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Market Plus: Aug 31, 2007: Alan Brugler

posted on August 31, 2007

Market Plus: Aug 31, 2007: Alan Brugler Pearson: This is the Friday, August 31st, 2007 version of market plus here at our Market to Market website. I'm Mark Pearson pleased to have with us one of our good market analysts this week, Alan Brugler. And, Alan, a lot of things to talk about in the markets these days and throughout agriculture as far as that goes. We talked a little bit about, you talked about the demand coming forward for both corn and soybeans for the biofuels world. I want to talk a little bit about what you see in that. What do you see happening with ethanol demand for 2008 as we head into, really as we start to put to bed very early the 2007 corn crop. Some people feel like it's already in the bin. Good yields, good numbers from some of the early results out there so people are feeling pretty confident. And you talked on the show about, you know, a 13 billion bushel corn crop could be here. Is that plenty of corn to supply ethanol or are we going to tighten things up quite a bit?

Brugler: We've got plenty of supply for the current marketing year. There is no food versus fuel argument for corn based on what we know today about the 2007 crop. The bigger question becomes 2008 and how fast we ramp up ethanol production versus the corn that's used in that process. We're seeing a little bit of stress in the system right now, ethanol prices have dropped basically to the lowest price all year now despite fairly high gasoline prices around Labor Day. That has to do with the blending capabilities around the country, some in the trade call that the blend wall. And the fear is that as we get more ethanol production that we have a hard time actually mixing that into the gasoline. We've seen some positive signs there, outfits like Krueger have announced rollouts of E85 pumps at a lot of their affiliated locations. But, again, I think there is some risk that we're overestimating ethanol consumption of corn in 2008 if we can't get this pricing of the ethanol turned around, if we don't solve this blend wall issue. Right now that's the biggest bull argument for corn for next year is that we're going to expand that consumption to 3.5 or 3.6 billion bushels in one year and eventually to over 4 billion bushels a year. But we do need to keep an eye on that consumption side. I think E85 is a logical solution if we can't physically blend enough 10% ethanol to find ways to use more 85% ethanol blend.

Pearson: That's right and you mentioned there's some promotions, those new pumps and so forth that are going out there so it's marching onward. So, the impact on corn prices, again, could be a little bit maybe not quite as optimistic as we had hoped if that blend wall isn't crushed somehow or isn't pushed through.

Brugler: Yeah, it's a very complicated scenario because you've got the ethanol consumption issue on one side, you've also got exports going quite well right now from other countries that are doing ethanol production and need corn and also for feed. You've got to look at that expansion of domestic demand though. This is very uncharacteristic, in '96 and some of the other famous bull markets in corn you had a sharp run-up in price, you expanded the crop and then the story was over. It's what we call short crop, long tail. For two or three years prices went down. This could be the exception year because that demand isn't, at least the domestic demand isn't going to be dropping. We know that it's going up by another 800,000 to perhaps 1 billion bushels because of this expansion in plants. How fast it expands is really the question here.

Pearson: Alright, and let's also look at the other biofuel which we haven't talked as much about recently and the economics for that have not been nearly as attractive and that's over on the soy biodiesel front. And what are you seeing over there? Obviously bean oil prices have been very strong, kind of hard to pencil these things out right now.

Brugler: Yeah, we're seeing more biodiesel plants, we've added more than 40 plants since the first of January in the United States. But what we're having trouble with is the economics of running those plants and not just here in the United States. There was an article out of Indonesia this week saying that the palm oil biodiesel plants were financially in trouble and asking for bail out from the government. But I think what we're seeing here in the U.S. is that we've got plenty of soy oil, in particular, to be available for biodiesel but the market in its hidden wisdom has kind of created a strategic vege oil reserve. Every time it looks like we're going to use the vege oil for biodiesel we run up the price of the soybean oil a couple more cents a pound and make it uneconomical to do so. So, that's a way of saying that we're expanding methyl ester production which is biodiesel. We're also expanding the consumption for fuel use but not at the pace that we would like to and certainly we're not making anybody wealthy who is running a biodiesel plant right now.

Pearson: Nope, a very cautionary tale for any new industry, it's a norm that you would see things like this. So, soybean prices, corn prices, get some good opportunities to make some sales for '08 and maybe step up and do some.

Brugler: Yeah, I think the key here is that we've got an imbalance in acreage in the system because of what corn did this year. That creates pricing opportunities for wheat and soybeans and cotton for the coming year but I think the lesson from corn this year was when you have those high prices lock in the prices, then go make your commitment to plant the crop. Don't look at the price, plant the crop and then expect the price to still be there.

Pearson: Always a good lesson. I think Diserelli said that, that adversity is the greatest education. Thank you so much, Alan Brugler, for being with us and for being with us here on market plus. From all of us here on Market to Market, I'm Mark Pearson. Have a great week.

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