Crude Oil, Biofuels,, and Implications for Corn and Soybean Markets By Dr. Robert Wisner, Emeritus University Professor and Biofuels Economist AgMarketing Resource Center Iowa State University
Grain Prices: Driven by Crude Oil & General Economy Expect modest strength in corn & beans this winter Beans will be sensitive to S. American crops Don t Expect recovery to May-June 08 highs -- U.S. & world economy slowing substantially -- Crude oil prices 63% below last July -- Oil still high by historical standards -- History says slow recovery in oil price likely -- 2 nd largest ethanol producer in bankruptcy -- 4 or 5 others also in bankruptcy -- Several new plants delaying start-up -- Government biofuels mandates to have impact
Key Developments to Watch for -- Crude oil prices & Dow Jones Average -- USDA January 9 final crop estimates & grain stocks -- World crop estimates Jan. 9 -- How quickly bankrupt ethanol plants will be transferred to new owners -- Weekly export sales, especially corn -- Soybean crushing margins http://www.ams.usda.gov/mnreports/gx_gr211.txt -- Private crop planting intentions reports
Lower grain prices will bring reduced global production First impacts: wheat in spring 2009 Also, South American soybean crop U.S. corn acreage for 2009? Ethanol mandates & industry expansion point to need for more corn in 2009 & next few years Global Economic Problems: impact on demand?
Monthly Corn Futures Price
Monthly SB Futures Price
U.S. 2007 Energy Bill U.S. 2007 old RFS: renewable fuels 2007 production mandate @ 4.7 bil. gallons For 2008: Requires U.S. renewable fuels production at 9 bil. gallons For 2009: 11.1 bil. gallons For 2015: 15 bil. gallons corn-based ethanol (57 bil. liters) For 2009: 500 mil. gallons of biodiesel (900 mil. Gallons for 2015) Green House Gas Emissions -20%
(Growth 2007-12 = 147% of U.S. soybean oil exports) (Food demand for vegetable oil highly inelastic) EU Use of Rapeseed Oil 10 Million Metric Tons 8 6 4 2 0 2002 2004 2006 2008 2010 2012 Year Crop Harvested Food Other Biofuel Source: FAPRI estimates Pulls land away from food uses
World Feed Grain Production, Use & Months of Reserve Supply Beyond Pipeline Needs Mil. Metric tons 1/11/08 1,200 1,000 800 600 400 200 0 Prod'n Use Revised 9/12/05 Old Reserve Revised Reserve Revised Reserve 7 12 04 Revised reserve 12/10/2004 1/11/08 reserve 1960196519701975198019851990199520002005 5.0 4.0 3.0 2.0 1.0 0.0 Months Reserve World Stocks are Near-Record Low -- USDA
1/11/08 World Soybean Utilization Mil. Bu. Anual Growth Mil. Bu. 10,000 9,000 Annual Growth 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Total Utilization 1964 1969 1974 1979 1984 1989 1994 1999 2004 1,000 800 600 400 200 0-200 -400
Key: how will world economy affect feed & exports??
If we are approaching maximum available acres for corn
Historical & Needed U.S. Corn Yield Deviation Needed From Trend 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0.7 0.0-10.2 0.0 16.2 1.8 0.9 0.9 3.3 3.8 7.5 11.8 13.4 14.0 Other Considerations: Sharp increase in marginal Corn acres Very tight fertilizer supplies Corn-on-corn yield drag Low C-on-C yields in bad weather
If extra acres are available
Mil. Bu. U.S. Soy Production, Use, & Exports to 2012 With 5.5 bil. Bu. Corn for ethanol 3,500 3,000 2,500 2,000 1,500 1,000 Crush Exports Production Other domestic use 350 Mil. Gal Bio Diesel From virgin SBO 500 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Assumes trend yields. Increased DGS Prod'n in 2012-13 replaces soybean meal from about 440 mil. bu. of soybeans
41 Countries Encourage Biofuels Ethanol, demand growth & food inflation shifting China from to corn exporter to importer?
