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Debate on ethanol blend rate is picking up again

 

By  KARL SETZER
Market Analysis

The reduction we have seen in farm-stored inventory being sold recently is being credited to the drop that has taken place in commodity values. While this is one factor in the total situation, it is not the entire cause.

What could be more of a reason is the large amount of deferred money that has been rolled over to this year, and the fact farmers are not being fiscally pressured into selling inventory. This is a development that could limit the amount of sales that would have taken place even if futures were not depressed such as they are.

This decision to hold inventory off the cash market could have two negative implications for farmers. One is if they become lethargic in their marketing, they could easily miss a chance at a profitable sale.

Another possibility – and one that could have a greater impact on revenue – is inventory can easily go out of condition if not properly checked. This means not only could a farmer miss a chance at making a profitable sale, but could also take an unnecessary quality discount as well.

We are once again hearing debate take place over the rate of blending the United States should have on ethanol. There is a group asking for a total reform of the current Renewal Fuel Standard, including the capping of ethanol blending at 10 percent.

Opponents of a higher blend rate claim it will raise food and feed grain costs to unprofitable levels. Ethanol supporters claim these accusations are unfounded, and a higher blend rate is needed to keep the industry profitable.

A recent report issued by the University of Michigan is also causing concerns in the biofuel industry. According to the study, current biofuel policies actually increase emissions that are harmful to the environment. This is mainly from increased crop production and fertilizer use, as well as fuel manufacturing processes.

The report claims the current models used to determine environmental impacts are incorrect, and once they are updated, they will show a less favorable picture for biofuel.

There is increased talk in the market surrounding U.S. ethanol exports and how they are needed to provide economic support to the industry. According to recent census data, the United States exported 836 million gallons of ethanol in 2014. While this was less than the record 1.2 billion exported in 2011, it was well above the 85 million exported in 2013.

U.S. ethanol exports seem to depend heavily upon Brazilian needs, which some economists believe will continue to grow.

Census data also gave a positive outlook on distillers grain exports. In 2014 the United States exported 11.3 million metric tons (mmts) of DDGs, up from 9.7 mmts in 2013. What was most positive in the report was that even with GMO concerns and obstacles, China imported 4.37 mmts of DDGs last year, very close to the 4.49 mmts in 2013.

Trade continues to take this year’s possible corn ending stocks and new-crop yield estimates, and tries to determine what a fair market value is. Given the current stocks-to-use on corn, economists believe corn futures will trade near $4.20 per bushel into spring.

At the same time, a new-crop yield estimate below 165 bushels per acre will likely cause new-crop futures to rally, even if old-crop holds steady. The threat of acreage loss as we head into the spring planting season could easily have the same impact on futures values.

The same type of scenario is being done on soybeans, but projections are much different. Even though carryout was reduced in last week’s balance sheets, it is still considerably larger than a year ago.

There is also a likelihood of global soybean reserves by March 1 being 20-25 mmts larger than a year ago. Forecasters believe this will pressure soybean values to the $9 per bushel range this summer, barring a significant weather event.

 

Karl Setzer is a commodity trading advisor/market analyst at Maxyield Cooperative. His commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.maxyieldcooperative.com

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources are believed to be accurate.

2/25/2015