a steeply appreciating Brazilian real that have reduced profits in a big way. For the quarter that ended on December 31, 2010, Cosan’s earnings fell by 20% from the same quarter a year earlier. Shares traded at $11.44 in New York at 12:30 on May 25. That’s down from $14.57 on January 4, 2011.

It’s hard to see either of these two factors turning around quickly. Right now the market believes that the Brazilian 2011-2012 sugar crop looks to be only marginally better than the 2010-2011 crop. A weakening in the Brazilian real will probably have to wait until the Federal Reserve starts to raise interest rates at the end of 2011 or in early 2012.

But you do know that the sugar supply problem will get resolved with a turn in the weather and that the real will—probably—weaken once U.S. interest rates start to rise (and when the Banco Central do Brasil stops raising interest rates in Brazil in late 2011 or early 2012.) If you were a value investor and didn’t own any of these shares, this is exactly when you’d be thinking about buying the stock on current weakness and future prospects. (Or you might wait six months or so.) Of course, if you do own it—and I have in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ since November 12, 2010—this is exactly when you want to throw up your hands and sell.

I think that emotional reaction is understandable but either premature or wrong. At the least, I think it’s worth waiting for the correction in emerging markets to work its way through the system. With a general recovery in Brazilian shares because of an end to this correction, I think Cosan is worth $15 a share. That’s roughly a 35% gain from here. I still see an end to the emerging market correction in the last half of 2011 and I’m willing to wait that long.

Am I willing to wait longer?

Let’s take a look in more detail at what’s been going on at Cosan. Read more

Corn hits a record high and only lower oil prices look capable of bringing relief

“Essentially, we don’t have any corn,” a Minnesota commodity broker told the Financial Times yesterday.

And that about sums it up. According to earlier projections, corn stocks are will drop to a 15-year low of 675 million bushels by the end of the marketing year on August 31.

That may be the good news. On Friday, April 8, the commodity markets worry, the U.S. Department of Agriculture could release new projections showing that by the end of August U.S. corn stocks will equal just four days of supply. The USDA could cut its projections to 525 to 575 million bushels. The all-time end of season inventory low was 426 million bushels in August 1996.

You can guess what this has done to the price of corn. Read more

Cosan and Shell move, slowly, closer to creating the third largest ethanol (and from sugar cane not corn) producer in the world

It’s taking quite a while to get this one done. But the joint venture announced in February between Royal Dutch Shell (RDS) and Brazilian sugar and ethanol giant Cosan (CZZ) has finally moved to the signing of binding agreements.

The deal, when completed, would create the third largest ethanol producer in the world with annual production of 440 million gallons and a sales network of 4,500 stations. Estimated annual sales revenue would come to $21 billion.

The deal seems a natural: Combine Brazil’s largest processor of sugar cane (Cosan will contribute its 23 sugar cane mills, all of its co-generation plants, 1,730 retail outlets, and other ethanol assets to the deal) with 2,740 retail stations operated by Europe’s largest oil company. Throw in Shell’s 50% stake in Canadian cellulosic ethanol producer Iogen Energy and its 15% stake in U.S biocatalyst developer Codexis (CDXS) so that the joint venture can stay on top of the next generation in biofuels and you’ve got quite a package.

So why is this taking so long? Money. (What else is new?)

Cosan is transferring $2.8 billion in debt to the joint venture. That’s about $300 million more than in the initial draft agreement announced in the winter. In exchange Cosan has added its cogeneration energy business to the joint venture.

The advantages for Shell are pretty clear. The company gets a huge presence in biofuels at one stroke. Even better that biofuels business uses sugar cane rather than corn so it’s more efficient at producing fuel and doesn’t face any of the obstacles that come with diverting a food crop such as corn to fuel production.

What’s in it for Cosan? Read more