By Glen Werling, Bluffton News-Banner
Ethanol is powering more than just vehicles nowadays. It's also the explosive force behind the rising grain markets.
That's the mutual analysis of David Kohli of Ford & Young Futures of Fort Wayne and Jon Cavanaugh of Central States Enterprises of New Haven.
The two made their annual presentation to a packed house at Tuesday's Fort Wayne Farm Show.
Acknowledged commodity experts, the two brought different but equally valuable view points to the farmers and others in attendance-Kohli from the standpoint of the commodities trader and Cavanaugh from the standpoint of a commodities marketer.
Ethanol is key to the market rise as the current supply demand for corn is at 2.15 billion bushels. That's expected to climb to over 3 billion bushels this year, said Kohli. He added that the demand might climb to 4 billion by 2008.
Considering that the entire 2006 crop has been estimated by the United States Department of Agriculture at 10.535 billion bushels, one quickly can see how much corn supply is being used up just to be burned up in vehicles.
However, that estimate by the USDA, according to Kohli, is also another reason why corn is starting to flirt with the $4 mark.
The USDA cut the final 2006 corn yield more than expected, down from the November crop estimate of 10.745 billion bushels. That's a significant drop, especially for nervous commodity traders.
That came on the heels of a surprising reduction in both yield per acre and acres to be harvested forecast by the USDA between September and October of 2006. "The USDA almost never decreases its numbers for acres from September to October. It caught the market completely off guard and sent it into spiraling higher prices. It was a major shock," said Cavanaugh.
The overall 210 million bushel reduction from November to now is the largest reduction ever made by the USDA, noted Cavanaugh. "This once again shocked the market at a time when demand is surging because of the ethanol situation, sending the market into another panic," he added.
Ending stocks will be extremely tight-maybe not as tight as the 1994-95 seasons when corn prices hit all time highs of $5.545 in July of 1996. The stock to usage ratio is at 6.4 percent. In 1996 it got all the way down to 5 percent.
Compare that to the outset of 2006 when the stock to usage ratio was 17.5 percent.
New crop acres will become the focus of this year with an estimated 90 million acres to go in corn, or about a 12 million acres increase over last year. This all assumes acceptable planting weather this spring, said Cavanaugh.
The drive to market corn as grain will take a deep cut in corn for silage, said Kohli. "But the seed corn people are ecstatic about this," he observed. Farmers seeking certain traits and quality seed needed to order early. "You may have to settle for second best," admitted Kohli.
The high price of corn will cut into the feed usage by about 166 million bushels according to the USDA. Less corn to feed, less livestock to be fed, less pork, beef and chicken for the market.
Kohli observed as more corn is delivered for the energy market, "You're going to be looking at higher prices in the grocery store."
The cattle market especially will take a hit because of the weather out west combining with higher feed prices, he added. "Hog farmers haven't felt it as much yet, but it's fascinating to watch the deferred hog future prices because as the corn futures are moving up, so are the hog futures," said Kohli.
But it is still the speculation over ethanol that is pulling all grain commodities upward.
Cavanaugh noted that to supply all of the plants that are being proposed right now, it will take more than 13 billion bushels of corn. Because that's an impossible number, many of the plants forecast for construction will not be built.
"Literally overnight there has been a huge created demand for ethanol. We have a shortage of ethanol, so the margins have remained good and a lot of plants have been proposed," said Cavanaugh-between 30 and 40 in Indiana. He believed that the more real estimate of how many will actually be built is 20 to 25 with the final numbers probably being 17 to 18.
"The question it comes down to is this: food versus fuel. How necessary is ethanol? How necessary are chicken, pork and beef and eggs. You have a classic battle being set up between food and ethanol. It's like the dotcom frenzy. Something's got to break," said Cavanaugh.
Of course as corn acres are added, soybean acres are subtracted. That vacuum might be filled in by South America, he added.
Cavanaugh observed that the demand for ethanol exceeds ability to produce it. The demand for ethanol might be rationed by either lower oil prices or higher corn prices-both of which affect the profitability of ethanol's production.
Kohli predicted that the drop in crude oil wouldn't last much longer and as summer demand comes on, it will start to rise again, driving the price of gas up to $2.60 to $2.75 a gallon again. That will increase the profitability of ethanol and increase its demand more.
"The whole point is, we need to watch the crude oil market," added Kohli.
Turning to beans, Kohli said that big Brazilian and Argentine crops will have an impact on prices. Asian soybean rust has become a manageable problem in Brazil and should have little affect on the Brazilian crop, he said.
