Unlikely Coalition Opposes Higher Ethanol Blends
The Dow Jones Industrial Index rose 2 percent Tuesday on news that the government will extend $5 billion to General Motors’ troubled financing arm, GMAC Financial Services.
The rally continued on Wednesday after the Labor Department announced new claims for unemployment benefits fell by 94,000 the previous week. Nevertheless, the total number of people claiming benefits stands at its highest level since 1982.
Oil prices also trended higher in the final hours of 2008 capping a volatile year in which the precious commodity surrendered four years worth of gains in just five months.
The increase in oil has yet to trickle down to the gas pump where prices are down more than 50 percent from last summer’s record peak above $4.
But even gas prices below $1.40 per gallon in some parts of the country haven’t spurred demand. According to the Federal Highway Administration, U.S. motorists drove more than 100 billion fewer miles between November 2007 and the same period a year earlier, marking the largest continuous decline in history.
Ethanol proponents take credit for reducing some of the pain at the pump. But an unlikely coalition of groups is telling the Bush Administration – and its successor – to put the brakes on expansion of the renewable fuel.
According to the U.S. Department of Energy, the ratio of ethanol to gasoline must be increased if the federal production mandate of 36 billion gallons of renewable fuel is to be realized. The DOE has stated that without an increase in blending rates more ethanol would be produced than could be used in all the gasoline sold in the United States.
In a letter to EPA Administrator Stephen Johnson, the coalition's 14 members stated they were opposed to any increase because so-called mid-level blends, like E-15 and E-20, may be incompatible with today's motor vehicles and off-road equipment. They went on to say recent tests indicated mid-level blends may cause the failure of emission control devices, might defeat engine safety features and could lead to significant increases in emissions over the life of some engines. Their solution is to conduct further study so a decision can be made based on unbiased and comprehensive testing.
Ethanol makers dispute these findings. Research released earlier this month strongly suggests the optimal blend may be E-20 or even E-30. The study, sponsored by the U.S. Department of Energy and the American Coalition for Ethanol, further contends that higher blends may reduce harmful tailpipe emissions.
The EPA has little time left to make a decision and the debate will likely continue as the Obama administration takes the reigns next month.
This is not to say that some states are waiting for a nod from the corridors of power in Washington. Specialized pumps that allow motorists to choose the amount of the ethanol flowing into their gas tanks are springing up in farm country. Known as "blender pumps" the devices are allowing motorists in Iowa, Kansas, Missouri, Minnesota, and South Dakota to choose their ratio of ethanol in amounts from E-10 to E-85.
In Memory of Doug Hjort
Rural America lost a dear friend this week when one of our regular commodity analysts, Doug Hjort, passed away.For more than 20 years, Doug provided timely analysis on Market to Market, and was well-respected for his acumen. His calm, rational approach to marketing was an all-too-rare commodity in recent years as the markets became more volatile.
The quintessential farm boy, Doug loved agriculture. His distinguished career as a marketing consultant spanned four decades. He was a true gentleman and will be sorely missed by all who knew him.
2008: Year of Crisis and Challenges
Thousands of homes and businesses had no electric lights for the holiday because of wind damage. Fargo, North Dakota and Brainerd, Minnesota both began the day more than 20 degrees below zero.
Winter is already getting long in North Dakota where a record 33 inches of snow fell in December.
The long term outlook, of course, calls for considerably more of the white stuff before spring.
While that’s a relatively safe bet, analysts are less sure about their predictions for rural America in 2009. Most expect the economy to emerge from recession sometime in the 3rd or 4th quarter. But others aren’t as confident. Given the turmoil experienced in 2008 it might be wise to look in the rear-view mirror. Andrew Batt looked back at 2008 and filed this report.
In one of the most turbulent and eventful years in recent memory, 2008 began much as it ended – amidst a whirlwind political season. Gov. Mike Huckabee, R-Arkansas: “I love Iowa...”
Caucus goers throughout Iowa’s rural countryside came out in record numbers to choose Republican Governor Mike Huckabee and Democratic Senator Barack Obama.
Sen. Barack Obama, D-Illinois: "But on this January night, on this defining moment in history, you have done what the cynics said we couldn't do."
As Obama, Hillary Clinton, and John McCain slugged each other throughout a brutal primary campaign, rural America faced a number of challenges.
Only six months after President Bush signed a sweeping energy bill favorable to biofuels, corn-based ethanol came under worldwide criticism. The United Nations pointedly labeled corn biofuel a “crime against humanity” for its potential impact on global grain supplies.
But while a variety of factors sent commodity prices upwards, critics blamed solely ethanol for higher food prices at the supermarket. Farm-state lawmakers pushed back.
