Ethanol & Grain Market Outlook Ethanol & Grain Market Outlook for 2007for 2007--0909

9/04/07

By Dr. Robert Wisner, University Professor of Economics and Coles

Professor of International Agriculture

Iowa State UniversityAmes, Iowa, U.S.A.

Grain Marketing Considerations for 2007Grain Marketing Considerations for 2007--0909

1. Tight storage & transportation ahead2. Weakening corn basis likely @ harvest3. Markets offering excellent storage returns

(if you have bin space) – for both corn & beans – to summer ‘08

4. Consider leaving basis open for summer ’08 delivery

5. Expect strong basis around ethanol plants6. Expect blow-off top in wheat to impact

corn, bean markets -- when it happens7. Be conservative on 2008 & ’09 marketings

Grain Marketing for 2007Grain Marketing for 2007--09, II09, II

1. Expect stronger cash corn mkt. into winter2. Wheat, SB pulling acres out of corn 3. Bean mkt. danger: big jump in Brazil Acres4. Biofuels is global development5. World grain & livestock mkts.: big

adjustments ahead6. Ethanol growth increases mkt. sensitivity

to weather

Risk Factors: Corn & Bean MarketsRisk Factors: Corn & Bean Markets

1. Severe grain transport stress – Miss. River (Tenn.-Ky. River prices corn $2.58/bu. 9/05/07)

2. Limited ethanol blending capacity & transportation

3. Big jump in South American acres

4. Collapse in world oil markets (doubtful)

5. Deteriorating global economy (doubtful)

Key Chart FormationsKey Chart Formations

1. December corn – Gaps @ $3.58 & $3.95

2. 55% retrenchment, Dec. 07 corn: $3.16

3. Nov. ’07 SB – Gap @$9.31/bu.

4. Dec. Chicago wheat – many down-side gaps

Dec. ’07 wheat reaches record highs

Weekly Corn Futures

$3.10/bu.

October ’07 Ethanol Futures

October ’07 Unleaded Gasoline

Nov. ’07 SB

Gap

41 countries encourage 41 countries encourage biofuelsbiofuelsMajor Countries with Ethanol Fuels

• U.S. • Brazil• Canada • China• EU-27• ThailandCountries considering ethanol fuels

• South Africa• Ukraine• Japan

Major Countries with Ethanol Fuels• U.S. – likely production of 14-15 bil. gal.

from corn in 3.5-5 years• Brazil –89 new ethanol plants to be built,

2007-2011– 2% biodiesel mandate by 2008 & 5% by 2013

• China – 3 corn-based plants, emphasis shifting to other feedstocks

• EU-27 – 5.75% of motor fuel to be renewable by 2010, 10% in 2020

• Canada – 5% ethanol mandate by 2010, 2% biodiesel by 2012

• Thailand – ethanol from sugar, mantiac

Biodiesel– Competition for crop land

International Impacts• U.S. ethanol plants under construction to

use 58 mil. tons of corn (doubling use)– 3.5 times the volume of Japan imports of

U.S. corn– 130% of 2006 EU corn crop– 70% of global corn exports

• Other countries are expanding ethanol & biodiesel

• Strong negative impacts on animal ag.• Higher food costs ahead• Major risk-management challenges in Ag.

& bioenergy

USDA 07-08

Expanding U.S. Ethanol Industry vs. 2005-06 Corn Feeding

2005-06 U.S.Corn FeedingPotential Cornfor EthanolOther underconstruction07-08 Ethanol

Current Corn forEthanol

2005-06 U.S.Corn Feeding

Proj. Corn ethanol2011-12

'06-07 Corn for Ethanol

'07-08Ethanol

Proj.Other Constr'n

New York Crude Oil

Futures Prices

Iowa corn processing & ethanol plants, current & planned, 10/26/06

63

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Lee

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Clay Kosuth

Jasper

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Storyr Jones

Fayette

Adair

Bentonn

Wapello

Pocahontas

Osceola

Jefferson

Audubon

Washington

BuenaVista

BlackHawk

Appanoose

CerroGordo

VanBuren

Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

Iowa Corn Processing & Ethanol Plant Locations, Actual & Planned. 9/26/06,

PoweshiekPolk

BooneGreeneCarrollCrawford

Plymouth

O’Brien

Woodbury

Monona

Harrison Shelby

Wright Franklin

Floyd Chickasaw

Webster Hardin

Louisa

Emmet

Palo Alto

Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

Hamilton GrundyBuchanan

Delaware

Dubuque

Jackson

Clintonn

Guthrie Dallas

Johnson

Marshall

Pottawattamie

Mills

Fremont

Madison

Warren Marion Mahaska

Keokuk

Adams Union Clarke Lucas Monroe

Taylor Ringgold

Cherokee

Calhoun

Decatur Wayne Davis

Henry

Scott

Humboldt

Clayton

Cedar

Sioux

Cass

Iowa*

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Pocahontas

Osceola

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Audubon

Washington

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Appanoose

CerroGordo

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Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

