Ethanol Industry Leaders Call for Elimination of Indirect Land Use Change
The Commerce Department's updated reading on gross domestic product, the broadest measure of economic activity, contracted at a 5.7 percent annual rate from January to March… a slight improvement over the 6.1 percent annualized decline reported last month.
Gains were readily apparent in the manufacturing sector this week as well, where a separate report confirmed orders for durable goods rose nearly 2 percent in April, marking their largest gain in 16 months.
Meanwhile, the National Association of Realtors reported April sales of existing homes grew nearly 3 percent from March to an annual rate of 4.7 million units. The gain marked the second increase in the past three months as foreclosure auctions and cheaper prices spurred bargain hunters, pushing the median home price down 15 percent from the previous year, reflecting the second-biggest decline on record.
And the Conference Board announced its Consumer Confidence Index rose unexpectedly to its highest level since September buttressing sentiment that the worst of the recession is over.
One sector that’s endured a bit of a confidence problem over the past year is the ethanol industry. The trend continued this week, as farm state lawmakers lamented the potential impact of changes in Renewable Fuels Standards.
Chairman Collin Peterson, D-Minnesota: "I feel very strongly that right now we don't have the right policy to be sure that we can produce a cost effective domestic supply of clean renewable fuel."
The ranking Republican, Oklahoma Congressman Frank Lucas, agreed.
Frank Lucas, R-Oklahoma: "...we must make sure our energy policies are not held hostage by those who are not friends of production agriculture. We must focus on incentives, innovation and research to address environmental issues not mandates."
Among its many regulations, RFS-2 requires biofuels like ethanol to comply with the landmark standard using a theory known as Indirect Land Use Change, or I-L-U-C. Developed by Tim Searchinger of Princeton University, I-L-U-C theorizes that when land previously used to grow food is switched to raising crops for renewable fuels farmers in other parts of the world will plant virgin ground to make-up the difference. Claiming the theory is flawed, representatives of the ethanol industry pointed to the period between 2004 and 2007 when ethanol output increased by a factor of three and the rate of deforestation in the Amazon was cut in half.
Tom Buis, CEO, Growth Energy: "How can we possibly hold our American farmers responsible for farming practices in sovereign foreign countries. I think the more you look at it the harder it's going to be. A lot of factors affect land use changes in other countries."
The witnesses testified the theories used to create the carbon standards in RFS 2 are not based on universally accepted science, economic modeling, or "real world" measurements.
Bob Dineen, CEO, Renewable Fuels Association: "This is a debate largely about the future. It is about being able to demonstrate that the technologies that are going to be employed will indeed achieve the greenhouse gas benefits that we believe that they will. And if all those benefits are undermined because of this unrealistic, unsubstantiated penalty of international land use then the finance community is not going to be able to support those projects and the evolution of the industry will stop."
Dinneen was joined by those testifying that RFS-2 unfairly singles out ethanol for scrutiny ignoring other fuels like gasoline.
Bob Dineen, CEO, Renewable Fuels Association "..you absolutely have to apply that same standard to other alternatives and to petroleum that we are being compared against, otherwise, you're creating a situation where you have an unlevel playing field. The fact of the matter is that petroleum has more indirect consequences than biofuels or any other alternative and yet it is getting a free pass."
House Agriculture Committee Chairman Peterson wants a larger say in pending climate change legislation that emerged from the House Energy Committee late last week. Before debate can take place on the House floor, the measure must go through a half-dozen other committees including the House Agriculture Committee. According to the New York Times, Peterson is expected to tack-on verbiage blocking the use of Indirect Land Use Change theory. After weeks of difficult negotiations, it is unclear how much flexibility the authors of the measure will give Peterson on a bill they want to arrive on the floor relatively untouched.
WTO Complains About U.S. Milk Subsidies
Unlike grain farmers who sometimes hold out for better prices by storing their crops, dairymen must sell their perishable product at the going price. And cows keep producing whether the economy's in recession or not.
U.S. dairy exports soared in recent years as supplies fell in Europe and Australia while demand grew in China. Exports rose to $3.82 billion, or 11 percent of all milk production in 2008.
