February 23, 2020

Brazil Eyes U.S. Ethanol Subsidies at WTO

Yesterday, the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS) released their latest Crop Production report.

In part, the NASS report stated that, “Corn production is forecast at 13.3 billion bushels, up 2 percent from last month and 26 percent above 2006. Based on conditions as of September 1, yields are expected to average 155.8 bushels per acre, up 3.0 bushels from August and 6.7 bushels above last year. If realized, this would be the second highest yield on record, behind the 160.4 bushel yield in 2004. Production would be the largest on record as growers expect to harvest the most corn acres for grain since 1933.”

For soybeans, the Crop Production report stated that, “Soybean production is forecast at 2.62 billion bushels, down slightly from the August forecast and down 18 percent from last year’s record high. Based on September 1 conditions, yields are expected to average 41.4 bushels per acre, down 0.1 bushel from last month and down 1.3 bushels from last year.”

For historic context with respect to corn production, see this graph; for soybeans, click here.

Also yesterday, the World Agricultural Outlook Board (WAOB) issued their monthly World Agricultural Supply and Demand Estimates (WASDE) report, which indicated that, “U.S. corn production is forecast at 13.3 billion bushels, up 254 million from last month. The forecast yield of 155.8 bushels per acre would be the second highest ever, but still 4.6 bushels per acre below the 2004 record. Total corn supplies are projected at a record 14.5 billion bushels, up 259 million from last month as beginning stocks are also raised 5 million. Feed and residual use is raised 100 million bushels reflecting the larger crop and reduced availability of distillers grains as projected ethanol corn use is lowered 100 million bushels. Ethanol use is lowered based on indications of declining plant capacity utilization and a slower-than-expected pace of start-ups. Exports are projected 100 million bushels higher with strong world demand for coarse grains and tighter foreign supplies, especially for corn. Ending stocks for corn are projected 159 million bushels higher at 1.7 billion. The season-average farm price range is unchanged at $2.80 to $3.40 per bushel supported by record wheat prices and strong soybean prices.”

With respect to oilseeds, yesterday’s WASDE report indicated that, “The U.S. season-average soybean price range for 2007/08 is projected at $7.35 to $8.35 per bushel, up 10 cents on both ends.”

And for wheat, the report stated that, “U.S. 2007/08 wheat ending stocks are projected at 362 million bushels, down 42 million bushels from last month reflecting lower imports and increased use. If realized, this year’s carryout would be the lowest since 1973/74. Imports are lowered 15 million bushels as production for Canada is lowered. Feed and residual use is projected 10 million bushels lower as higher prices limit feeding and tight supplies draw lower quality wheat into milling. Food use is raised 10 million bushels in line with revisions to 2006/07 based on the latest mill grind estimates from the U.S. Bureau of Census. Exports are projected 25 million bushels higher as a tighter world supply situation boosts prospects for U.S. wheat sales. The wheat season-average farm price is projected at $5.50 to $6.10 per bushel, up 40 cents on each end of the range from last month. The projected range is well above the 1995/96 record price of $4.55 per bushel.”

For a historic look at prices, click here (corn), here (soybeans) and here (wheat).

As for the supply estimates impact on futures prices, Associated Press writer Lauren Villagran reported yesterday that, “Wheat prices climbed sharply on expectations for dwindling U.S. stockpiles before giving back the gains in a late-day tumble to the market limit. The Agriculture Department projected Wednesday that U.S. stockpiles will shrink to 33-year lows by the end of the crop year.

“The recent run-up in U.S. wheat grows out of months of robust demand from foreign buyers, who are shopping in an increasingly tight global market and have been willing to pay record-high prices as a result. Wheat crops the world over have been damaged by poor weather conditions, driving more buyers to the market. The USDA projected Wednesday that the country’s stocks of wheat at the end of the crop year will decline to 362 million bushels, the lowest since 1973-74.”

More specifically, the AP article stated that, “December wheat spiked as high as $9.07 a bushel before plunging 30 cents to close at $8.605 a bushel on the Chicago Board of Trade,” and that, “December corn added 15.25 cents to $3.565 a bushel, while November soybeans swelled 18 cents to $9.385 a bushel.”

Energy prices, particularly crude oil prices, have also been making news.

