Agricultural Outlook- Biofuels
Reuters writers Robert Rampton and Charles Abbott reported on Friday that, “American farmers are in a bind this year — land, fuel and seed costs are up but crop prices are down sharply after a three-year, ethanol-fueled boom, say leaders of the largest U.S. farm group.
“‘We’re looking for less net farm income … The only question is how much less,’ said Bob Stallman, president of the 6 million-member American Farm Bureau Federation, in an interview ahead of the group’s annual convention.
“About 5,000 people are expected at the convention in San Antonio, Texas, which opens on Sunday. Farmers will hear the first forecasts of U.S. harvests and farm-gate prices this year before 369 delegates vote on farm policy proposals.”
The Reuters article noted that, “Wheat, corn and soybean prices soared to record highs last summer thanks to rapid expansion of the fuel ethanol industry. But market prices tumbled last fall.”
With respect to potential prices for 2009, an update posted yesterday at the Farm Bureau’s webpage indicated that, “Farm income hit a record high in 2008 due in part to record prices for corn, soybeans and wheat, but an economist speaking at a crop outlook seminar at the American Farm Bureau’s 90th annual meeting said farmers can expect lower prices this year.
“Jim Sullivan, an agricultural economist and senior vice president of Informa Economics in Washington, D.C., said the global recession will mean weakening demand for corn, soybeans and wheat this year. For corn, the only strong driver for demand will be ethanol while biodiesel will be the top demand driver for soybeans.”
Yesterday’s Farm Bureau update also pointed out that, “Cotton farmers can expect another challenging year in 2009, according to Sharon Johnson, senior cotton analyst with First Capitol Group in Atlanta, who also addressed the seminar. ‘Cotton prices are under significant pressure as consumption and trade are negatively impacted,’ Johnson said.
“The global recession is weakening demand for cotton products. ‘Nobody is going to the stores, and they’re certainly not buying many cotton items,’ Johnson said.
“The past few years have been tough for cotton producers. In 2007 and 2008, world cotton consumption declined by its largest percentage in 65 years.
“Cotton acreage has been losing to corn acreage since 2006. For 2009, cotton acreage will also be impacted by input costs, versus competing crops and credit availability.”
In news regarding the current market price situation, Bloomberg writer Jeff Wilson reported on Friday that, “Soybean prices surged to a three- month high and corn climbed on speculation that hot, dry weather will damage crops in Argentina.”
The article added that, “Soybean futures for March delivery rose 46.5 cents, or 4.7 percent, to $10.36 a bushel on the Chicago Board of Trade. Earlier, the price reached $10.40, the highest for a most-active contract since Oct. 2. This week, soybeans gained 6 percent, the fifth straight advance. The price still has dropped 18 percent from a year ago.
“Corn futures for December delivery rose 4 cents, or 1 percent, to $4.1075 a bushel. The price dropped 0.4 percent this week. The most-active contract has declined 14 percent in the past year.”
And Shane Romig reported on Saturday at Barron’s Online that, “As Chicago’s bitter cold batters CBOT soybean traders, blistering sunshine is baking South American crops. That makes a continued price rally likely — especially with world markets looking for record output from Southern cone countries (Argentina, Brazil, Paraguay, Uruguay and Bolivia) to replenish low international stocks.
“As it is, the most-active Chicago Board of Trade March soybean contracts have rallied by more than $2 a bushel in a month, partly on weather concerns. On Friday, March CBOT soybeans settled at $10.36 a bushel, up 6.04% on the week.
“In December, the U.S. Department of Agriculture said that Southern cone should account for 58% of the world’s soybean exports. The January report, scheduled to be released this week, may well downgrade that number.”
In the wheat market, Bloomberg writer Jeff Wilson reported on Friday that, “Wheat rose, capping a fifth straight weekly gain, on expectations that production will fall in the U.S., the biggest exporter of the grain.