Sen. Charles Grassley, R-Iowa: “When a farmer gets so little out of a box of Corn Flakes don’t be blaming the farmer and ethanol for the high price of food.”
Much of the run-up in food prices was traced to skyrocketing energy costs – especially crude oil which peaked at record highs of nearly $150 per barrel in July. As oil markets shot into a seemingly never-ending upward spiral, lawmakers questioned the motives and business plans of energy company executives.
Rep. John Larson, D-Connecticut: "When it's between heating your home or freezing to death that's not much of a choice. You know, when it comes down to whether or not you're going to be able to get back and forth to work that's not much of a choice. It's what my grandfather used to says, 'trust everyone but cut the cards.”
Peter Robertson, Chevron Corporation: "We're doing our damnedest to fix this as much money as our company can with the people that we have and the infrastructure that exists."
Speculators were a common theme amongst industry experts attempting to peg higher commodity prices on extenuating factors outside of supply and demand.
Mark Pearson: “A wild market this year, incredible demand, record prices.” (March 7, 2008)
Sue Martin: “I think corn is going higher. I look for the July futures to get to $6.33.”
Under increasing attention, commodity markets unprecedented rallies as wheat, corn and soybeans set new record highs.
John Roach: “…if we have any weather problem at all they'll be at higher levels than where we are right now.”
The concern that weather could adversely affect commodities was everywhere in farm country. Oversaturated farm fields and streams across the Midwest reached a breaking point by mid-year.
(slug rushing water)
Millions of acres of farmland and entire cities were wiped clean by the floods of 2008.
Max Lamb, Waterloo, Iowa: “I hope that levee holds or my business is gone.”
The nation’s top corn and hog producing state of Iowa was considerably damaged by record flooding.
Gov. Chet Culver, D-Iowa: “We are a determined people, we are hard working and we love this state and because of that I have the level of confidence I do about the future of Iowa as well.”
The 500-year floods in Iowa eventually dumped into the Mississippi River basin, a main shipping lane for grain supplies. The Army Corp. of Engineers shut down more than 200 miles of barge traffic along the River keeping upper Mississippi terminals plugged with grain and empty barges idling downstream.
President George W. Bush: "I tell people that, you know, often times you get a hand you didn't expect to have to play, and the question is not whether you're going to get dealt the hand. The question is how do you play it. And I'm confident the people of Iowa will play it really well."
Midwestern farmers were pushed to the breaking point on spring planting but many producers were able to get into their fields by late June. As rural America braced for disaster, lawmakers in Washington were still trying to pass the 2007 farm bill…in mid-2008.
Rep. Rosa DeLauro, D-Connecticut - "A vote of 318 --it's very sweet!"
Rep. Randy Neugebauer, R-Texas - "This is a victory for America. It is important America has a strong agricultural economy."
Rep. Bob Goodlatte, R-Virginia - " We have not a 2-to-1 majority, but 3-to-1 majority vote. A 318-to-106 vote is very significant."
The farm bill eventually passed with broad bipartisan support – enough to override President Bush’s veto. The President opposed the new farm bill based on what his Administration deemed excessive costs. But concern over government spending was tossed aside months later in the face of a growing financial crisis.
Sec. Henry Paulson, Treasury Department: “I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to ten years. I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change...”
“Government bailouts” quickly became a dinner table discussion as the Federal Reserve began pumping billions of dollars in the direction of America’s financial institutions. The ongoing crisis seemed to dwarf all other issues in the closing weeks of the 2008 Presidential election – even surpassing the summer’s hot-button issue of off-shore oil drilling.
Sen. John McCain, R-Arizona: “Drill here. Drill now!”
On election night, Illinois Senator Barack Obama was elected the nation’s 44th President of the United States.
President-Elect Barack Obama: “The road ahead will be long. Our climb will be steep. We may not get there in one year or even in one term. But, America, I have never been more hopeful than I am tonight that we will get there. I promise you, we as a people will get there.”
Back in the corn belt, some ethanol producers lost a long battle to stay afloat. Ethanol maker VeraSun Energy succumbed to rapid expansion, high corn prices, and a contract hedging scheme gone bad when the company filed for Chapter 11 bankruptcy this fall.
The closing weeks of 2008 were centered on more negative economic news including the ongoing debate over government loans to American car companies. While President Bush eventually agreed to offer government loans, the bleak reality of recession, home foreclosures, and deep losses on Wall Street had dealt a vicious blow to the American economy. With 2008 in the rearview mirror, many economists predict a turbulent 2009 could be on the horizon, but some see a glimmer of hope.
For Market to Market, I’m Andrew Batt.
