Crude Oil, Biofuels, and Implications for Corn and Soybean Markets
Transcript of Crude Oil, Biofuels, and Implications for Corn and Soybean Markets
Crude Oil, Crude Oil, BiofuelsBiofuels, and , and Implications for Corn and Implications for Corn and
Soybean MarketsSoybean Markets
By Dr. Robert Wisner, Emeritus University Professor and
Biofuels EconomistAgMarketing Resource Center
Iowa State University
Grain Prices: Driven by Crude Grain Prices: Driven by Crude Oil & General EconomyOil & General Economy
Expect modest strength in corn & beans this winterBeans will be sensitive to S. American cropsDon’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-- 2nd 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 forKey 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 For 2009: 500 mil. gallons of biodiesel (900
mil. Gallons for 2015)mil. Gallons for 2015)•• Green House Gas Emissions Green House Gas Emissions --20%20%
Source: FAPRI estimates
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
Pulls land away from food uses
(Growth 2007-12 = 147% of U.S. soybean oil exports)(Food demand for vegetable oil highly inelastic)
World Stocks are NearWorld Stocks are Near--Record Low Record Low ---- USDAUSDA
World Feed Grain Production, Use & Months of Reserve Supply Beyond Pipeline Needs
0200400600800
1,0001,200
1960196519701975198019851990199520002005
Mil.
Met
ric to
ns
0.0
1.0
2.0
3.0
4.0
5.0
Mon
ths
Res
erve
Prod'nUseRevised 9/12/05Old ReserveRevised ReserveRevised Reserve 7 12 04Revised reserve 12/10/20041/11/08 reserve
1/11/08
Total Utilization
World Soybean Utilization
01,0002,0003,0004,0005,0006,0007,0008,0009,000
10,000
1964 1969 1974 1979 1984 1989 1994 1999 2004
Mil.
Bu.
-400
-200
0
200
400
600
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1,000Mil. Bu. Anual Growth
Annual Growth
1/11/08
?
Key: how will world economy affect feed & exports?
If we are approaching maximum available acres for corn
Historical & Needed U.S. Corn Yield Deviation Historical & Needed U.S. Corn Yield Deviation Needed Needed From TrendFrom Trend
14.013.411.8
7.53.83.30.90.91.8
16.20.0
-10.20.00.7
20132012201120102009200820072006200520042003200220012000
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
U.S. Soy Production, Use, & Exports to 2012 With 5.5 bil. Bu. Corn for ethanol
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Mil.
Bu.
CrushExportsProductionOther domestic use
Assumes trend yields. Increased DGS Prod'n in 2012-13 replaces soybean meal from about 440 mil. bu. of soybeans
350 Mil. Gal Bio Diesel From virgin SBO
Ethanol, demand growth & food inflation shiftingChina from to corn exporter to importer?
41 Countries Encourage Biofuels
Corn Yield to Affect China Export Availability
One-third as large as U.S. exports, but increasing
Potential area to be cleared for cropsWest Central Argentina, 2007
Iowa corn processing & ethanol plants, current & planned, 10/26/06
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Johnson
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Winnebago
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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
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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
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Floyd Chickasaw
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BremerButler
Hamilton GrundyBuchanan
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Johnson
Marshall
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Figure 1.
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Iowa corn processing & ethanol plants, current & planned, 11/20/06
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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
Figure 2.
BasisBasisImpacts?Impacts?
U.S. Annual Average Corn Price, 1908-2005
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
1908
1912
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1920
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1940
1944
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1952
1956
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1968
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1976
1980
1984
1988
1992
1996
2000
2004
$ Per Bushel
Data Source: USDA/NASS
1908-1942
35 years
Avg $0.78
1942-1972
30 years
Avg $1.26
1973-2005
33 years
Avg $2.37
Figure 1. Cushing, Oklahoma Monthly Average Crude Oil Prices
1986-2008
0102030405060708090
100110120130140
1986-Jan 1991-Jan 1996-Jan 2001-Jan 2006-Jan
$ pe
r Bar
rel
Source: U.S. Energy Information Administration
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 1st
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
0.00
20.00
40.00
60.00
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100.00
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140.00
160.00
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1953
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Bil.
Gal
lons
Per
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r
Inflation-adjustedPrices
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
132.00134.00136.00138.00140.00142.00144.00146.00148.00150.00
January March May July Sept. Nov.
Bil.
Bar
rels
Ann
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ate
0.00
5.00
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Bil.
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. Eth
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Ethanol
Gasoline
Figure 4. Annual U.S. Ethanol Production, Use & Stocks
0
1000
2000
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6000
7000
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1983
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Mil.
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lons
Production, Mil. Gal.Net Ethanol ImportsEthanol StocksEthanol Consumption
Figure 5. End-of-month U.S. Ethanol Stocks & Monthly Imports in Weeks' Use
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1619
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embe
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Dec
embe
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Wee
ks' U
se
Ethanol Stocks, Weeks' SupplyImports, Weeks' Supply
Corn Balance Sheet
Key AssumptionsKey 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 Emerging BiofuelsBiofuels TechnologyTechnology• 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 Emerging BiofuelsBiofuels Technology IITechnology 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 feedstocksPotential Feedstocks:• DDGS fiber• Corn stover• Prairie grasses • Sugar, sweet sorghum• Forest wastes• Municipal & livestock wastesResearch for major handling & storage challenges
Marketing Take Home PointsMarketing 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/agmrc_renewable_energy_newsletter.cfm