Dr. Robert Wisner: Grain Outlook Dr. Robert Wisner: Grain Outlook 3/15/063/15/06

Iowa State University AgMarketing Resource CenterAgMarketing Resource Center

Grain Outlook for 2008-20103/21/08

Dr. Robert Wisner, University Professor & BioFuels Economist

Global agriculture shifting from Global agriculture shifting from food & fiber to food, fiber & food & fiber to food, fiber &

energy outputenergy output•Grain-based ethanol – first phase•Shift requires sharp increase in grain, oil crop supply

•Adjustments in livestock production

•Oil price shock increases food costs

•Tightening supplies + weather variability add food-feed price volatility

Corn-ethanol only partial solution to energy challenges

Other feedstocks needed•Municipal wastes•Animal agriculture wastes•Forest product wastes•New crops

New automotive technology•Hybrid gas/electric vehicles•New engine & vehicle designs•Hydrogen fuels & fuel cells

Diversification of energy sourcesIncentives for increased mass transportation Wind power use increasing

Key Determinants of Grain-Based Biofuels Industry Size

•Crude Petroleum Price

•Grain & Oil Crop Prices Needed for Grain & Oil Crop Prices Needed for Increased Area & ProductionIncreased Area & Production

•Crop Inputs Availability & Cost

•Government Mandates

Recent Start-ups & Soon to be on Line Recent Start-ups & Soon to be on Line U.S. Ethanol PlantsU.S. Ethanol Plants

Location Mil. Gal. Cap. Date• Pikely, CA 40 AprilPikely, CA 40 April

• Lima, Ohio 54 MarchLima, Ohio 54 March• Greenville, OH 110 March Greenville, OH 110 March • Hennepin, IL 100 April Hennepin, IL 100 April • Cambria, WI 40 AprilCambria, WI 40 April• Coshocton, OH 60 MarchCoshocton, OH 60 March• St. Ansgar, IA 100 MarchSt. Ansgar, IA 100 March• Monona, IA 100 April Monona, IA 100 April • Volney, NY Volney, NY 41 41 May-Jn May-Jn

Total 645 Total 645

Recent Positive Developments in Recent Positive Developments in Biofuels DemandBiofuels Demand

• 2007 Energy Bill & mandates & a mechanism for implementation

• New Union Pacific rapid ethanol train receiving & unloading facility in Dallas

• North Iowa ethanol shipping facility• Opening of substantial ethanol market in

Florida and movement toward opening other southeast markets

• California state government commitment to reduce green-house gas emissions

• Higher gasoline prices?

Grain Market Outlook 2008-’10Grain Market Outlook 2008-’10

• Driven by global biofuels & U.S.-foreign wheat/weather problems

• Multi-yr. global battle for crop acreage: corn, soybeans, wheat, cotton, others

• Soy Prices: need for extra 7- 9 mil. U.S. Soy Prices: need for extra 7- 9 mil. U.S. acres in ’08acres in ’08

• Other crop prices supported by SB, corn• Record-high ‘08 guarantee prices for

revenue insurance• Bio-fuels future: support from crude oil

prices & energy bill

2007-08 U.S. corn supplies 2007-08 U.S. corn supplies adequate to meet demandadequate to meet demand

• Crop up 24% -- 20% increase in corn acres• But at expense of:

– 16% decline in soybean planted area16% decline in soybean planted area– 29% decline in cotton area29% decline in cotton area– 8% decline in non-durum spring wheat8% decline in non-durum spring wheat– Declines in minor cropsDeclines in minor crops

• Soybean supplies tighten substantially, increased Soybean supplies tighten substantially, increased plantings needed in 2008plantings needed in 2008

• More U.S. corn will be needed in 2009,More U.S. corn will be needed in 2009,

2010, 20112010, 2011

Enough Bean Acres Bought?