Corn Yield to Affect China Export Availability
One-third as large as U.S. exports, but increasing
Potential area to be cleared for crops West Central Argentina, 2007
Lyon Sioux Plymouth Osceola O Brien Cherokee Dickenson Clay BuenaVista Kosuth 63 66 Planned + current in Iowa 11 Just across the borders Woodbury Ida Sac Webster Hamilton BlackHawk Buchana Delawa Dubuque Calhoun Hardin Grundy n re Tama Linn Story Benton n Jones Jackson Monona Crawford r Carroll Greene Boone Marshal l Clinton n Audubon Poweshiek Cedar Harrison Shelby Guthrie Dalla Polk Jasper Iowa Johnson Scott s Mucatine Pottawattamie Adair Madis Warren Washington Cass Marion Mahask Keokuk on a Louisa Figure 1. Mills Fremont Montgomery Page Emmet Palo Alto Pocahontas Winnebago Worth Mitchell HowardWinnesh iek Allamakee Hancoc Floyd CerroGordo k Wright Franklin Appanoose Chickasaw Bremer Fayette Iowa Iowa Corn corn Corn Processing processing Processing & Ethanol & ethanol Plants, plants, Current Locations, current & Actual Planned, & planned, & Planned. 7/25/07, 10/26/06 11/20/06 9/26/06 Butler Adams Union Clarke Lucas Monroe Taylor Figure 2. Humbol dt Ringgold Decatur Wayne Wapello Davis Capacity: 129% of 2006 crop Capacity: 159% of 2006 Crop 72 Potential Iowa Plants 11 Just across IA Borders Jefferson Henry VanBuren Clayton Lee Basis Impacts? Des Moines
U.S. Annual Average Corn Price, 1908-2005 $ Per Bushel 4.00 3.50 3.00 2.50 2.00 1908-1942 35 years Avg $0.78 1942-1972 30 years Avg $1.26 1.50 1.00 0.50 1973-2005 33 years Avg $2.37 0.00 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Data Source: USDA/NASS
$ per Barrel 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Figure 1. Cushing, Oklahoma Monthly Average Crude Oil Prices 1986-2008 Source: U.S. Energy Information Administration 1986-Jan 1991-Jan 1996-Jan 2001-Jan 2006-Jan
High Prices: the best cure for high prices Supply Responses Rapid expansion of ethanol Tar Sands in Canada http://ffden-2.phys.uaf.edu/102spring2002_web_projects/m.sexton/ Large oil discovery off E. coast of Brazil Cuba & China tapping oil off Cuban coast Large oil discovery in western Gulf of Mexico New oil coming on line in FSU, Nigeria Some older oil fields show declining production U.S. offshore drilling approved (but likely to be banned again)
Demand Developments U.S. gasoline consumption declines for 1 st time in 17 years Developing countries reduce gasoline subsidies in early summer 2008 Developing country gasoline & crude oil use decline Deteriorating world economy reduces demand
U.S. Gasoline Consumption Since 1945 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 2005 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 Bil. Gallons Per Year
Inflation-adjusted Prices
Market reaction after previous oil shocks Late 1970s: gasoline use declined for 4 straight years 16 years were required before previous high regained Late1980s: gasoline use declined for 3 years 5 years were required to recover to previous high
Figure 3. U.S. Monthly Total Gasoline & Ethanol Deliveries 150.00 40.00 Bil. Barrels Annual Rate 148.00 146.00 144.00 142.00 140.00 138.00 136.00 134.00 2006 2007 2008 Eth l Gasoline Ethanol 35.00 30.00 25.00 20.00 15.00 10.00 5.00 Bil. Gal. Ethanol Ann. Rate 132.00 January March May July Sept. Nov. 0.00
Figure 4. Annual U.S. Ethanol Production, Use & Stocks 8000 Mil. Gallons 7000 6000 5000 4000 3000 2000 1000 0 1981 1983 Production, Mil. Gal. Net Ethanol Imports Ethanol Stocks Ethanol Consumption 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
16 12 8 4 0 Figure 5. End-of-month U.S. Ethanol Stocks & Monthly Imports in Weeks' Use Ethanol Stocks, Weeks' Supply Imports, Weeks' Supply Weeks' Use 1992 December 1993 December 1994 December 1995 December 1996 December 1997 December 1998 December 1999 December 2000 December 2001 December 2002 December 2003 December 2004 December 2005 December 2006 December 2007 December
Corn Balance Sheet
Key Assumptions Crude oil price $75-$85 per barrel Ethanol & biodiesel mandates unchanged & enforced Slow growth of world economy CRP early out not permitted
Soy Bal. Sheet
Emerging Biofuels Technology Biodiesel fuel from algae 5 to 7 years out due to cost issues Can be produced in salt water Favorable prospects in SW U.S. Cellulose: processes are available, but cost issues remain + harvesting, storage, transport, & soil issues U. of Wisc. spin-off company has catylist process for creating gasoline + petro chemicals from grain, biomass Energy efficiency much better than for ethanol Avoids ethanol infrastructure issues Useable at all blend levels with non-flex fuel vehicles
Emerging Biofuels Technology II U.S. moving rapidly toward GHG emissions cap & trade policies California policies About 15 Midwest states following, incl. Iowa President asks Congress to deal with GHG issues Ethanol GHG issues will be looked at more carefully (S. America land clearing issues) Increased focus on wind energy, use of urban wastes for electric power generation, methane capture from livestock (some with ethanol plants) Carbon market expected to become more significant More research needed on impacts from cultivation of fallow lands, land clearing in S. America, etc.
What Could Change Prospects of Long- TermTightening Global Grain Supply? Accelerated corn yield increases Further crude oil price collapse Early break-through in economical cellulose conversion Declining global livestock feeding U.S. $0.47 blending credit reduced Eliminate $0.54 import tax
U.S. Cellulose Ethanol Mandates become aggressive after 2010 At least 3-4 pilot plants being developed Government emphasis on alternative feedstocks Potential Feedstocks: DDGS fiber Corn stover Prairie grasses Sugar, sweet sorghum Forest wastes Municipal & livestock wastes Research for major handling & storage challenges
Marketing Take Home Points Modest upward potential in corn & bean prices into Mid-February Demand slowing especially corn exports & soy crush Uncertain how much added corn acres needed: watch ethanol & export sales Spring & summer market still to be quite sensitive to weather Biofuels mandates are important Be aware of risk in contracting with ethanol plants
Questions & Comments? http://www.econ.iastate.edu/faculty/wisner/ http://www.agmrc.org/renewablefuels/ http://www.agmrc.org/renewable_energy/a gmrc_renewable_energy_newsletter.cfm