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03-05-2012 06:56 AM - edited 03-05-2012 06:57 AM
So, I'm visiting with a grain analyst the other day. He says don't go bearish on ethanol plants. And here's why, in his own words:
"The economic collapse in late 2008 pulled grains down dramatically from the summer high record high prices. The ethanol plant owners who got into the business for environmental reasons, using government money, all went bankrupt as they bought corn at the highs. This showed no marketing skills and they sold the plants to the strong Midwest grain producer hedgers. In 2009, record ethanol production and profits arrived as Obama took office early year and implemented multiple mandates to increase ethanol production and usage thru 2017. In 2010, the government ended the subsidies given to build these plants as they were no longer needed and investors were falling over themselves to build at their expense. In 2011, per gallon subsidies ended, as profits received signaled the subsidies were no longer needed.
Farmers, the last two years, have sold only what grain is needed at harvest time to meet current bills and now store the remaining grain for what now is the seasonal high price period in the summer. This was the case in 2007, 2008 and 09.
Ethanol producers have learned the same lesson. They now buy corn heavily at harvest-low prices and build inventory to produce ethanol for profit when the summer high crude oil and gasoline prices are set at peak seasonal demand. The ethanol and grain producers are now in sync with the new seasonal patterns of prices controlled by index and trend-following funds. The ethanol business will continue to expand and profit in coming years by continuing to buy record corn tonnage at seasonal low periods and building large storage to meet these peak demand periods."
What do you think? Is he on to something? Have the ethanol plants that you have been dealing with gotten more market savvy? What do you see out there in the countryside?
03-05-2012 07:05 AM
Here is one of your Irish counterparts thoughts.
Gerard Brickley, Director of Meat, Bord Bia – Irish Food Board
For the first time in US history, ethanol refiners are consuming more of the US corn crop than livestock producers and this trend is set to continue to at least 2014 as government mandates and exports boost fuel demand.
Corn use for ethanol has risen almost fourfold from 1.32 billion bushels in 2005 to 5.02 billion in 2011, exceeding 40% of the total harvest last year. Feed, which previously accounted for the biggest share of the crop, fell by almost 22% during the period to 4.79 billion bushels as livestock and poultry farmers in the US turned to alternative feeds, including dried distillers grain, an ethanol byproduct.
Feed demand is forecast to drop to 4.6 billion bushels, the lowest since 1990, after the U.S. cattle herd inventory on January 1st 2012 fell to the lowest number recorded since 1973. Chicken producers also curbed output due to poor profit margins from high corn costs.
Corn prices in the US have rose by 5.58% since December 2011. Despite this, US ethanol production is expected to reach record 13.7bn gallons this year, exceeding mandated levels by 1bn gallons. The meat industry and some environmentalists say rising corn consumption by ethanol refiners has driven up food prices worldwide. With high petrol prices, ethanol production remains a very attractive proposition.
This shift in the balance between food and fuel could be the tipping point in world grain markets. China, once able to supply its internal corn demand, currently expects to import a few million tonnes of corn next year from the US. This will likely place additional stress on the United States corn industry, as it will introduce another source of demand (and corresponding market pressures) for the US corn harvests.
Just found this this morning. Just throw it in there with all the other thoughts you will get.
03-05-2012 07:19 AM
Yesterday, in Chicago, I paid $4.00 for gasoline. It really hurt my feelings. As both of our sources note, as long as the crude oil and gasoline markets stay high, the ethanol prices have a "ticket to ride". Thanks for adding that piece. This energy business is turning out to be quite the revenue stream for the ethanol industry. And we haven't even started to talk about the demand from Brazil. You wait until people wake up to that demand.
03-05-2012 07:59 AM
03-05-2012 08:02 AM
There are a few points he didn't talk about in your discussion. 1st is the blend wall, which since demand for gasoline has decreased so has the mandate to blend. 2nd is the experation of not the blenders credit but the import duty restrictions on world ethanol. Brazil is the low cost producer in the world and can export into the US at world prices. 3rd is the lack of storage capacity since he is assuming seasonal driving patterns will consume the excess ethanol.
There are more challenges to US ethanol then they have ever seen in the past.
03-05-2012 08:07 AM - edited 03-05-2012 08:09 AM
I notice the local ethol bids from two plants within 30 miles of me seem to try and hold the cash bids at $6.45 to $6.60/bu level inspite of what Chicago cash bids are by varying their basis.. I don't know if that is better marketing, or just the most they can pay and still keep grinding 24-7 profitably.
Their future bids especially Dec are more in line with the board.
Filled my pickup yesterday for $3.899-- #2 diesel
03-05-2012 08:18 AM
I'm not sure that I completely buy into his thesis that there is now a virtuous circle where farmers sell high and e-plants buy low. If anything, when everyone begins to count on the inevitability of a seasonal pattern it becomes a matter of self-prophesied self destruction.
I'm also not sure about his narrative that the guys who went broke were just enviros or something and not serious "marketers." Evidence on VeraSun is that they made a huge bet by selling puts in a place where everyone knew the market couldn't possibly go. If the current consolidated operators are merely operating on beating the market the same will surely happen to some of them at some point.
I would say that it was apparent 2006-8 that there wasn't enough risk management talent to go around for the large number of entities and consolidation was inevitable at some point.
That said, I assume the ethanol industry will be well protected by the mandate and will do fine as long as there is corn to grind (and that is a very, very large problem if the much discussed 140 US yield would materialize with current tight stocks).
Anyway, I think the big thing is oil and while everyone is counting on $5 gasoline, I'm not so convinced, barring war on Iran. The oil market is very well supplied at the moment and my view is that like 2006-8 it is being supported primarily by the risk-on, "short dollar, long everything else" trade.
The tricky part on that is that it tends to continue until the system locks up and then liquidity all sloshes to the other side of the boat at the same time and things get rather violent. This is an electin year and the system seems to be very blithely confident that any and all challenges will be met by intervention. I'd tend to agree but see a lot of rocks out there too.
We'll see. I guess I'd look for a close over around 80.30 in DX to indicate anything might be changing. Even then, there probably will be plenty of posturing and maybe real intervention to try to drive it down and keep assets up. So it is a long game.
But the dollar doesn't seem to be real cooperative with attempts to drive it down, which has my interest.
I still think oil has considerable downside with the war caveat.
03-05-2012 08:30 AM
Brazil isn't going to be importing US ethanol like last year since they have adjusted fuel blend rates in that country. Saying wait unil people wake up to brazil ethanol demand has a bias that should be seen by an analyst. Currently Brazil is ramping up capacity to produce ethanol for its own market but also to export to the US market (the import duty was also let to expire along with the blenders credit). Brazil's sugar ethano is the least cost producer in the world, which means if the can produce it they don't need US ethanol.
I agree with hardnox that every time someone thinks they figured out the game (marketing) the game changes. Farmers have been selling corn for years and some years you get the bear, some years the bear gets you.
03-05-2012 08:38 AM