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Plymouth

O’Brien

Woodbury

Monona

Harrison Shelby

Wright Franklin

Floyd Chickasaw

Webster Hardin

Louisa

Emmet

Palo Alto

Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

Hamilton GrundyBuchanan

Delaware

Dubuque

Jackson

Clintonn

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Johnson

Marshall

Pottawattamie

Mills

Fremont

Madison

Warren Marion Mahaska

Keokuk

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Adair

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Pocahontas

Osceola

Jefferson

Audubon

Washington

BuenaVista

BlackHawk

Appanoose

CerroGordo

VanBuren

Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

Iowa Corn Processing & Ethanol Plant Locations, Actual & Planned. 9/26/06,

PoweshiekPolk

BooneGreeneCarrollCrawford

Plymouth

O’Brien

Woodbury

Monona

Harrison Shelby

Wright Franklin

Floyd Chickasaw

Webster Hardin

Louisa

Emmet

Palo Alto

Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

Hamilton GrundyBuchanan

Delaware

Dubuque

Jackson

Clintonn

Guthrie Dallas

Johnson

Marshall

Pottawattamie

Mills

Fremont

Madison

Warren Marion Mahaska

Keokuk

Adams Union Clarke Lucas Monroe

Taylor Ringgold

Cherokee

Calhoun

Decatur Wayne Davis

Henry

Scott

Humboldt

Clayton

Cedar

Sioux

Cass

Iowa*

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Clay Kosuth

Jasper

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Page

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Fayette

Adair

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Wapello

Pocahontas

Osceola

Jefferson

Audubon

Washington

BuenaVista

BlackHawk

Appanoose

CerroGordo

VanBuren

Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

,

PoweshiekPolk

BooneGreeneCarrollCrawford

Plymouth

O’Brien

Woodbury

Monona

Harrison Shelby

Wright Franklin

Floyd Chickasaw

Webster Hardin

Louisa

Emmet

Palo Alto

Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

Hamilton GrundyBuchanan

Delaware

Dubuque

Jackson

Clintonn

Guthrie Dallas

Johnson

Marshall

Pottawattamie

Mills

Fremont

Madison

Warren Marion Mahaska

Keokuk

Adams Union Clarke Lucas Monroe

Taylor Ringgold

Cherokee

Calhoun

Decatur Wayne Davis

Henry

Scott

Humboldt

Clayton

Cedar

Sioux

Cass

Iowa*

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66 Planned + current in Iowa11 Just across the borders

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Figure 1.

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Iowa corn processing & ethanol plants, current & planned, 11/20/06

63

Capacity: 129% of 2006 cropCapacity: 159% of 2006 Crop

Iowa Corn Processing Plants, Current & Planned, 7/25/07

72 Potential Iowa Plants 11 Just across IA Borders

Needed Yld. @ 2007 Acres

?

334 bu./A. @ ethanol plant rated cap.

New trend?

June 2007

Total 11,693 mil. Bu.

A.

Ethanol Blending Wall?(Are we there yet?)

• Market incentive to increase blending capacity

• What happens when avg. Midwest blend is 10%?

• More shipments to coasts – at higher cost

$ per Gal.

State Avg. Ethanol Rack Prices

www.ethanol.org

Averages provided by:

www.axxispetro.com

Date: Wednesday, Aug. 08, 2007

Iowa: 2.13

Ill.: 2.21

Ks.: 2.34

Minn.: 2.15

Mo.: 2.34

N. Dk.: 2.23

Nebr.: 2.35

S. Dk.: 2.27

Wisc.: 2.21

5.9 Bil. Bu. Corn for ethanol by 2012

Will increased South American exports more than offset U.S. decline?