Matt Chambers, writing in yesterday’s Wall Street Journal reported that, “The front-month October light, sweet crude contract on the New York Mercantile Exchange rose 74 cents, or 1%, to $78.23 a barrel, the highest-ever settlement for a front-month contract.”

And David Bird, writing yesterday afternoon at The Wall Street Journal Online indicated that, “Crude-oil futures prices traded to a record intraday high of $80.18 a barrel Wednesday as a tropical storm loomed off the U.S. Gulf Coast refining region amid fresh indications of tight U.S. oil inventories.

“Front-month October-delivery crude oil futures prices settled at a highest-ever closing level of $79.91 a barrel on the New York Mercantile Exchange, up $1.68, or 2.1%. Prices have gained 9%, or $6.55 a barrel in the past eight sessions.”

Production estimates, the market prices of commodities, and the market price of oil, are among the factors that can play a role in ethanol profitability and future ethanol production levels.

A Dow Jones news article from yesterday reported that, “The U.S.’ ethanol production capacity will probably total 20.43 billion gallons as of August 2009, up sharply from 6.707 billion gallons as of August this year, due to high profit forecasts and government support, a U.S. commodity risk management consultancy firm said Wednesday.

“That means corn consumption for ethanol will total 7.46 billion bushels in the 2009-10 crop year, more than double the 3.62 billion bushels in 2007-08, Bill Tierney, executive vice president of research and marketing for John Stewart & Associates, said during the International Corn Industry Conference in Dalian.

“But factors including changes in government policies, crude oil prices and the global economy may result in overcapacity, he added.”

Although corn used for ethanol continues to surge, concerns regarding overcapacity may mean that in the near-term, while corn used for ethanol increases, it may be increasing at a decreasing rate. Recall that yesterday’s WASDE report lowered projected ethanol corn use by 100 million bushels and stated that, “Ethanol use is lowered based on indications of declining plant capacity utilization and a slower-than-expected pace of start-ups.”

In addition, even as the price of crude oil soars to record levels, the price of ethanol for the first seven months of this year ($2.35) is averaging $0.23 less than last year’s average price ($2.58).

One of the most important variables influencing ethanol production is U.S. energy policy. As concerns regarding overcapacity percolate, attention on potential changes in the Renewable Fuel Standard, as well as tax incentives for renewable energy production, will likely heighten.

A Congressional Research Service (CRS) report from August (“Biofuels Provisions in H.R. 3221 and H.R. 6:A Side-by-Side Comparison”), which was written by Brent D. Yacobucci, provided a helpful guide to potential changes in U.S. energy policy.

The CRS report stated that, “This report provides a side-by-side comparison of biofuels-related provisions in the House- and Senate-passed energy bills, H.R. 3221 and H.R. 6, respectively. H.R. 3221 (the New Direction for Energy Independence, National Security, and Consumer Protection Act and the Renewable Energy and Energy Conservation Tax Act of 2007) was approved by the House on August 4, 2007. The Senate approved its version of H.R. 6 (the Renewable Fuels, Consumer Protection, and Energy Efficiency Act of 2007) on June 21, 2007. Both bills cover a wide range of energy topics with extensive attention to biofuels, including ethanol and biodiesel.

“Key biofuels-related provisions of the two bills include:

* a major expansion of the renewable fuel standard (RFS) established in the Energy Policy Act of 2005 (P.L. 109-58) [Senate bill];

* expansion and/or modification of tax credits for alternative fuel refueling infrastructure and for ethanol, and renewable diesel fuels [House bill].”

For a more complete breakdown on tax issues, see this comparison on page 24 of the report; and for a more detailed look at the RFS provisions, see this comparison on page 27 of the CRS report.

For a look at the legislative process regarding the energy legislation, see this excellent article (“Lawmakers Get Ready To Revisit Energy Bills”) by Steven Mufson, which was published in The Washington Post on September 5.

And John M. Broder, writing in today’s New York Times reported that, “The prospect of a comprehensive energy package’s emerging from Congress this fall is rapidly receding, held up by technical hurdles and policy disputes between the House and the Senate and within the parties.

“This summer, both houses passed major bills meant to promote energy efficiency and wean industry from fossil fuels. The bills have gaping differences that are supposed to be resolved in a conference committee.

