09-16-2010 11:59 AM - edited 09-16-2010 03:11 PM
A corn market scenario has gone viral. This was sent to me, it's not my scenario. So, here it is. And then afterwards, I offer a grain analyst's perspective on it. Of course, it would be fun to hear your take on this too.
USDA “DISCOVERS” A Trainwreck on corn yield in the Oct or Nov. crop estimate..
Ethanol moves to an even greater premium to gasoline (currently blendable up to 'credit minus blending cost (That is 45 – 10 =35 premium gasoline)
To avoid a food panic……………………
EPA – Simultaneously announces a waiver of the ethanol mandate – utilizing their existing authority to avoid economic damage from ethanol policy– Instantaneously altering 4.7 billion bushels of demand.
With funds long, near 500,000 contracts, it could be a day to remember.
As we appear to be going “parabolic” in price action, we need to remember that 35% of the corn demand is gov't controlled, affected by a single stroke of a pen.
One analyst says, "Obama has yet to budge on any of the early mandates like ethanol commitments. There doesn’t appear to be any grain shortages here, looking at ending stocks, shrinking yes but running out no. It seems unlikely, prior a drought next summer, that the government would alter ethanol direction.
09-16-2010 12:16 PM
Now, that would be tough on the economy. As stated before, corn used for ethanol is still used for feed. I read that every dollar the farmer touches is turned over 2.68 times in the rest of the economy, which is the highest group return rate in the US. We are still talking a 13 billion bushel crop, huge by historical standards. If they wanted more acres, why did they up the CRP rates so much and enroll so many acres this year? Remember it was $4 gas that started the last consumer collapse, not high priced food. Cutting back to zero mandate, slim to to none. I would think if it happens it would be in a very slow, methodical pace, like a percent or two at a time. So is ethanol their new 'reserve' program? Course we could drink the ethanol and eat the DDG's I suppose some day. What would be their basis, that us fat Americans need more cheap food?
The biggest concern this market has is the weather in SA.
09-16-2010 12:37 PM
When ever the government is involved is there any other outcome then a train wreck. I think ethanol is a great way to use our surplus corn, gives us energy independence, the live stock market in the Midwest gets a quality feed product, creates jobs etc. but ethanol policy is creating a market where supply and demand can't work. Really if you have an abundance of corn you should be crushing more of it, but you can't because you hit the 10% blend wall. On the flip side if you have a corn shortage there should be less corn crushed but you can't because of government mandates. I know genetics and farming practices have insulated us from the bad year, but we haven't had major 1988 type drought since we started using a big chunk of corn for ethanol. You would think the proactive approach is to have a policy in place that could remove or lower the mandate if that production shock occurs, but when has the government ever been proactive. My guess is that if we have a year with a big production shock ethanol will become unpopular the government will act too slowly and by the time the do react it will be too late and instead of slowing demand for a year they will crush demand for a decade.
09-16-2010 01:36 PM
My 2 cents is that they were already going to eliminate by percentages the tax credit this nest year so the how of it is going to be interesting. If they use this method then they can claim the moral high ground while at the same time trimming the budget exposure which they are going to have to do any ways. Remember jr's rule of gov. number 1 " the gov. giveth and the gov. takes away cursed be the name of the gov."
Since we are into conspiracies though hows about this:
Corn is going through the roof! Watermelons like greenpeace claim no room to cut out bio fuels. Gov gives in to corn and environmental lobby. Using the moral high ground of global warming they ban all animal agriculture. Except grass fed animal operations. Cuts out 6 billion bu. Of demand with a pen stroke. Allows for a decrease in fried foods and dairy products which as we all know contribute to the obesity of Americans. This saves the the almighty precious bio fuels industry and only a few big hog farmers get gored along with the multi national beef packers who own cattle herds and well since there are only 50,000 dairy farms in the US they won't be a big enough voting block to affect us any way! You say it will never happen ........ We got health care didn't we?
No I am not bitter just musing.
09-16-2010 03:48 PM
Has it ever occured to anyone out there that for ethanol producers to make money they need low corn prices and high gas prices. I repeat....
FOR ETHANOL PROCESSORS TO MAKE MONEY THEY NEED LOW CORN PRICES AND HIGH GAS PRICES!!!!!
Seems bad for both farmers and American in my opinion. Note to self, the best way to make prices go up on a necessity product like corn is to just burn up all the ending inventory. If the government pays for it, even better!
My prediction...higher interest rates in the coming years and a switch from corn to other ethanol feedstocks will cause a major crises in production agriculture. Land prices don't make any sense today based on forward economics. My advice -- pay off debts and save for the day when this charade implodes. We may be on our way toward some of the best land deals in a lifetime. The government is burning up 1/3 of the corn crop and subsidizing it to the tune of approx $7 for each bu processed to make corn ethanol. When that changes, we are going to have big problems. Of course, Purdue the NCGA, ADM and POET and all the others who created this situation in the first place will probably find a way to cry and whine enought to get some other sort of subsidy at that time but who knows!
09-16-2010 04:00 PM
And another thing, I think ethanol production has done an awful lot to hurt our core markets -- food and especially animal feed. High corn prices increased the pace of consolidation in the hog market over the last few years and put a lot of livestock guys out of business. I think that all the negative environmental attention associated with ethanol is really hurting farming also and it just adds to the perception that we farmers need yet another subsidy to contribute to society. POET recently said that it doen't even need the subsidy to compete anymore and wants to level the playing field by eliminating it. To that I would say great, and while your at it open up the US to Brazilian ethanol from sugar producers like Cosan that are approximately 17x more efficient than POET because their feedstock sugar is superior and can sell ethanol profitably, delivered to the US for something like 1.00 per gallon. Too bad they had to cut down millions of acres of rainforest to get all that sugarcane but that is beside the point.
And yes, I am opinionated. But I am not afraid to criticize the industry. And yes, I care about agriculture and have been directly involved with it for 20+ years. But I think we will have enough demand in the long-run from food and feed markets and rising populations that we don't need to burn up our ending inventory.
09-16-2010 04:26 PM
This debate is not complete without bringing up the competetor of ethanol, fossil fuels. The subsidies going to fossil fuels, read enviromental and military, is beginning to gain some attention. Some circles are waking up to the Big Oil/Military Industry subsidy. Take away their subsidy and all bets are off.
09-16-2010 06:03 PM
So mr. ethanol basher, what is your business model for agriculture... you can't have any subisidies, because you are the only ones that get them, LMAO, and at the same time you can't charge more than $5.00 a bushel because that is unethical... or is it $4? Sounds fair to me. He who doesn't take any government money can cast the first stone, there is a large crowd... Where did this idea come from that the american farmer has a moral obligation to feed every last person on planet earth at or below the cost of production? If I want to sell my corn to an ethanol plant, so what? That is my right, or until someone dictates that I can't. But apparently I have a moral obligation to raise certain crops and sell it them to certain buyers for a "reasonable" price. Are the subsidies to big oil, larger or smaller than those to ethanol, and what are the ratios of those subsidies? The point lost about government subsidies is that they are also intended to "control" behavior. you take away the subsidies and your control/stability will go right out the window. So take away the subisidies to agriculture and then you can really start to whine about feed prices.