West Texas Intermediate Crude Oil

0

10

20

30

40

50

60

70

80

90

100

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

dol

lars

/bar

rel (monthly average price)

U.S. 2007 Energy Bill

• U.S. 2007 renewable fuels production: 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 (1bil. For 2009: 500 mil. gallons of biodiesel (1bil. Gallons for 2015)Gallons for 2015)

Source: Dr. Terry Francel, American Farm Bureau Federation & U.S. Energy Dept.

Keys to 07-09 Grain Markets

1.1. Ethanol profitabilityEthanol profitability

--Infrastructure & transportation

-- Negative margins ahead -- how long & how bad?

2. Govt. biofuels mandates to support corn

3.3. Strong Export sales—better foreign weather?Strong Export sales—better foreign weather?

4. World Economy?

5. EU opening up 10% set-aside in 2008

6.6. Battle for acreage: S. Am., EU, U.S. Battle for acreage: S. Am., EU, U.S. wheat, SB, Cotton, & Cornwheat, SB, Cotton, & Corn

Cautions in 2008-09 Grain Markets

1.1. Fund TradersFund Traders

2. Bio-diesel economics not good, no mandate until 2009.

2.2. Domestic user returns tighten Domestic user returns tighten with higher corn prices – livestock with higher corn prices – livestock & fuel& fuel

Risks: 2009 & 2010 Crop Sales

• Production Costs

• Some of new-generation contracts not tested in extreme mkt. conditions

• Weather (Strongly consider harvest-price revenue insurance)

Ethanol, demand growth & food inflation shifting China from to corn exporter to importer?

41 Countries Encourage Biofuels

U.S. expansion Continuing

Changes in U.S. Ethanol Plants, 7/27/07 to 1/08/08 (From DTN)

7/27/07 11/6/07 1/8/081/8/08 3/14/083/14/08

• U.S. Opr. Plants 134 139 163 171

• Under Const. 89 91 81 74

• Planned plants 329 343 336 341

• Total 552 572 580 586

World Stocks are Near-Record Low -- USDAWorld Stocks are Near-Record Low -- USDA

World Feed Grain Production, Use & Months of Reserve Supply Beyond Pipeline Needs

0

200

400

600

800

1,000

1,200

1960196519701975198019851990199520002005

Mil.

Met

ric

ton

s

0.0

1.0

2.0

3.0

4.0

5.0

Mo

nth

s R

eser

ve

Prod'nUseRevised 9/12/05Old ReserveRevised ReserveRevised Reserve 7 12 04Revised reserve 12/10/20041/11/08 reserve

1/11/08

Soybeans: Stocks/Use Ratio

0%

5%

10%

15%

20%

25%

30%

35%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2003

2004

2005

2006

2007

US

World

Declining but not yet record lowDeclining but not yet record low

S. America, U.S. & Rest of World Soybean Supplies

0

2,000

4,000

6,000

8,000

10,000

12,000

Mil

. B

u.

S. America.

1/11/08

World

U.S.

R-O-W

World Supply Tightening

Total Utilization

World Soybean Utilization

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1964 1969 1974 1979 1984 1989 1994 1999 2004

Mil.

Bu

.

-400

-200

0

200

400

600

800

1,000

Mil. Bu. Anual Growth

Annual Growth

1/11/08

Corn Used in Ethanol Production, and Co-products Produced

0

20

40

60

80

100

120

140

160

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Mil.

To

ns

Corn Processed

Net Bu. After Co-Product Credits

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

Historical & Needed U.S. Corn Yield Deviation Historical & Needed U.S. Corn Yield Deviation Needed Needed From TrendFrom Trend

0.7

0.0

-10.2

0.0

16.2

1.8

0.9

0.9

3.3

3.8

7.5

11.8

13.4

14.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Other Considerations:

Sharp increase in marginal

Corn acres

Very tight fertilizer supplies

Corn-on-corn yield drag

Low C-o-C yields in bad weather

U.S. Planted Acreage of Major Grains, Oilseeds, and Cotton

0

40

80

120

160

200

240

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Mil

. A

cre

s

AllBarleyoatsCottonSorghumwheatSBcorn

255.6 239.9 244.6

Lower productivity land

Conservation Reserve Land

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)

International Impacts

• U.S. ethanol plants under construction to use 2.0 bil. bu. of corn (almost doubling use)– Over 3 times the volume of Japan imports

of U.S. corn– 105% of 2007 EU corn crop– 54% of global corn exports

• Higher food costs ahead• Major risk-management challenges in Ag. & bioenergy

U.S. Cellulose Ethanol

• At least 3-4 pilot plants being developed • Government emphasis on alternative feedstocks

Potential Feedstocks:• DDGS fiber• Corn stover• Prairie grasses • Sugar, sweet sorghum• Forest wastes• Municipal & livestock wastesResearch for major handling & storage challenges

Daily ethanol futures to 3/17/08

Monthly CRB Index

Incentive for Index Fund Traders to buyCommodities for inflation hedge

Week U.S. Dollar Index: Reduces grain prices in world markets

Weak U.S. Dollar Index:

Reduces grain prices in

world markets

Dec. ’08 Corn Futures

3/17/08

Possible Objectives:

$5.41, $5.25, $5.15?

Double Top

Nov. 08 SB Futures Prices, 3/17/08

Objectives: $11.70-$12.10?

Total 11,693 mil. Bu.

Figure 3.

U.S. Grain Export Sales to 3/06/08

• Corn +29% vs. year ago

• HRW Wheat +118%

• SRW +54%

• HRS +33%

• All Wheat +52%

• Soybeans 00%

• Barley +89%

• Sorghum +138%

Iowa corn processing & ethanol plants, current & planned, 10/26/06

63

Sac

Linn

Lee

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Clay Kosuth

Jasper

Lyon

Page

StoryrJones

Fayette

Adair

Bentonn

Wapello

Pocahontas

Osceola

Jefferson

Audubon

Washington

BuenaVista

BlackHawk

Appanoose

CerroGordo

VanBuren

Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

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

PoweshiekPolk

BooneGreeneCarrollCrawford

Plymouth

O’Brien

Woodbury

Monona

Harrison Shelby

Wright Franklin

Floyd Chickasaw

Webster Hardin

Louisa

Emmet

Palo Alto

Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

HamiltonGrundy

Buchanan

Delaware

Dubuque

Jackson

Clintonn

Guthrie Dallas

Johnson

Marshall

Pottawattamie

Mills

Fremont

Madison

Warren Marion Mahaska

Keokuk

Adams Union Clarke Lucas Monroe

Taylor Ringgold

Cherokee

Calhoun

Decatur Wayne Davis

Henry

Scott

Humboldt

Clayton

Cedar

Sioux

Cass

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Audubon

Washington

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CerroGordo

VanBuren

Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

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Plymouth

O’Brien

Woodbury

Monona

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Wright Franklin

Floyd Chickasaw

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Louisa

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Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