Potential area to be cleared for crops

August 2007 Crop Production

+ 18.6NC92.9Mil Ac

PlantedCorn:

+ 20.9NC85.4Mil Ac

Harvested+ 2.5--152.8Bu/AcYield

+ 23.9--13.1Bil BuProduction

Unit

% Chgfrom Prev

Season

% Chgfrom PrevForecastAug

‘07Crop

Corn for Grain Yields 2007Bushels and Change From Previous Year

65-7

153#7

1707

150-6

80-65

1153

17815

157NC

18014

13217 120

-26

150#10

90-52

111-36

156-5

12515

137-1

168#16

112-17

185#NC

123-6

94-38

12514

143-16

13530

110-12

100-10

U.S. 152.83.7

# Record HighNC = No Change

11720

95-30

142#21

80-40

210#NC

1452

*

Percent Change in Iowa Grain Production by Crop Reporting District, 2007 vs. 2006

-30%

-20%

-10%

0%

10%

20%

30%

40%

NW NC NE WC C EC SW SC SE State

CornSoybeansCorn +SB

Iowa 2007 August Corn & Soybean Production Chgs. Vs. '06 by District

-40

-20

0

20

40

60

80

100

NW NC NE WC C EC SW SC SE

Mil.

Bu.

Chg

. vs.

200

6 SoybeansCorncorn + SB

State Combined Total +378 Mil. Bu., +15%

2007

Model Forecast:Model Forecast:$3.11/bu$3.11/bu. U.S.. U.S.’07’07--08 & 08 & $3.20$3.20for ’08for ’08--0909

Proj. Proj.

U.S. Soybean Production

2.74 2.76

2.45

2.652.692.76

2.89

3.12 3.063.19

2.63

2.00

2.20

2.40

2.60

2.80

3.00

3.20

3.40

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Billion Bushels

U.S. Soybean Yield

41.5

20

25

30

35

40

45

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Bushels/Acre

Soybean Yields 2007Bushels and Change From Previous Year

266

383

24-7

305

47-1

47-3

50-0.5

342 38

-6

37#2

25-9

33-12

40-4

39#13

37-1

50NC

27-8

37-9

27-5

343

44-3

247

39-1

26-3

U.S. 41.5-1.2

# Record HighNC = No Change

351

33-6

328

25-6

43-1

China Soybean Supply & Use

0

10

20

30

40

50

60

96/97 98/99 00/01 02/03 04/05 06/07

Mill

ion

Met

ric T

ons

Production Net Imports Domestic UseSource: FAPRI, Univ. of Missouri

Soybean Trade

0

5

10

15

20

25

30

35

96/97 98/99 00/01 02/03 04/05 06/07

Mill

ion

Met

ric T

ons

US Net Export Brazil Net Export China Net Import

Source: FAPRI, Univ. of Missouri

EU Use of Rapeseed Oil

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012

Year Crop Harvested

Mill

ion

Met

ric T

ons

Food Other Biofuel

Source: FAPRI, Univ. of Missouri

Potential Future Co-Product Changes

• Removing Corn Oil from DDGS• Converting Fiber to Ethanol• Pelleting DDGS• Grades & Standards• Converting biodiesel glycerine to

ethanol• Reduced feed energy supplies

Add biodiesel

Source: Dr. Terry Francel, American Farm Bureau Federation

MINIMUM SOYOIL PRICE FOR BIODIESEL BREAKEVENat GIVEN WORLD CRUDE OIL PRICE

PRX_C_US_BA, GTB-06-03, Mar-14-06

Crude Oil Price, $/bbl

$30.00 $35.00 $40.00 $45.00 $50.00 $55.00 $60.00 $65.00 $70.00

Soybean $0.19 ($0.10) $0.02 $0.14 $0.25 $0.37 $0.49 $0.61 $0.73 $0.85

Oil Price $0.20 ($0.18) ($0.06) $0.06 $0.18 $0.30 $0.42 $0.54 $0.66 $0.78

$/lb $0.21 ($0.25) ($0.13) ($0.01) $0.11 $0.23 $0.35 $0.47 $0.58 $0.70

$0.22 ($0.32) ($0.20) ($0.08) $0.04 $0.15 $0.27 $0.39 $0.51 $0.63$0.23 ($0.39) ($0.28) ($0.16) ($0.04) $0.08 $0.20 $0.32 $0.44 $0.56

