A number of farmers say they have their crops locked up. They've got the corn and beans in the bin and it's going to take a strong price rally to get them to go back out there and open bins up. Many are going to watch for USDA's January Crop Report to see how bullish the situation is. Some expect USDA may lower the final estimates of the 2010 corn and soybean harvest. There's a lot of economic uncertainty in Europe too, and what happens with the ethanol tax credits after the first of the year will make a difference.
Iowa Farmers have trusted Bob Wisner's advice for many years. The long-time Iowa State University Extension grain marketing economist is now retired but still writes monthly articles for the AgMRC Renewable Energy Newsletter, which is available on ISU's Ag Decision Maker website. You can read his thoughts on marketing and price outlook, and the biofuels industry, each month at www.extension.iastate.edu/agdm. Scroll down to AgMRC Renewable Energy Newsletter. This month's article is titled Corn and Soybean Availability for Biofuels in 2010-11.
Supplies are on a hair trigger. Any weather problems anywhere, any problems with the soybean crop in South America, for example, and prices are going to react. Any problems with corn and the lack of acreage in 2011 in the U.S., the market will react to that too. Regarding the ethanol issues in Washington D.C., Wisner doesn't think it will be a huge impact if the tax credits aren't renewed by the end of 2010, because the U.S. still has the mandates on ethanol usage. He believes ethanol demand will remain strong.
Corn and soybean availability for biofuels in 2010-2011
"First of all, this 2010 corn crop in the United States is not a severe short crop," says Wisner. "By historical standards, we still had a pretty good yield. But I think what makes it different this time around are a couple of things. One is we have the federal mandates for blending biofuels. Those appear to be rather inflexible except under extreme grain supply shortages."
"We don't know for sure, because decisions on that, if there are changes in the mandates, would come through the political process," he adds. But assuming the mandates, called the Renewable Fuel Standards, then we have to look forward with at least a two-year perspective and ask—is it a temporary tightness in supply or is it going to continue on? "We have to recognize that those federal mandates for ethanol use will increase again next year," says Wisner.
He adds, "When we look at a two-year perspective, we see a continued tightness in not only corn supply but also soybeans. We see a one-year situation in tightness in wheat supply, due to foreign weather problems. But also some tightness developing in cotton. So the four largest crops in this country are going to be battling for more acreage in 2011 and 2012. The key is what kind of price will it take for corn to have some increase in acreage—without a severe reduction in soybean acreage?"
Expect some further strength in crop prices after January 1
So, Wisner expects we'll see some further strength in grain prices after January 1, 2011. "There are a number wild cards that we will be watching, to see whether or not that will occur and how much strength we see," he adds. "But that's how the picture looks right now, as we move into a battle for acreage in 2011."
He points out how important ethanol is in supporting demand for corn. The issues right now with the 45 cent per gallon federal blenders' tax credit expiring at the end of 2010, along with the 54 cent per gallon tariff on imported ethanol which is also set to expire. These are both political considerations. "We don't know what is going to happen," he says. "It doesn't look like at this point the blenders credit will be continued, at least in the lame duck Congress. So effective January 1 that tax break for the ethanol industry will go away. Regarding the second part of the question, the tariff on ethanol imports that enter the U.S., who knows what will happen on that tariff restriction?"
Will these changes, if they occur, impact ethanol production and prices much—as we move into 2011? If the tax credit and the tariff aren't renewed, will it curtail production of ethanol at all?
If ethanol tax credits aren't extended, will it hurt ethanol much?
Bruce Babcock, another economist at ISU recently released his study on that Babcock argues that the blenders credit really isn't that important "because we still have the federal renewable fuel standards to fall back on, as mandates for a certain amount of ethanol to be blended with gasoline each year in the United States," says Wisner. "I think if we lose the blenders credit, we'll lose that tendency to go above the mandate. So that could have a negative effect on demand for corn and thus negative for corn prices."
The other factor is that the price of gasoline sets a limit on how much can be paid for ethanol. "When you take the blenders credit out, which is 45 cents a gallon, it may very well have some pressure on corn prices," says Wisner. "I think the market taken that into account in the last two weeks. But I don't think that completely eliminates the upward potential for corn prices, considering the battle for 2011 corn acreage that will occur this winter. That's because we can't reduce corn processing for ethanol very much as long as we have the mandates and as long as they are enforced."
The other issue is the import tax. Longer term, that is significant, says Wisner. But this year, world sugar supplies are tight and sugar prices are high. It looks as though Brazil doesn't have a lot of ethanol to export to the U.S., so he doesn't see that as a major threat at this time, to the corn and ethanol markets.
We'll need more corn acres in 2011, but what about soybeans?
Thus, there's a tight demand for corn and we're going to need more acres of corn planted in 2011. What is Wisner's assessment of the soybean situation?
