Ethanol industry smiling at record corn crop

The markets reacted quickly following the recent World Agriculture Supply and Demand Estimate Report released by the U.S. Department of Agriculture with gains in futures prices of corn and soybeans.

According to an Aug. 14 DTN webinar, the report has implications for the biofuels market as well.

The report estimates American farmers are producing record levels of both corn and soybeans -13 billion bushels and 3.8 billion bushels respectively.

The national average corn yield estimate at 167.4 bushels per acre, though lower than earlier pre-report estimates, is still a record high.

The report said ending stocks for 2013-2014 will be about 1.18 billion bushels for corn and the 2014-2015 carryout at 1.8 bb, both below pre-report expectations.

During the webinar, Jordan Godwin, of Platt’s news service, and Darin Newsom, senior analyst, DTN, said they see the ethanol industry also getting a long-term boost.

Godwin said the corn report, along with ending stock levels, signals a changing situation for corn producers as “supplies begin to swarm” demand.

“The one constant in a sea of variables,” he said, “for now remains the ethanol industry’s demand for corn.

“Ethanol and corn are a hot-button item that has as many opponents as proponents, both of them believing strongly in their point of view.”

The significance of ethanol’s demand market for corn, beginning with the Energy Policy Act of 2005, is the heart of the economic growth seen in the agriculture sector – the key reason for the Midwest showing economic growth since 2008.

Producers and the ethanol industry have opposing views to the report, Godwin said.

“Producers don’t like a situation with large supplies that generally leads to lower prices,” he said. “On the other hand, the ethanol industry likes large supplies because more is available at lower cost.”

While producers may try to reduce supplies by planting other crops during future growing seasons, unless corn stops being the more profitable of the major crops, he sees ethanol producers continuing to buy cash corn on an “as-needed basis” until the supply situation begins to change.

Meanwhile, Godwin said, that price risk management is important on both sides of the fence with tools readily available to mitigate potential risk due to an adverse price move.

The worst case scenario for producers, he said, would be a repeat large crop in 2015.

Weather turns against the ethanol industry, he said, as adverse conditions reduce production.

A number of factors, Godwin said, come into play with regard to corn futures depending on bigger production levels and lower prices, or a smaller-than-projected crop which could begin stabilizing prices.

Newsom said he thinks U.S. ethanol producers are relatively comfortable.

“Production is running strong,” Newsom said, “and there don’t seem to be any possible grenades in the near future.

“The ethanol industry is eyeing the severe dry weather in Brazil to see if it’ll have to swoop in and ramp up exports, but that is still another month or two away before those discussions get heated.

“Sources are still concerned about the state of the rail industry with heavy competition and the possibility of another hard freeze. There are always moving targets in this market, but this is about as stable and calm as it could possibly get.”

Ethanol buyers, Newsom said, were shaken after the February-March rail freeze.

“No one had expected it to explode the way it did,” he said, “and prices hit nine-year highs because of that lack of preparedness.

“Now buyers are hedging their bets much, much further out, as we’re seeing heavy trade liquidity around futures markets two and three quarters down the road.

“It’s been an interesting shift in the dynamic of the way ethanol is traded, but again, it’s all about managing that risk.”

It appears clear that there will be plenty of corn available in the closing months of 2014. “Ethanol producers have even had the luxury of a sizeable quantity of old crop corn throughout the summer driving season,” he said, “something many of my sources had warned could become an issue, but it really never was.

“What I see are supplies that are relatively healthy with demand much lower than many were predicting this past spring.”

Newsom said the ethanol industry is “one of the most consistent sources” of demand for corn over the past five years and holding “pretty steady” near 5 billion bushel in four of the past five years.

This point, he said “resonates in a cloud of uncertainty” in the ethanol industry regardless of where the Environmental Protection Agency sets its finalized Renewable Fuels Standard.

“You can practically pencil in that demand for corn,” he said. “Despite the wealth of good news for all things corn crop-related, there is always the fear of the unknown. The bushel in the hand is better than the bird in the bush at this point, however.

“Ethanol production was extremely healthy in 2014, even withstanding the harsh winter where many plants had to reduce run rates or shut down entirely,” he said.

“But to know that this corn has a home and it will likely be acquired extremely cheap in relative comparison to prior years makes everyone happy.”