The industry responded by increasing production, but once the global recession accelerated last fall, foreign demand dried up and prices plummeted.
Now, the dairy sector is faced with too much milk and too many cows. And in many cases, producers are spending more to maintain their herds than they are receiving for raw milk.
Late last week, though, the Agriculture Department intervened.
Late last week the Agriculture Department announced it will aid U.S. farmers by subsidizing the export of over 92,000 metric tons of dairy products. However, this week 29 countries of the World Trade Organization criticized the subsidy saying it “undermined the effectiveness and credibility of the WTO system.” Secretary of Agriculture Tom Vilsack said the move was consistent with WTO rules.” Vilsack also said "These allocations illustrate our continued support for the U.S. dairy industry, which has seen its international market shares erode, in part, due to the reintroduction of direct export subsidies by the European Union earlier this year." According to WTO rules, the U.S. can hand out annual subsidies of up to $150 million for up to 92,000 metric tons of dairy products.
Other efforts to reduce the surplus supply of milk include trimming the size of the U.S. dairy herd. Cooperatives Working Together, a program started by the National Milk Producers Federation, plans to reduce milk production by 2 billion pounds by removing 100,000 cows in the first of a series of reductions over the next 12 months.
Dairy Farmers Working Together, the Holstein Association USA, and the California-based Milk Producers Council are cooperating to create legislation that would penalize producers who boost production from one year to the next. And, U.S. Senators Arlen Specter and Robert Casey Jr. have introduced a bill titled the Federal Milk Marketing Improvement Act, which would reduce extreme price volatility by requiring all milk produced in the United State be priced using a national average cost of production.
Produce Unit Train Links West Coast Farmers with East Coast Food Distributors Part 2
The effort is orchestrated by a company called, Railex, which contracts with the Union Pacific and CSX railways to establish the exclusive route.
The Fresh Express is the nation’s first and only nonstop rail unit for perishables and guarantees a maximum five-day cross-country transit. Temperatures inside each 64-foot car are constantly monitored by GPS tracking and adjusted to each customer’s unique specifications.
Producer Laurel Bower Burgmaier followed one of the “Fresh Express” trains to the end of the line in New York and filed this report.
Bill Collins, Railex, LLC: “Railex is a transportation platform primarily for produce coming cross country in conjunction with UP and CSX. They’re the two primary rail carriers. They connect to our facilities in Washington and California. They provide a z rated train that gets across country with no stops for switching or yard work.”Once the train, known as the “Fresh Express,” has reached its destination in New York, the railcars are prepared for unloading within the confines of the Railex Distribution Center so the cold chain is not broken. Produce is unloaded swiftly to get the merchandise to market or, if needed, to store products at the optimal temperature in one of several, monitored zoned coolers allowing customers to manage their inventory with overnight delivery.
Bill Collins, Railex, LLC: “Our facility here is 225,000 square feet. The facility is built lengthwise so that we can accommodate receiving more cars. The train arrives in the back; we flow through the building out to the truck docks in the front. We can basically crash the train and bring it all in at one time. We unload it without stopping from front to back 55 cars in four waves of fourteen at a time. The building is set up as a mirror image of itself so that you never have to go further than the center of the building. It’s a much more efficient way to unload the railcars.”
In just three years, Railex has increased from one train leaving Washington to New York, to three trains leaving the West Coast. The California location, which began operating last fall, now has two trains bound for the East Coast each week. The five-day service 55-car refrigerated unit trains have the capacity to transport the equivalent of 200 trucks of refrigerated merchandise every week, both ways –that’s 600 truckloads combined. Railex officials say that while most of their clients are produce related; they have the capability to work with a variety of other goods including liquor and frozen foods.
Neil Golub, Price Chopper Supermarkets: “This company was founded in 1932 by my dad and my uncle, and it has grown very dramatically over the past 20 years. We now have 116 stores located in six northeast states. We have to recognize that during the seasons the growing markets change around the country. During the winter weather which normally comes in here about the beginning of October, you’d got to really make sure that you have a full line of products and so during that time of year, we bring a tremendous amount of things cross-country. You really have to shop the entire country so the American consumer really has the opportunity to shop for a full variety year round.”