HamiltonGrundy

Buchanan

Delaware

Dubuque

Jackson

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Johnson

Marshall

Pottawattamie

Mills

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Madison

Warren Marion Mahaska

Keokuk

Adams Union Clarke Lucas Monroe

Taylor Ringgold

Cherokee

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Henry

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Audubon

Washington

BuenaVista

BlackHawk

Appanoose

CerroGordo

VanBuren

Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

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

PoweshiekPolk

BooneGreeneCarrollCrawford

Plymouth

O’Brien

Woodbury

Monona

Harrison Shelby

Wright Franklin

Floyd Chickasaw

Webster Hardin

Louisa

Emmet

Palo Alto

Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

HamiltonGrundy

Buchanan

Delaware

Dubuque

Jackson

Clintonn

Guthrie Dallas

Johnson

Marshall

Pottawattamie

Mills

Fremont

Madison

Warren Marion Mahaska

Keokuk

Adams Union Clarke Lucas Monroe

Taylor Ringgold

Cherokee

Calhoun

Decatur Wayne Davis

Henry

Scott

Humboldt

Clayton

Cedar

Sioux

Cass

Iowa*

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Osceola

Jefferson

Audubon

Washington

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BlackHawk

Appanoose

CerroGordo

VanBuren

Mucatine

Dickenson

DesMoines

Winnebago

Montgomery

,

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BooneGreeneCarrollCrawford

Plymouth

O’Brien

Woodbury

Monona

Harrison Shelby

Wright Franklin

Floyd Chickasaw

Webster Hardin

Louisa

Emmet

Palo Alto

Hancock

Worth Mitchell HowardWinneshiek Allamakee

BremerButler

HamiltonGrundy

Buchanan

Delaware

Dubuque

Jackson

Clintonn

Guthrie Dallas

Johnson

Marshall

Pottawattamie

Mills

Fremont

Madison

Warren Marion Mahaska

Keokuk

Adams Union Clarke Lucas Monroe

Taylor Ringgold

Cherokee

Calhoun

Decatur Wayne Davis

Henry

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Clayton

Cedar

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Cass

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66 Planned + current in Iowa

11 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.

Warren

Boone

t

Shelby

Union

Ringgold Decatur

Clarke

Madison

Dallas Polk

Humboldt

HamiltonWebster

Wright

Kossuth

Hancock

Winnebago

Clinton

Keokuk

Wapello

Wayne

Lucas

DavisAppanoose

Monroe

Marion

Jasper

Mahaska

Poweshiek

Louisa

Van Buren

Jefferson

Lee

Henry

Des Moines

Johnson

Washington

IowaScott

Muscatine

Cedar

Howard

Black HawkHardin

StoryTama

Marshall

Grundy

Worth

Franklin

Cerro Gordo

BremerButler

Mitchell

Floyd Chickasaw

Buchanan Delaware

LinnBentonJackson

Jones

Dubuque

Fayette

Winneshiek

Clayton

Allamakee

Warren

Boone

t

Shelby

Union

Ringgold Decatur

Clarke

Madison

Dallas Polk

Humboldt

HamiltonWebster

Wright

Kossuth

Hancock

Winnebago

Clinton

Keokuk

Wapello

Wayne

Lucas

DavisAppanoose

Monroe

Marion

Jasper

Mahaska

Poweshiek

Louisa

Van Buren

Jefferson

Lee

Henry

Des Moines

Johnson

Washington

IowaScott

Muscatine

Cedar

Howard

Black HawkHardin

StoryTama

Marshall

Grundy

Worth

Franklin

Cerro Gordo

BremerButler

Mitchell

Floyd Chickasaw

Buchanan Delaware

LinnBentonJackson

Jones

Dubuque

Fayette

Winneshiek

Clayton

Allamakee

3

6 E. Central5 Central

98

August 07 High Points in Iowa Corn BasisFeed Mills & Ethanol Plants

+6 to +7

+6 to +7

-18 to -20

-10 to -12

-10 to -20

-18 to -20

Basis Examples, Corn 9/28/07

Garner

Kebler Milling

Hobartan

Global Lakota (ethanol)

Algona

Emmetsburg - Ethanol

RangeRange

Harv. Delivry July Delvry

3.18 (-.55) 3.66 (-.42)

3.41 (-.32) 3.86 (-.22)

3.29 (-.44) 3.80 (-.28)

3.28 (-.45) 3.73 (-.35)

3.20 (-.53) 3.66 (-.42)

3.33 (-.40) 3.78 (-.30)

.23 .20

N.C. Iowa

Basis Examples, Corn 9/28/07

Coon Rapids ethanol Denison ethanolCreston ElevatorCorning ethanol plantBunge, Council BluffsOnawaLamoniShenandoah eth. plant RangeRange