The USDA also cut the yield estimate for 2006 soybean-the first cut it has made in beans in several years, largely owing to terrible fall harvest weather, said Kohli. "Weather is going to be very, very important in the next year," he said.
In addition to weather, again, the decrease in bean acreage as more fields go to corn will have a major impact on the bean prices in 2007. The soybean planted acreage is expected to drop from 75.522 million acres in 2006 to 70 million acres this year. "Soybeans will be forced to keep pace with new crop corn prices in order to see enough soybean acres planted this year," said Kohli.
And that is causing the market to look beyond supply and demand, because right now supply relative to demand is fairly high. World demand is growing for soybeans, meaning as crop acreage is devoted more and more to corn to meet ethanol demand, the export crop will continue to shrink. That void will be filled in by South America, forecast Cavanaugh.
Kohli said that he would like to see more beans go toward bio-diesel. "I think ultimately bio diesel is the way to go. We're seeing much better mileage on bio-diesel vehicles than on ethanol vehicles," said Kohli. The larger the vehicle the more the mileage drops. "On a big pickup truck or a big over-the-road vehicle, E-85 drops the mileage about 45 to 50 percent," said Kohli.
But Cavanaugh threw a wet blanket on Kohli's aspirations for bio-diesel because America cannot produce enough soybeans to come anywhere near close to the demand for diesel fuel. Bio-diesel is made from soybean oil. Soybeans are about 18 percent oil. Soybean oil is also made for food consumption. If all of the vegetable oils produced in the United States-not just soybean oil but all of the vegetable oils-were turned into bio-diesel, it would only satisfy five percent of the demand for diesel fuel, said Cavanaugh.
So its not bio-diesel that's going to be driving up the price for beans, it's ethanol, again. The projected reduction in acreage and corresponding reduction in stock will drive the prices over the $8 a bushel mark, both predicted.
Another dark cloud over the market, according to Cavanaugh is Conservation Reserve Program (CRP) acres. More CRP acres than expected may be released this year, he said. "You can count on it for next year," he added, "Because by next year it will be an absolute must."
Of the 36 million in CRP, Kohli believed as many as 12 million acres could become available this year. Cavanaugh doubted the number will be that high.
Turning to the third most grown commodity in northeastern Indiana-wheat-Kohli said he was taken by surprise with the USDA estimates. "How did this happen?" he asked of the projection of 44.089 million acres of winter wheat sown 2006-07 compared to 40.575 million sown in 2005-06.
"We didn't plant it here because we had lousy fall weather. So where did they plant it? Missouri," said Kohli, answering his own question. He said while Indiana was getting all of the rain, Missouri was enjoying a tremendous fall. Missouri wheat is also enjoying a great winter with good snow cover.
Cavanaugh added that world wheat production will be up substantially.
Interestingly, though, he noted that the corn demand actually got its start with the demand for wheat last fall. Australia is a major exporter of wheat but had a terrible year last year, causing the world demand for wheat to rise. "The wheat price took off, went through the roof and pulled corn with it," said Cavanaugh, adding, "Everybody kept saying it's not corn, it's wheat." But he added that the wheat problem has been solved and there should be adequate supplies to meet world demand.
"Wheat prices are still going up because it's corn that's pulling them up now," added Cavanaugh. Wheat prices will remain supported by higher corn prices.
So what were Kohli and Cavanaugh's predictions?
A short-term setback for corn prices because the market has become too bullish, according to Kohli. That's short-term, he emphasized. Cavanaugh agreed that the market will experience a slight corrective pullback, but he did not see anything that will support long-term declines with prices still staying relatively high.
Kohli said he was crunching some numbers for corn futures earlier and kept coming up with $4.20. He foresaw a pullback to between possibly $3.35 to $3.80. Long-term he saw dramatic changes.
"Ethanol is just a totally different phenomenon. Corn is now not just a food commodity, it's a fuel commodity," agreed Cavanaugh, who added it's very politically popular. Add weather problems and/or a below trend yield, the $5.54 long term might not be out of the question according to Cavanaugh. "It could possibly go even higher," he added.
Kohli said he was not willing to go that high because he predicted $6 to $6.10 in 1996 and was extremely disappointed.
On soybeans, Kohli believed this summer's prices could run to $8, but weather, again, will have an impact on that. Near-term, he saw little downside but believed current new crop was fairly priced.
The wheat market will stay the weak sister to corn, said Kohli, and is probably about as high as it will go.
Cavanaugh noted that soybeans could hit $8 or maybe $9 with weather problems.
As far as the politics of ethanol go, Kohli believed that a Democrat-controlled Congress will stay solidly behind ethanol.