$0.24 ($0.47) ($0.35) ($0.23) ($0.11) $0.01 $0.13 $0.25 $0.37 $0.48

$0.25 ($0.54) ($0.42) ($0.30) ($0.18) ($0.06) $0.05 $0.17 $0.29 $0.41

$0.26 ($0.61) ($0.49) ($0.38) ($0.26) ($0.14) ($0.02) $0.10 $0.22 $0.34

$0.27 ($0.69) ($0.57) ($0.45) ($0.33) ($0.21) ($0.09) $0.03 $0.15 $0.27

$0.28 ($0.76) ($0.64) ($0.52) ($0.40) ($0.28) ($0.16) ($0.05) $0.07 $0.19

$0.29 ($0.83) ($0.71) ($0.59) ($0.48) ($0.36) ($0.24) ($0.12) $0.00 $0.12

$0.30 ($0.91) ($0.79) ($0.67) ($0.55) ($0.43) ($0.31) ($0.19) ($0.07) $0.05

$0.31 ($0.98) ($0.86) ($0.74) ($0.62) ($0.50) ($0.38) ($0.26) ($0.15) ($0.03)For Blue Sky Scenario, PRX adopts a crude oil price of $50/bbl and thus a minimum 24 cent/lb soyoil price, to evaluate impact of subsidized biodiesel market.

Source of data: USDA, NASS

Illinois Corn Yields Drought Tolerant?

2004 2005• NW 184 140• NE 174 129 • WEST 192 141• E.SE. 175 139 • SW 158 133• SE 158 130

% chg.

-24

-26

-27

-21

-16

-18

Implications for U.S. and World Livestock, Poultry & Food Costs

• U.S. supplies 2/3 of world corn exports, 20-25% of wheat & 35-40% of cotton exports

• Cost of livestock & poultry feed will increase• Large increase in variability of feed & food

costs• Food aid impacts?• Accelerated ag expansion into areas with

fragile eco systems • Shift livestock industries from U.S. to South

America? • Rural employment implications in U.S.

Infrastructure Needs of bioenergy Market(Time Frame: 3 to 5 years)

Sharp Increases in:• Inputs for corn production• Corn receiving, drying, storage, farm

transporting infrastructure• Efficient rail shipping of ethanol & DDGS• More tank cars for ethanol movement• Electric power generation• Water supply systems• Research on pipelines for ethanol• Retail facilities for E-85, E-20 & E-30 stations

U.S. Cellulose Ethanol

• At least 2 pilot plants being developed• Expect strong U.S. government emphasisPotential Feedstocks:• DDGS• Corn stover• Prairie grasses• Forest wastes• Municipal wastesResearch for major handling & storage challenges

Environmental Issuesfor Research: ethanol

• Impact on groundwater supplies• Long-term effects, mono-culture ag.• Allowable maximum removal of

corn stover & grasseso Soil erosion impactso Soil organic matter impactso Diminished wildlife habitatso Water quality impacts from

more fertilizer

Key Issues for Agriculture• Alternative feedstocks: which ones, how

soon? Biomass, sweet sorghum, sugar beets, high-oil crops, cane sugar, others

• Differential impacts on livestock & poultry species

• Environmental: continuous corn, off-take of biomass, erosion-prone land

• Efficient use of distillers grain, including new uses

• Risk Management: livestock, crops, ethanol

Key Issues for Agriculture, II• Future transition of corn-ethanol plants to

other feedstocks• Policy issues: import tax, blending credit, LDPs,

CCPs, E-85 vs. E-10, pipeline possibilities, vehicle redesigning, Hydrogen sources

• Global developments: EU biodiesel, Brazil export potential, Asia, S. Africa bioenergy & global grain supply, demand & prices

• Infrastructure needs: grain handling & storage, transportation, ethanol & ddgs transport

• High Prices encourage oil exploration & conservation

What Could Change Prospects of Tightening Global Grain Supply?

• Accelerated corn yield increases• Crude oil price collapse• Early break-through in economical

cellulose conversion• U.S.Ethanol import tax removed – longer

term impacts• U.S. $0.51 blending credit reduced or

made variable• Declining global livestock feeding

Need for Both Ethanol and Animal Agriculture

• 100 million gallon ethanol plant– 37 million bushels of corn– 80 workers directly employed

• 37 million bu corn Direct jobsFarrow-finish 800Or Wean-finish 242Or Beef feedlot 278

Source: Dr. John Lawrence, Head of ISU Beef CenterSource: Dr. John Lawrence, Head of ISU Beef Center

http://www.econ.iastate.edu/faculty/wisner/

...and justice for allThe U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability,political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Manymaterials can be made available in alternative formats for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call 202-720-5964.

Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Jack M. Payne, director, Cooperative Extension Service, Iowa State University of Science and Technology, Ames, Iowa.