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

800

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

63

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Iowa Corn Processing & Ethanol Plant Locations, Actual & Planned. 9/26/06,

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Plymouth

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Iowa Corn Processing & Ethanol Plant Locations, Actual & Planned. 9/26/06,

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66 Planned + current in Iowa11 Just across the borders

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Figure 1.

*

*

*

Iowa corn processing & ethanol plants, current & planned, 11/20/06

63

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

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

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 1sttime 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

80.00

100.00

120.00

140.00

160.00

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

Bil.

Gal

lons

Per

Yea

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

ual R

ate

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Bil.

Gal

. Eth

anol

Ann

. Rat

e200620072008Eth l

Ethanol

Gasoline

Figure 4. Annual U.S. Ethanol Production, Use & Stocks

0

1000

2000

3000

4000

5000

6000

7000

8000

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Mil.

Gal

lons

Production, Mil. Gal.Net Ethanol ImportsEthanol StocksEthanol Consumption

Figure 5. End-of-month U.S. Ethanol Stocks & Monthly Imports in Weeks' Use

0

4

8

12

1619

92 D

ecem

ber

1993

Dec

embe

r

1994

Dec

embe

r

1995

Dec

embe

r

1996

Dec

embe

r

1997

Dec

embe

r

1998

Dec

embe

r

1999

Dec

embe

r

2000

Dec

embe

r

2001

Dec

embe

r

2002

Dec

embe

r

2003

Dec

embe

r

2004

Dec

embe

r

2005

Dec

embe

r

2006

Dec

embe

r

2007

Dec

embe

r

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