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

Iowa State University. AgMarketing Resource Center. Increasing Risk Exposure & Risk-Management Challenges in Today’s Grain Markets 3/27/08. Dr. Robert Wisner: Grain Outlook 3/15/06. Dr. Robert Wisner, University Professor & BioFuels Economist.

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

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  1. Iowa State University AgMarketing Resource Center Increasing Risk Exposure & Risk-Management Challenges in Today’s Grain Markets 3/27/08 Dr. Robert Wisner: Grain Outlook 3/15/06 Dr. Robert Wisner, University Professor & BioFuels Economist

  2. BioFuels Lead to Highly Volatile Grain Markets • Prices Explosive With Weather Prob. • Loss of Marketing Alternatives • Grain industry offers only basis contracts beyond ‘08 crop --Some Buyers offer only basis contracts starting fall ’08 • Options + revenue insurance are the remaining risk mgt. tools • Basis Risk Greatly Increased

  3. Minneapolis Wheat: New definition of highly Volatile market • Two contracts createdup to $38,500loss (or gain) in six-day limit locked down move • Maximum daily limit increased with days of limit moves • Has seen 7 consecutive limit up days • A preview of corn & SB with weather problems? • Spread risk (Like HTA problem in ’96)

  4. Risk Issues, II • Some new-generation grain contracts not well tested in extreme mkt. volatility • Example: Premium-offer contracts that sell call options for next year’s crop • Accumulator contracts (Appear to involve sale of over-the-counter options) • Any others that involve sale of options

  5. Example Grain Elevator PositionFrom Dr. Roger Ginder, ISU

  6. Many elevators don’t have net worth & credit lines to coversuchlarge needs plus other financing.

  7. Where is the Risk Coming From & Will it Change?

  8. Bio-Fuels: A Global Development-- With Record Low World Grain Stocks Driving Forces: • High crude petroleum prices • Concern over green-house gas Emissions • Government policies • Energy security

  9. 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 sources • Incentives for increased mass transportation • Wind power use increasing

  10. Recent Positive Developments in Biofuels Demand • 2007 Energy Bill & mandates & implementation mechanism + penalties • New Union Pacific rapid ethanol train receiving & unloading facility in Dallas • North Iowa ethanol shipping facility • Substantial ethanol market opening in Florida & movement toward opening other southeast markets • California state government commitment to reduce green-house gas emissions • Higher gasoline prices?

  11. Down-side risk in crude oil prices? 100 West Texas Intermediate Crude Oil 90 (monthly average price) 80 70 dollars/barrel 60 50 40 30 20 10 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

  12. U.S. 2007 Energy Bill • 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 (1 bil. gallons for 2015)

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

  14. Cautions in 2008-09 Grain Markets • Fund Traders – index funds as hedgers add potential volatility • Bio-diesel economics not good, • no mandate until 2009. • Domestic user returns tighten • with higher corn prices – livestock • & fuel

  15. 41 Countries Encourage Biofuels Ethanol, demand growth & food inflation shifting China from to corn exporter to importer?

  16. U.S. expansion ContinuingChanges in U.S. Ethanol Plants, 7/27/07 to 3/14/08 (From DTN) 7/27/0711/6/071/8/083/14/08 • U.S. Opr. Plants 134 139 163 171 • Under Const. 89 91 81 74 • 35 under construction a year or more • Planned plants 329 343 336 341 • Total 552 572 580 586

  17. Recent Start-ups & Soon to be on Line U.S. Ethanol Plants LocationMil. Gal. Cap.Date • Pikely, CA 40 April • Lima, Ohio 54 March • Greenville, OH 110 March • Hennepin, IL 100 April • Cambria, WI 40 April • Coshocton, OH 60 March • St. Ansgar, IA 100 March • Monona, IA 100 April • Alexanderia, IN 65 Mid-April • Volney, NY 41 May-Jn Total 710

  18. 2007-08 U.S. corn supplies adequate to meet demand • Crop up 24% -- 20% increase in corn hectares • But at expense of: • 16% decline in soybean planted area • 29% decline in cotton area • 8% decline in non-durum spring wheat • Declines in minor crops • Soybean supplies tighten substantially, increased plantings needed in 2008 • More U.S. corn will be needed in 2009, 2010, 2011

  19. Historical & Needed U.S. Corn Yield Deviation Needed From Trend • 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

  20. International Impacts • U.S. ethanol plants under construction to use 1.9 bil. bu. of corn (About 65% increase) • 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, U.S. & globally • Major risk-management challenges in Ag. & bioenergy

  21. Figure 3. Total 11,693 mil. Bu.

  22. Figure 2. 72 Potential Iowa Plants 11 Just across IA Borders Basis Implications in Short Crop Capacity: 159% of 2006 Crop Iowa Corn Processing Plants, Current & Planned, 7/25/07

  23. Take-Home Points • 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

  24. Thanks! Questions?

  25. ...and justice for all The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Many materials can be made available in alternative formats for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call 202-720-5964. Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Jack M. Payne, director, Cooperative Extension Service, Iowa State University of Science and Technology, Ames, Iowa.

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