Harv. Delivry July Delvry3.27 (-.46) 3.74 (-.34)3.51 (-.22) 3.84 (-.24)3.30 (-.41) 3.78 (-.28)3.32 (-.41) 3.85 (-.23)3.29 (-.44) est. 3.75 (-.33)3.43 (-.35) N.A.3.18 (-.53) N.A. 3.49 (-.24) 3.95 (-.13)

.33 .21

W.C. & Sw. Iowa

Add biodiesel

MINIMUM SOYOIL PRICE FOR BIODIESEL BREAKEVENat GIVEN WORLD CRUDE OIL PRICE

PRX_C_US_BA, GTB-06-03, Mar-14-06

Crude Oil Price, $/bbl

$30.00 $35.00 $40.00 $45.00 $50.00 $55.00 $60.00 $65.00 $70.00

Profitability of Biodiesel at given crude oil and soyoil prices, %$/lb

Soybean $0.19 ($0.10) $0.02 $0.14 $0.25 $0.37 $0.49 $0.61 $0.73 $0.85

Oil Price $0.20 ($0.18) ($0.06) $0.06 $0.18 $0.30 $0.42 $0.54 $0.66 $0.78

$/lb $0.21 ($0.25) ($0.13) ($0.01) $0.11 $0.23 $0.35 $0.47 $0.58 $0.70

$0.22 ($0.32) ($0.20) ($0.08) $0.04 $0.15 $0.27 $0.39 $0.51 $0.63

$0.23 ($0.39) ($0.28) ($0.16) ($0.04) $0.08 $0.20 $0.32 $0.44 $0.56

$0.24 ($0.47) ($0.35) ($0.23) ($0.11) $0.01 $0.13 $0.25 $0.37 $0.48

$0.25 ($0.54) ($0.42) ($0.30) ($0.18) ($0.06) $0.05 $0.17 $0.29 $0.41

$0.26 ($0.61) ($0.49) ($0.38) ($0.26) ($0.14) ($0.02) $0.10 $0.22 $0.34

$0.27 ($0.69) ($0.57) ($0.45) ($0.33) ($0.21) ($0.09) $0.03 $0.15 $0.27

$0.28 ($0.76) ($0.64) ($0.52) ($0.40) ($0.28) ($0.16) ($0.05) $0.07 $0.19

$0.29 ($0.83) ($0.71) ($0.59) ($0.48) ($0.36) ($0.24) ($0.12) $0.00 $0.12

$0.30 ($0.91) ($0.79) ($0.67) ($0.55) ($0.43) ($0.31) ($0.19) ($0.07) $0.05

$0.31 ($0.98) ($0.86) ($0.74) ($0.62) ($0.50) ($0.38) ($0.26) ($0.15) ($0.03)

For Blue Sky Scenario, PRX adopts a crude oil price of $50/bbl and thus a minimum 24 cent/lb soyoil price, to evaluate impact of subsidized biodiesel market.

Now $0.65Now $0.65

Take-Home PointsTake-Home Points• Grain Markets: driven by energy prices

• Current corn supplies adequate

• Major concern about tight ‘08-12 corn supply

• World Soybean & wheat supplies very tight• More soybeans, wheat (cotton?) likely to

reduce corn acres in 2008• Acreage battle likely to intensify in 2009 & Acreage battle likely to intensify in 2009 &

20102010• Higher govt. biofuels mandate supports

ethanol infrastructure capacity & Profits

Take-Home Points: IITake-Home Points: II

• All grain markets extremely sensitive to U.S. & foreign weather

• ISU Climatologist Elwynn Taylor sees 70% probability of below trend ‘08 U.S. corn yield

• Corn & SB basis likely stronger, May-August

• Strong basis creates high risk for livestock feeders

• Options Mkts. more important than in the past

• Options look expensive, but out-of-money strike prices can provide upward price flexibility

http://www.econ.iastate.edu/faculty/wisner/

Thanks! Questions?

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