Market Analysis: Virgil Robinson, Pioneer Hi-Bred International
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For the holiday-shortened week, March wheat gained nearly 30 cents while the nearby corn contract moved 9 cents higher.
Soybeans also rallied, as the January contract gained more than 55 cents, and the nearby meal contract was up more than $12 per ton.
In the softs, cotton flirted with $50 dollars this week with the March contract posting a gain of $2.66.
In livestock, January cattle lost $3.00. Nearby feeders were off 82 cents. And the February lean hog contract moved 2 cents higher.
In other markets of interest, the Euro lost 23 basis points against the dollar. Crude oil gained $6.69 per barrel. Comex Gold rose more than $36.00 per ounce. And the Goldman Sachs Commodity Index gained more than 25 points to close at 345.50.
Robinson: Thank you, Mark. Happy New Year.
Pearson: Well, as we visit the oil market jumped up some this week, again, because of some events in the Middle East. Are we starting to delink some of the oil price move with what's happening in our traditional corn and soybean commodities?
Robinson: No strong indications of that thus far, Mark, at least in my opinion. Clearly that can happen over the course of time but to answer your question, no, I don't see that delinking as we visit tonight. Crude oil did jump today but clearly end of month here as we visit tonight did not have a particularly good month. So, the trend of that market, at least to a bar chartist's eye remains down. It would be, I think, very misleading for me to suggest that any kind of bottom has taken shape.
Pearson: Let's move over to the wheat market and the one that truly does trade on fundamentals and what's happening worldwide. And we do have wheat growing everywhere in the world. We've had pretty good production in 2008, I think that's been one of the positives again this year. But that has caused some price pressure. What is your outlook for wheat going into 2009?
Robinson: Before I forget, Mark, January 12th the USDA will give us an idea of winter wheat seedings and the industry is of the opinion they will be smaller as will wheat acreage throughout 2009 in the U.S. as well as globally. So, I think that has come into play. Wheat futures, if I can divert here for just a moment and address that subject, put in a particularly strong month in December. To a traditional bar chartist, of which I profess to be, the price behavior, a reversal type month, a classic outside month, often times suggests that a market has reached a low. So, over the course of the next several months given that criteria, less production, stocks will probably give us an indication of wheat used for feed on the 12th, I think we can expect and anticipate some gradual price improvement over the course of the next many weeks in wheat futures and subsequently cash wheat.
Pearson: So, the action this month kind of portends a stronger market going forward?
Robinson: It does to me, Mark, it does to me in that particular indicator, a technical indicator was strong this month.
Pearson: Let's talk about the corn market. Did you see something there? Actually before we move onto corn do you have a target in mind for making some wheat sales?
Robinson: Mark, I don't. I think at this point assuming a clean slate I would prefer the minimum price idea, keeping that opportunity open for improved price. I think there will be gradually improving demand to accommodate that with an improving global economy over the next many months.
Pearson: I'll take that. What about on corn? What is your outlook now as we move into 2009 after the most volatile year in history? What do you see ahead?
Robinson: I can't really add much to what's been discussed in previous programs regarding export sales, domestic use for feed and the ethanol margin issue. Those have not changed appreciably. Ethanol remains at a very healthy premium to gasoline futures and that is not conducive to increasing ethanol production and capacities. However, again, a more positive spin on that market would be this, I believe. Much like wheat I did see some very impressive price behavior from a bar chartist's perspective in the month of December. Now, either it's a colossal short covering phase in this market or it portends a price improvement over the course of the next many months. I'm going to lean in that latter camp. I think there are indications of improved usage as a result of a little cheaper dollar, a little weaker dollar, ocean freight as has been discussed, unbelievably inexpensive as compared to a few short months ago and I think that is the underpinning for some improvement in price over the course of the next several months, not Monday morning mind you, but the next several months.
Pearson: So, going into the New Year both wheat and corn you would expect to see some kind of a general maybe kind of a grind higher here until we kind of get a feel for what acreage looks like and so forth?
Robinson: I think that's a good point, yes. As measured by the futures market I would concur with that. Now, if futures do improve over the course of the next several weeks be advised there is another function here that should be addressed and that is your local basis. There's a lot of corn, a lot of wheat, a lot of feed grains stored on farms so those who are in that particular camp be advised that a stronger futures market often times weakens your local basis.
Pearson: And we might see that diversion as we move through spring. The basis has been fairly tight at the end of 2008.
Robinson: Post the harvest, kind of an elongated harvest, yes. In certain geographies the basis improvement has been very impressive.
Pearson: Same kind of strategy, kind of a minimum price strategy for corn?