One of the biggest benefits of using the Railex train is the ability for growers, shippers and distributors to position their inventory. And that offers some distinct advantages over other modes of transport.
Bill Collins, Railex, LLC: “They can customize their outbound order and they have the inventory option here as well. Their rate includes five to seven days of free storage here as well. As they await market changes or if they want to get ahead of a market or you know market you know suddenly shifts and they need an item or they’re out. We have the same performance as a truck, perhaps a little better. They have all these options available they wouldn’t have with just a standard truck. It’s very difficult to track 35/40/50/100 trucks if you’re an inbound logistics person for a chain store, whereas the Railex train arrives in one place. We know exactly where everything is. They have insight into their inventory when it’s going to get here, where it is in the building, and how they can build it on the way out.”
Neil Golub, Price Chopper Supermarkets: “Sometimes you don’t have a full railcar of lettuce or potatoes or onions or peaches. So what that does is opens the door for what we call a mixed load. In one railcar we may have broccoli, celery, carrots, potatoes, onions –a whole variety of things. And, a mix car sometimes can be very beneficial to us. Being able to do that is beneficial because instead of having four trailers on the road coming from different places, you have one railcar that’s got it all in there.”
With volatile fuel prices and global climate change on everyone’s mind, using a greener method of transportation is important. According to Railex, railroads are the most fuel-efficient form of ground transportation with the three “Fresh Express” trains saving more than 15 ½ million gallons of fuel per year. Railex adds railroads are three times more fuel efficient than other modes of ground transportation, while generating three times less emissions.
Neil Golub, Price Choppers Supermarkets: “They should be able to get their train here within five days. Now that’s very close to the time it would take a truck. But, if you look at the big picture and the amount of fuel that’s wasted and the amount of the environmental problems as that results from spewing fumes into the air, this certainly is a real benefit from doing that.”
Along with Union Pacific and CSX railroads, Railex officials say they take the best attributes of truck, rail and warehousing and tailor them to meet customer needs.
Bill Collins, Railex, LLC: “We guarantee that their product is held without breaking the cold chain from one end to the other in a very rapid fashion. And, they can get it to market without breaking that cold chain anywhere and that’s unusual in the rail service because typically rail received outdoors and the cold chain is broken. Here, we’re different. It never leaves a cold chain. You know it’s much better for arrival product particularly in produce.”
Neil Golub, Price Choppers Supermarkets: “If the temperature goes up on produce that’s not good. If it goes down and gets too cold, that’s not good either. It has to be at a level that protects the product and keeps it at its peak condition during the entire trip. That’s certainly going to be a real benefit.”
In just three years, Railex has increased from one produce unit train to three. While most of the products still move West to East, more and more goods now travel East to West opening up new opportunities for growers, shippers and distributors on both coasts. And Railex officials say they are excited about keeping perishable products on the right track in the future.
Bill Collins, Railex, LLC: “We’ll be expanding this facility at some point in the future a little bit larger and possibly be able to accommodate another train as well. We’re looking to get one in every other day.”
For Market to Market, I’m Laurel Bower Burgmiaer.
Market Analysis: Jamey Kohake
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For the week, July wheat rallied nearly 25 cents, and the nearby corn contract was up 6 cents.
Strong foreign demand supported the upward trend in soybeans, as the July contract gained 18 cents and the nearby meal contract was up $7.50 per ton.
In the softs, cotton moved slightly higher again this week with the December contract posting a gain of 47 cents.
In livestock, June cattle lost $1.20. Nearby feeders were off 17 cents. And the June lean hog contract was down a little more than $2.00.
In other markets of interest, the Euro gained 118 basis points against the dollar. Crude oil gained $4.64 per barrel and is up more than $9.00 in the past two weeks. Comex Gold was up nearly $20.00 per ounce. And the Goldman Sachs Commodity Index gained more than 20 points to close at 443.15.
Kohake: I think the sharp gains are limited from here on up. I think we can still grind higher very, very easily. We've seen a weaker U.S. dollar, we saw bullish inventory report this week which I thought was a big surprise. Refinery capacity, the usage there is up by three percent this week. They also sold the regular inventory barrels down by over half a million compared to what the average was. So, two very bullish reports. We saw OPEC and Saudi Arabia say two weeks ago they thought $75 to $80 was a fair value and I think $77 right now is the target. That's 138% retracement off this winter's lows and I think that's the top side right now.