“Farmers probably planted 44.056 million acres of U.S. winter varieties from September to November, down 4.6 percent from a year earlier, based on the average estimate of 11 analysts surveyed by Bloomberg News. U.S. exports fell and prices plunged by more than half from a February record. The Department of Agriculture is scheduled to release its estimate on winter-wheat acreage on Jan. 12.”
The article stated that, “Wheat futures for March delivery rose 17 cents, or 2.8 percent, to $6.295 a bushel on the Chicago Board of Trade. Prices gained 3 percent for the week and are up 34 percent since reaching an 18-month low of $4.71 on Dec. 5. Wheat still is down 53 percent from a record $13.495 reached on Feb. 27.”
In more specific news on biofuels, Reuters news reported on Friday that, “Average U.S. ethanol distillers remained in the red this week, though not as deeply as last week thanks to an uptick in prices for the finished product, analysts said.
“The ethanol crush spread rose about 7.8 cents to 19.8 cents a gallon, using the formula of the Midwest ethanol price, minus the corn price divided by 2.8.”
The article noted that, “Operating costs such as natural gas prices and overhead trim the crush spread by about 25 cents per gallon, bringing net margins to -5.2 cents a gallon.
“‘We continue to see negative profit margins and I don’t see much light at the end of the tunnel for another year or so,’ said Ron Oster, analyst at Broadpoint Capital.”
Friday’s Reuters article also explained that, “Corn is the main input cost for U.S. ethanol makers. March corn closed at about $4.10 a bushel on Friday, up about 3 cents from last Wednesday.
“Ethanol prices, however, moved up at a faster rate, gaining nearly 10 cents a gallon to $1.66/$1.67 in the Midwest market, dealers said.
“Analysts said the gains have come in the aftermath of a series of production shutdowns and curtailments as the hardest-hit distillers slow operations.”
In a related article, David Bird reported in Saturday’s Wall Street Journal that, “The roller-coaster ride in crude-oil prices may get wilder still in coming weeks.
“Amid a glut in U.S. crude-oil inventories and the bleak economic outlook, crude-oil prices clocked up a dismal week, shedding 16% since Monday’s settlement of $48.81 a barrel. Friday, light, sweet crude for February delivery on the New York Mercantile Exchange fell 87 cents, or 2.1%, to $40.83 a barrel, after tumbling to a low of $39.38, the weakest intraday level since Dec. 31.
“Weak demand has caused crude-oil inventories to swell, adding pressure on near-term prices. The Organization of Petroleum Exporting Countries is trimming output, but the moves aren’t expected to begin affecting stockpiles for weeks. Poor fundamental forces in the U.S. — weak demand and high inventories — mean prices are set for a challenge of $35 a barrel and perhaps a move back toward $30 a barrel.”
On the issue of second-generation biofuels, Reuters news reported on Friday that, “Ethanol production from wood chips, grass and other plant material could ‘explode’ by 2012 if a commercialized facility to produce the second generation of biofuels is successful, U.S. Agriculture Secretary Ed Schafer said on Thursday.
“Schafer told reporters that he expected that by January 20 USDA will award a loan guarantee to Range Fuels, based in Colorado, to build a commercial-size plant capable of producing 100 million gallons of ethanol annually from woodchips.
“It would be the first guarantee issued through a program created in the 2008 farm law to speed development of new biofuels. Schafer would not say how much the loan would be.”
The article noted that, “‘If that investment is made and that facility gets up and running, it will jump, I believe, by two years the goal of producing on a commercialized basis ethanol from non-corn sources or non-food based sources,’ he said.
“‘If this first-commercialized production capacity works then I think it will explode the opportunities in second-generation biofuels,’ he added.
“Currently, estimates say large-scale production of second-generation biofuels are five or six years away. Corn is the feedstock for almost all U.S. ethanol now.”