Corn and soybeans have to be looked at together and soybeans are in a tight situation too, he says. "Our projections, which are a little more optimistic on the exports than USDA, show that barring further changes in the supply estimates, we'll end the 2010 crop marketing year on August 31, 2011 with about a 2-week supply of soybeans. That's a very tight situation. We'd like to see a minimum, at least 3 to 3 and a half weeks supply at the end of August to carry us until we have new crop supplies of beans in the market system."
For corn, Wisner says, "We'd like to see around 4 weeks minimum, and it looks like we're shaping up for corn to have a 3.4 week supply at the end of this coming summer. So, we're looking at tight U.S. supplies for the current crop year, the 2010 crop year, for both corn and beans. That tight supply situation looks likely to continue into the following year too, the marketing year for the 2012 crop. If you project 3.5 million more corn acres planted in the U.S. in 2011 and assume you'll get a trend yield, that situation will take 2 million to 2.5 million acres in the U.S. out of soybeans in 2011."
What about the E15 situation? Will it affect corn prices?
EPA recently announced that it will allow the use of E15 ethanol blends in gasoline for cars and trucks that are 2007 model year and newer. Does Wisner see that as a big factor as far as ethanol demand? Or is it something that is going to be absorbed into the market rather slowly? Currently, only the E10 blend is approved for use in all vehicles.
As it looks now, it's going to take time to generate additional demand for corn from E15 use, he says. "I don't see E15, so far anyway, as a big immediate source of increase in demand. That's because only the model year 2007 and newer vehicles have been approved for use of E15 by EPA--other than flex fuel vehicles. We had expected by this time that EPA would approve the E15 ethanol blend for use in 2001 and newer vehicles. But with the announcement EPA made last week, it now looks like that E15 decision on the older vehicles is going to be delayed until sometime after January 1, 2011."
What if EPA allows E15 in vehicles 2001 model year and newer?
If you put those two decisions together—so that E15 is allowed to be used in vehicles from 2001 model year and newer, then you're looking at roughly 40% of the nation's cars and light trucks being able to use E15 ethanol. "That could be a significant market over a period of time," says Wisner.
However, the infrastructure, such as pumps and tanks to handle E15 and sell it to the public at gas stations throughout the U.S., is not in place yet.
"We're seeing that the fuel retailers are a bit reluctant to make the additional investment for installing more tanks, and more pumps that can handle E15 at gas stations—which is expensive," says Wisner. "There's also some concern about liability issues, as far as gasoline retailers are concerned, in case a motorist puts the wrong fuel in a vehicle and it's not approved for the vehicle. So I think we will see a slow increase in corn demand from E15—because the use of E15 will take place more slowly than many people expect."
What about soy-based biodiesel? Will demand for it increase?
The federal blenders' tax credit for biodiesel expired at the end of 2009 and it has not been renewed by Congress. As a result, soy-based biodiesel demand has dwindled during the year 2010.
"So far, the industry has been using up the RENS or renewable energy numbers that can be substituted for actually blending biodiesel," says Wisner. "When they come to the end of that, then the renewable fuel mandates for biodiesel will begin to have more impact on actual soyoil use. I think the general feeling among many analysts is that before long we will begin to see some increase in the use of biodiesel, some pickup in demand will occur in 2011."
USDA economists are indicating they think biodiesel demand will increase, if you look at USDA's latest projections for soybean oil use for biodiesel in 2011. "It looks like we'll see some increase in demand for soyoil in the U.S. thanks to biodiesel use," he says. "That is occurring at the same time Argentina, a major soybean producer and competitor of the U.S., has moved to a mandated biodiesel use in that country. The use of soybean oil in Argentina is increasing significantly. And that's important because Argentina is the world's largest exporter of soybean oil. Argentina's increased use of biodiesel will tighten their supply of soybean oil. The result will be that we can expect some increase in export demand for U.S. soybean oil, versus what it would have been without Argentina's domestic biodiesel program."
Also, Brazil is moving into using soy-based biodiesel. "So from a soyoil standpoint, we see some tightening in world supply," says Wisner. "How much it will tighten in 2011 and 2012 is gong to depend on other vegetable oil supplies, especially the world palm oil crop and some other factors."
What happens if North Korea and South Korea fighting erupts?
Wisner notes that here's a lot of tension right now between North Korea and South Korea. Would any hostilities or war that could develop between those two countries have an impact on corn and soybean prices? South Korea is a good trading partner with the U.S. They buy U.S. farm products and the U.S. buys a lot of manufactured goods from Korea.
"That's a hard question to get a perspective on," says Wisner. "I recently returned from a trip toTaiwan and Japan, just before the hostilities started there. And if you put those three markets together plus China, that's a huge market for soybeans and also for corn. I don't have a clear picture of what is likely to happen with the Korean market or how it would likely affect our relationship with China. But if there were threats of supply disruptions, certainly that situation could have some impact on the market for U.S. corn and soybeans."