Pearson: That's going to translate to higher prices obviously at the pump, higher fertilizer costs going into next year. Are the other energies moving in tandem with oil?
Kohake: They are spilling over a little bit like the unleaded gas. Natural gas is still lagging but I think it will eventually catch fire there as well as the funds in that market. Natural gas has been depressed in the futures for quite some time now and I think guys are wanting position, they're longer term and try to get the spillover from unleaded and from crude as well.
Pearson: So, as we look at this market here tonight, of course, we had the dollar falling out of bed. Is that the big factor with the dollar is this higher oil price again?
Kohake: That is right, part of it is. We've seen a lot of fund buying too come in the market the last week, week and a half. Funds are buying corn, a little bit of softs and some energies and metals and they're selling treasuries against it. With all this money being printed and all of this debt being sold we saw $100 billion more debt being auctioned off this week in two year, five year and ten year bonds and the funds don't like that, they're selling that, they're assuming there's going to be an inflation increase which I think is very simple to see, see interest rates go up and they're positioning themselves for that longer term.
Pearson: One group that hasn't been participating in any kind of inflation is the dairy producer. We talked about earlier on the show class 3 milk prices still struggling. There's a lot of issues out there for the dairymen. We've had the buyout, we mentioned that, cooperatives working together. We've had the USDA now intervene and still we haven't seen much of a response in the mailbox price for milk. Consumers are wondering, they're saying where is this cheap milk? But the producers out there, they are seeing some very depressed prices.
Kohake: That is right. I don't have a whole lot of good news for these guys yet. I think the bigger sustained rally is probably sometime middle to late third quarter of this year. There is no big fund activity. The cash market is not providing any support. I think that's a major problem right now. Plus the exports are terrible and I think before those two turn around there's not going to be any type of fund money coming or any type of speculation money. It's a miserable trade right now. We just saw last week from Thursday to Wednesday of this week the August contract lost $1.50 again. The market got oversold, they had a late rebound this week, Thursday and Friday, but I don't see much upside potential upwards of 16 and above that until third quarter. I think you could see a short covering rally pushing 15, 15.5 for August, maybe 16 but that's about it.
Pearson: That's still a long ways from where we were 22 when this market was really good and people were building production. So, let's talk about the flip side of this. There was some optimism on the markets this week, on the farm markets, but pretty much on the grain side. The wheat market was up a little bit. Are these attractive positions to start selling now? Should we start selling some of this new crop wheat coming in?
Kohake: I think absolutely. I think you start close to $7 for December Chicago and you sell upwards to $7.20. There is an open chart gap up to $7.20, at $7.20 get up there, get sold some more. I'd be 30% to 50% sold right now and sell some more in rallies. Exports are still very slow for the wheat and I think that's going to be the most bearish factor. As the prices have went higher the exports are going to slow down despite the dollar correcting a little bit lower. But yes, I would be selling into this rally. We do have a couple of problems that are bullish, some fundamental problems in southern Illinois, Arkansas from all the rain, we still have roughly 2 million acres to be planted too but the funds that came out of the shorts they were short roughly about 25,000 contracts as a week ago, they came out of those this week and I think $7.20 December is where I'd be very aggressive on the hedge.
Pearson: So, sales idea there on the wheat. Let's talk about the corn market and what you see happening there. Obviously the eastern Corn Belt is still struggling and every producer that I've talked to in Illinois and Indiana has said they're going to plant corn for as long as they can and that may be in a shorter season hybrid, we've heard shifts of seed corn moving out to eastern parts of the Corn Belt. What is your take right now on acreage for corn and soybeans and what kind of a shift will we see?