Meanwhile, an update posted last week at the Mulch Blog (The Environmental Working Group) stated that, “As Congress and the incoming Obama administration plan the nation’s next major investments in green energy, they need to take a hard, clear-eyed look at Department of Energy data documenting corn-based ethanol’s stranglehold on federal renewable energy tax credits and subsidies.
“An Environmental Working Group (EWG) report released today uses data from a little noticed analysis buried in an April 2008 report from the federal Energy Information Administration (EIA). The information unearthed by EWG shows that solar, wind and other renewable energy sources have struggled to gain significant market share with modest federal support. Meanwhile, corn-based ethanol has accounted for fully three-quarters of the tax benefits and two-thirds of all federal subsidies allotted for renewable energy sources in 2007.
“The corn-based ethanol industry received $3 billion in tax credits in 2007, more than four times the $690 million in credits available to companies trying to expand all other forms of renewable energy, including solar, wind and geothermal power.”
Farm Bill (“Sodsaver”)
Associated Press writer Dennis Gale reported on Saturday that, “Gov. Mike Rounds said Saturday that he hasn’t decided whether South Dakota should sign up for the so-called sod saver provision of the 2008 Farm Bill, although he did say he’s ‘leaning against it.’
“Sod saver would not allow federal farm program benefits for those who plow under native prairies as cropland.
“Rounds said the concept is right in the long term but that no one’s sure the program in the federal Farm Bill will work. He also noted that affected organizations are split on the issue.”
Dow Jones writer Nathalie Boshcat reported last week that, “International trade talks won’t restart until the Obama administration takes office, World Trade Organization head Pascal Lamy said Thursday.
“‘I don’t expect to see any political steps being taken until the new administration takes office,’ Lamy said at an event in Paris. He added that it is difficult at this stage to say how long this will take, but negotiations are continuing at a technical level.
“The trade talks stalled at the end of last year in part due to the reluctance of many emerging countries to open up their agricultural markets.”
And Bob Davis reported in today’s Wall Street Journal that, “A wave of protectionism is swelling around the world that could further damage struggling economies.
“Industries are starting to line up in Beijing, Brussels and Washington for import protection. That has happened in past downturns, too, but this time the restrictions may bite harder because of the global nature of the problems.”
Today’s Journal article explained that, “Trade protection can deepen economic problems and shut off a potential engine of growth at a time when consumer demand and business investment are sagging globally. Already, the World Bank forecasts that global trade will shrink by 2.1% this year, the first decline since 1982.
“While global trade deals have greatly reduced tariffs, they do little to fend off protection. Under World Trade Organization rules, countries establish formal tariff levels, which are often very high, and then apply lower tariffs. That gives them leeway to boost tariffs without violating WTO rules.
“That’s starting to happen now. Ecuador announced in the fall that it was lifting tariffs across the board, increasing the levy on some imported meat to 85.5% from 25%. India raised tariffs on steel, while Russia, which isn’t a WTO member, boosted levies on imported cars.”
Brenda Cronin, also writing in The Wall Street Journal, reported that, “Trade data out Tuesday from the U.S. Commerce Department are expected to reflect continued belt-tightening around the globe as 2008 neared its end.
“In October, the U.S. trade deficit widened to $57.2 billion from $56.6 billion in September, with imports and exports both declining. Low oil prices and reduced demand were factors in shrinking the import tab and are likely to sway the November figures to be released this week. Economists warned that exports of goods and services will continue to be affected as the world-wide slowdown persists.
“Amid the downturn, America’s major trading partners are curbing their appetites for U.S. goods. Demand from developing countries and emerging markets for capital goods, including U.S.-made farming and industrial equipment, has collapsed.”
In a general recap of economic issues during the Bush administration, Neil Irwin and Dan Eggen reported in today’s Washington Post that, “Bush also boasts about his record on trade, including the signing of 11 free-trade agreements with countries in Asia, Africa and Central and South America. But he also failed in bids to land several other prominent trade pacts and saw the collapse of negotiations to curb global agricultural subsidies, known as the Doha Round.”