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Dry expectations

The drumbeat to modify the RFS continues and ethanol haters are jumping on the bandwagon. All this talk of waiving ethanol blending requirements because ethanol uses too much corn is having the market effect of driving the price of corn down.
By Susanne Retka Schill | August 06, 2012

The drumbeat to modify the RFS continues and ethanol haters are jumping on the bandwagon. All this talk of waiving ethanol blending requirements because ethanol uses too much corn is having the market effect of driving the price of corn down. The headline from Businessweek.com in a Google news search on Friday morning said: “Corn Declines for Fourth Day on Proposal to Curb Ethanol Usage….Corn fell for a fourth day in Chicago on speculation demand will slow after a drought-fueled surge in prices spurred ….” 

A DTN daily report said Friday morning: “The corn market continues to grow less bullish fundamentally, hinting stronger demand rationing is taking place and that the top may be in.” Growth Energy CEO Tom Buis repeated the maxim in a Thursday press conference, “the best cure for high prices is high prices.” Growth Energy and RFA held the joint news conference last Thursday, to try to counterbalance the coverage of a letter signed by more than 100 representatives urging the EPA to lower the ethanol blending mandate. 

The drought and its impact is big news, sending media outlets to their local ethanol producers for comment. Green Plains Renewable Energy’s Todd Becker appeared in two stories this past week. The Omaha World-Record did a profile on Becker and covered Green Plain’s recent financial reports and outlook.   The Lincoln Journal Star discussed the “clash of titans” and  said this:  “Omaha-based Green Plains President Todd Becker, who presides over nine ethanol plants including Nebraska outlets at Central City and Ord, said what’s done to the ethanol industry is also done to the state’s corn producers. ‘Why do we expect corn producers to take less of a price for a smaller crop?’ said Becker, in reacting to the waiver attempt. ‘Limiting the Renewable Fuels Standard would inflict more pain on farmers already dealing with the drought.’”

Another story I read online points out Iowa Governor Terry Branstad, the state’s longest-serving governor, experienced two droughts in the 1980’s. In the story in The Hawkeye Branstad says “We’re going to get through this, we’ve been through worse things before.” And, he cautions to not lose perspective—mentioning corn varieties are better, farmers aren’t facing the debt they had in the ‘80s, 90 percent of farmers have crop insurance and CRP acres are now open for haying. “My concern is, with this short-term disaster, let’s not overreact and do something dumb,” the story quotes the governor as saying, referring to the continuing food-versus-fuel debate.

The drought is severe and widespread and there is much speculation on how bad it could be. The USDA monthly supply/demand report comes out later this week and analysts in advance are giving their best guesses and reducing the national average yield from last months’ 145 bushels per acre to around 120 bushels per acre of corn. That would be in the neighborhood of 10.5 billion bushels of corn.  

There is a lot of uncertainty in the corn crop. I remember the last time corn prices were this high was when Iowa was having severe flooding and the markets got carried away with speculation. That was a short term weather market, and the crop turned out not too badly. This year, of course, the drought is far more widespread and the weather market is getting wilder than a summer thunderstorm. It really won’t matter what the USDA report says this week – if it’s higher than the trade is predicting the market will swing one way, if it’s lower it will swing the other. Regardless, there are speculators hoping to outguess the swings and make some money on the fluctuation. The commercial interests (read, people who actually buy and sell corn, like farmers, elevator managers and ethanol producers) are most likely sitting back and watching the circus, while chewing their nails wondering just how bad it will be.

One possible positive in all of this – it may get the multiple, sometimes competing, biofuel organizations working together. Just this morning, we’re hearing of a new coordinating council being formed where eight industry groups will work together to defend the RFS. They have their work cut out for them.