Kohake: I think we're going to see a very minimal shift with corn compared to what everybody was portraying, you know, three, four, six weeks ago, eight weeks ago. You look at the past six years USDA reports, except for last year, we've seen an increase from March until June. Last year was an exception, floods out west, we lost 30,000 acres, there was talk 18 million just like last year. So, I think the USDA will find acres, they always do. I think it comes from wheat, maybe a million acres up in North Dakota that goes to beans and maybe some wheat acres down south, Oklahoma, parts of Kansas goes to beans and that's where you pick it up. I don't think a lot of corn acres get lost to beans right now. Guys that I talk to are going to plant until June 10th, that’s their cutoff line right now.
Pearson: That's what we're hearing. So, with that in mind, without that shift occurring this corn price has gotten fairly attractive.
Kohake: It has, open interest what I'm watching right now has increased drastically. We are back to where we were in November with open interest. That is a major bullish factor. We had a great close today, $4.58 was key resistance, we closed above it today and I think we're probably going to see more follow through next week. I don't think we're going to run to $5.00, $5.50 at all, I would be making incremental sales between $4.65 and $4.80. $4.80 is my short-term target right now unless there's some type of drastic weather problem towards the middle of July.
Pearson: Any more drastic than what we've seen. Let's talk about soybeans now. With this shift over in the Dakotas, Oklahoma, more incremental shifts what is your take on soybeans and soybean prices going forward?
Kohake: I would be pricing some from today's highs up to $10.80 in November. That's a key retracement number in the November beans as well. What's going to be important to see in here with these beans the next two weeks are the spreads. The longest rally that we've seen funds are long July, short November, they have to come out of those for first notice day and how is that affecting new crop when they buy that back. I would sell into it because of the increase of acres and the bean market is getting a little bit overbought. A lot of the strength we've seen in the last couple of weeks, though, is the meal. Crushers are having a terribly hard time producing high protein 48% and 52% meal and that is taking pretty much the bean market right now. You can see by the Informa market front months higher than the back months and I think that's what takes the bean market from here all the way into the middle of summer.
Pearson: We'll see what happens weather wise, of course, another issue. Real quick, Jamey, your thoughts on the cotton market and the rally we've seen there?
Kohake: I think you sell last week's highs, December up to 60, the cotton market I think ran up too hard and too fast. We saw that with the export figure and they have dropped off. China also too is bearish right now for us because they are exporting cotton out and I would sell the cotton market up to 60 in December.
Pearson: Let's shift gears, let's talk livestock. It's been such a bad run in the cattle business and the hog business. Give us your take, fed cattle prices the balance of 2009 what do you see?
Kohake: Short-term I think we're caught in a range cash between 82 and 85. I do not think we'd do that much. You look at the combined cutouts, the average the last 20 years is about 144.5 right now and historically in the month of June we lose about $3 off of that. I don't think we lose that much now but I think there's maybe two more dollars of downside in the cash market. Futures are lower than cash right now, there's no big fund activity and I think by middle to late June we should have this bearishness factored in and I would be positioning longer term with these October, December and February for next year on a pullback to buy into it and get long.
Pearson: So, not much for the next couple of weeks and then maybe we start putting a bottom in, maybe start seeing this fed cattle market start to strengthen?
Kohake: Yes.
Pearson: So, let's talk about the hog market and what you see happening there. Again, we had a good thing going, we had the swine flu, the H1N1 unfortunately called the swine flu and took this market away. Are we starting to recover? Do you think we'll see that just continue to rebuild for the summer?
Kohake: I think we are in a compressed trade. Rallies are going to be sold yet right now. We saw a terribly disgusting trade today, new contract lows for most of the contracts, funds are short roughly 20,000 contracts coming into today, futures are higher priced than the index, it's a very easy sell for the funds, speculators got long too early trying to buy the tighter supplies and they're still getting flushed out. I think until the cash market firms up and the exports pick up we're just range bound right now.
Pearson: So, that's what we look forward to as far as the hog go, not a pretty picture, thank you so much Jamey Kohake, as usual we appreciate your insights. That's going to wrap up this edition of Market to Market. But if you'd like more information from Jamey on where these markets just may be headed visit the Market Plus page at our Web site where you'll find streaming video of our program. Of course, you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. Be sure to join us again next week when we'll learn how a renewable energy entrepreneur in the Midwest is enticing homeowners to give wind turbines a whirl. Until then, thanks for watching. I'm Mark Pearson. Have a great week.
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