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Ethanol Still Supporting Grain Markets

For three-times-daily market reports from Don Bousquet and RNI, visit “ICE Futures Canada updates” at www.manitobacooperator.ca

Grain and oi l seed prices at ICE Futures Canada in Winnipeg closed the week ended Sept. 25 lower with modest losses in canola. Canola was pressured down by the advancing harvest, favourable weather, bearish technical signals, slower demand and declines in the Chicago soy complex. However, canola losses were smaller than those in the U. S. soy market. Limiting the decline was export demand, the weak Canadian dollar and a slower pace to farmer selling. Exporters and crushers were steady buyers while elevator companies, commodity funds, commission houses and commercials provided the bulk of the selling.

Western barley saw small losses on the harvest and sluggish end-user demand.

Limiting the weakness were the lack of farmer selling and gains in U. S. corn prices.

Chicago futures ended mixed, with soybeans down and corn higher. Soybeans were undermined by the favourable weather and expectations for a large crop. However, export demand is strong and that gave some support. U. S. corn futures posted moderate gains as demand is very strong, and that offset the beneficial weather for the crop and talk of a record-large U. S. corn crop.

U. S. wheat futures posted small losses as the large global wheat supply and sluggish demand for U. S. wheat sent prices down. However, selling was not aggressive and that accounted for the declines being small.

FROST IMPACT

The big news in both Canada and the U. S. this past week was the incredible weather and lack of frost, which permitted the Canadian harvest to advance and the U. S. crops to mature. That’s expected to come to an end this week with frost likely to appear.

For the Canadian crop, it is felt that the impact will be minimal, likely lowering the quality of a few grain crops with little impact on the canola crop. In the U. S. it’s felt it will have limited negative impact on soybeans, but could reduce quality and quantity in the corn crop. However, for corn it’s felt that yields are so high that even with a frost, there will be large supplies for the market.

Increasingly this large U. S. corn supply is being viewed not as burdensome, but as necessary to meet the exceptional demand that’s coming from the ethanol industry in the U. S. and the export market – this is offsetting the falling demand from the livestock sector.

Many farmers have indicated to me that they thought that the U. S. ethanol industry was a “bust,” with plants shut down and companies losing money.

However, the opposite is the case: ethanol production is actually moving ahead of forecast and will use as much as 33 per cent of the U. S. corn crop in 2009-10. There has definitely been a shakeout in the U. S. ethanol industry, but the change has actually improved the situation.

The companies that have made it through the shakeout are stronger and are expanding, such as Green Plains, the fourth-largest U. S. ethanol producer by volume. It has recently purchased two new plants in Nebraska and has indicated it is willing to buy more.

BUYING INTO BIOFUELS

Another development in the industry is that many of the bankrupt plants have been bought by either crushers or oil companies. Valero Energy, the largest oil refiner in the U. S., bought seven plants from bankrupt VeraSun Energy. Exxon, Mobil and BP have all announced investments in biofuel plants. Other plants have been built or bought by ADM and Cargill. The change in the industry has resulted in the ethanol ownership coming into the hands of people who understand how to manage risk and make these plants profitable.

This industry is currently producing at the rate of 11.5 billion gallons of ethanol per year, which puts it ahead of the U. S. Renewable Fuel Standard mandate of 10.5 billion gallons for 2009. In 2010, the mandate calls for the blending of 12 billion gallons and by 2015, 15 billion gallons are expected to be blended.

This year the profit margins for the plants have been between US10 and 20 cents a gallon. The big threat to the ethanol industry is the price of crude oil. As long as crude oil remains above the $60 per barrel level, the corn market can trade as high as $4 per bushel with plants remaining profitable.

Currently a bushel of corn yields 2.8 gallons of ethanol and analysts feel that most plants can increase that yield to three gallons per bushel.

If crude oil falls to $30 a barrel and stays there for several months, as some feel it could, then corn prices would have to drop to $2 a bushel for ethanol to be profitable.

The current U. S. government mandate is for fuel to contain 10 per cent ethanol. There is a push on to get that up to 15 per cent. However, car manufacturers are fighting it, saying engines could not handle that level of ethanol and warranties would be voided.

The feeling is that the 10 per cent mandate will be raised though to the 12 per cent level, which will further boost the use of corn for ethanol production. The result would be a further reduction in corn ending stocks from the September U. S. Department of Agriculture forecast of 1.64 billion bushels to as low as 1.3 billion bushels, which would pull corn prices up to the $3.60-$3.75/bu. level, as long as oil holds above $60 a barrel.

While this is good news for corn producers, it is bad news for barley producers who are competing against the byproduct of ethanol, dried distillers grains (DDGs) in the livestock feed market. Already record imports of U. S. DDGs have cut back demand for barley, offsetting the drop in barley acreage that occurred this year. Ultimately, though, barley will come back in line with its supply-demand and barley prices will firm up, although it may take another year.

Corn tends to supply the base price for grains in the world and the use of corn as ethanol is helping prevent all grain prices, including wheat, from dropping back to the dismal price level we saw prior to 2006.

This week (Oct. 2) Statistics Canada issues its second look at the size of the Canadian grain and oilseed crop. The feeling is that the numbers will be up modestly from its previous report, but will not reflect the full extent of the crop size increase that resulted from the exceptionally good weather in September. The StatsCan report was felt to have been taken at the beginning of the period when the crops improved. It’s expected that StatsCan’s numbers will not reflect true crop size until December.

– Don Bousquet is a well-known market analyst

and president of Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.

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