“Democratic leaders in both chambers have signaled that conference committee members are unlikely to be named until late October, at the earliest. Others suggested that leaders may try to resolve the differences in the bills without convening a conference, which would create other problems, including the threat of a Republican filibuster in the Senate.

“Although Democratic leaders proclaimed energy a top legislative priority last January, the issue competes with Iraq, appropriations, financial market turmoil and product safety for room on Congress’s fall calendar.”


As an interesting and important side development on energy issues and agriculture, some have indicated that energy policy, not agricultural policy is an increasingly important variable that influences production decisions and market prices of program crops.

For example, Associated Press writer Amy Lorentzen reported in an article from August 30 that, “Many in Iowa are pushing Congress to raise the amount of renewable fuel that must be used in the nation’s fuel supply. And there’s interest in what presidential candidates would do in 2010, when a 51-cent-per-gallon of ethanol tax break is up for review.

“‘Energy policy is arguably more important to Iowa farmers than commodity policy,’ Babcock [Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University] said.”

As that reality plays out, international trading partners continue to take note.

As has been highlighted before, a Dow Jones article from August 22 stated that, “In July, Brazil formally filed a plea at the World Trade Organization, charging the U.S. government has handed out billions of extra dollars to its hometown farmers in the grains and oilseed sectors from the years of 1999 to 2005, contrary to WTO rules.

“However, a big question in recent weeks has been whether Brazil, the world’s leading ethanol exporter, would try to tackle U.S. subsidies for ethanol in its newest case, or leave the issue of biofuels for a future date.”

Just yesterday, Associated Press writer Bradley S. Klapper reported that “Brazil will ask the World Trade Organization for a formal investigation of U.S. farm subsidy programs, which it says includes payments for ethanol production, a senior Brazilian official said Wednesday.

“The South American country, which has already won a series of WTO rulings over U.S. cotton subsidies, will make its request for an investigative panel soon, said Roberto Azevedo, the Brazilian Foreign Ministry’s trade chief.

“The dispute could become a major case for the global commerce body, which has largely steered clear of energy issues in its 12-year history. Brazil is a major ethanol producer.”

The AP article added that, “While most of the measures it questioned Washington about concerned farm produce, Brazil included in its complaint what it called ‘energy subsidies,’ which included tax exemptions on diesel fuel and gasoline.

“‘Ethanol results from agricultural subsidies,’ Azevedo said. ‘You don’t produce ethanol from rocks or underground. It’s derived from agricultural commodities.’

Joe Glauber, the chief U.S. farm trade negotiator, disagreed.

“‘We don’t feel that’s appropriate,’ he told The AP at the WTO’s Geneva headquarters. ‘We view the payments as industrial subsidies and we’ve notified all of them.’

“Glauber declined to comment on what a WTO investigation would mean.

“Azevedo said he was not sure when Brazil would formally ask the WTO to launch an investigation. The next meeting of the WTO’s dispute settlement body is Sept. 25 and new items must be added to the agenda by Thursday.

“Azevedo and Glauber met Wednesday at the WTO to discuss the dispute.”

The AP article stated that, “Brazil says it also is worried about U.S. subsidies to corn growers, who are devoting more than a quarter of their crop this year to ethanol, according to U.S. Agriculture Department estimates. The United States is the world’s leading ethanol producer, while Brazil, the top sugar producer and exporter, is second.”

However, Reuters news reported yesterday (via DTN, link requires subscription) that, “The government would present its request as early as next month but wanted to coordinate its presentation with Canada, which was preparing a similar case, Marega added.

“Brazil will argue that the total of U.S. farm subsidy programs exceeds a $19.1 billion limit allowed under a WTO accord.

“It will question Washington’s direct payments to farmers as well as counter-cyclical aid programs. Brasilia had questioned Washington on its ethanol subsidies last month but has not yet decided whether to include them in the request for a panel, Marega [Flavio Marega, head of trade disputes at Brazil’s foreign ministry] said.

“Brazil is the second-largest producer of ethanol after the United States. Brazil’s ethanol is derived from sugar cane and is charged a $0.54 per gallon import tariff in the United States, where the cost of corn-derived ethanol is significantly higher.”

Keith Good

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