Robinson: Well, certainly in the new crop that's where I would reside. As you mentioned we're still in this acreage uncertainty and how that all shakes out remains to be seen. Old crop corn, again, please be advised as we move forward here the element of time is a factor. Storing grain commercially, storing grain on the farm is not free. I think the March corn futures contracts positioned here sometime in January, early February to trade to around $4.50. Now, if it occurs in that January, February time window and you need cash, if you need to generate cash then the first quarter of the year I like to sell based on a $4.45 March futures contract.
Pearson: Looking forward to the 2009 crop, again, we've got a long ways to go and I know people don't want to get in that big of a hurry about it but as we look out there there's starting to be some attractive opportunities out there.
Robinson: They have improved, they certainly have depending on your crop budget. Therein lies the real key here in terms of where you want to make sales and how you want to approach your marketing throughout the course of 2009. At this point for fear of being too general here I still like the minimum price idea even though option premium is clearly expensive.
Pearson: Let's talk about soybeans and what you see happening on the soybean front. You mentioned some of the positives going on in corn, the weaker dollar, that's a plus for soybeans too.
Robinson: It is and export sales as has been mentioned numerous times remain strong to this point in time led by the Chinese. There is some concern in this up and coming production report on the 12th that bean yields could be tweaked a bit, crush could be adjusted a bit as could exports. I don't sense there's going to be a significant change in the carryout or the basic supply and demand in the '08-'09 time period. As we look forward again the industry is of the opinion that bean acres will, in fact, increase year over year. I wouldn't argue that, at least as of tonight. Having said that, please be advised then you are obligated to watch seriously price behavior in that new crop futures contract. Here again, I fully understand options are expensive but I would look to do some type of a vertical put spread in that January, February period and as that November '09 futures contract approaches that $10.60 to $10.70 area.
Pearson: Real quick on cotton, talk about a turnaround definitely occurred there up around $50 again.
Robinson: I think some concern about acres, perhaps some forecasts of improved demand are surfacing, pretty strong five year seasonal in cotton futures January through February to strengthen in value. This year appears to be tracking in that same pattern. So, I would think either the March or May cotton futures contract is in position to trade in that $55 to $60 zone at which point I would clearly create some type of floor or defensive strategy.
Pearson: Let's talk about livestock, fed cattle market not a great month and a lot of cattlemen are out there scratching their heads when is this market going to turn. What are your thoughts?
Robinson: Well, again, looking forward here in 2009 a little theme has kind of come to my attention that I'll share. I think the economy, U.S. and global, will gradually improve through 2009. We know for a fact that placements have consistently been smaller, at least versus last year and the five year average, so tighter numbers and I think given the value of currency and the prospect of improved export trade should underpin live cattle and feeder cattle values in the first quarter of '09 and they should gradually improve, at least in my opinion, through the balance of 2009. I think live cattle will average annually something in that mid perhaps upper mid $90 area through 2009.
Pearson: So, fairly friendly on the cattle market going forward which is some good news out there. You mentioned the feeder market. I keep hearing these numbers, smallest cow herd since 1950. That's substantial. Are we doing that much better of a job managing beef and with genetics and we have that much product out there for us?
Robinson: Well, there's certainly an argument in that direction but as mentioned if our thoughts are correct here looking into 2009 regarding tighter numbers, improved demand and gradual improving economic conditions it should create some strength in those feeder cattle markets and feeder cattle futures into and through 2009.
Pearson: Some good news there. Let's talk about the hog market. The USDA hogs and pigs report released yesterday, our last one obviously for the year, hog numbers surprised people. You're telling me that the numbers are shrinking.
Robinson: I don't think unexpectedly, Mark. They were within pre-report estimates and ranges but here again if you buy into this argument I've tried to make here, this little theme, tighter numbers, improved demand with the prospect of better exports I think lean hog futures and subsequently cash hogs will improve through the course of 2009 as well. I'm not looking for a significant spike in value but I think the average price through 2009 will be something in the vicinity of $3 to $5 a hundred, better than was the case in this last year and the average price last year was around $47 or $48 live. So, something in the low $50s in my opinion is likely to be the price range or the price average for lean hogs through 2009.
Pearson: Virgil Robinson, thank you so much. That is going to wrap up this edition of Market to Market. But if you'd like more information from Virgil on where these markets just may be headed visit the Market Plus page right there at our Web site where you'll find streaming video of our program. You can also download audio podcasts of our Market Analysis and, of course, the popular Market Plus segments free at our Web site. Before we go we'll pause this week to honor the memory of a key contributor to Market to Market.
Market to Market is a production of Iowa Public Television which is solely responsible for its content. Funding for Market to Market is provided by Pioneer Hi-Bred ... working to provide growers with local knowledge and support to help get the right product into each field. Pioneer ... science with service delivering success.
