History indicates we are about to see a decline in grain basis values. Basis is the difference between futures and cash bids, and mostly accounts for elevation, carrying charges and transportation.

This is from the fact we remain in an inverted futures market, especially in corn. In such years we tend to see grain demand deterred, especially when we get closer to the harvest season and buyers can delay their bookings. Even if futures remain at an inverse at this time, the cash markets tend to level out.
Another point of pressure for corn and soybean basis is a general decline in demand. Soybean crush margins have eroded in recent weeks and caused many processors to withdraw from the cash market altogether.

Ethanol margins have also decreased in recent weeks, but remain supported by high-priced gasoline. The poorest margins are in the feed grain use though, with cattle profitability at its lowest point in 15 years.

Trade is receiving mixed signals from the U.S. ethanol industry. Analysts associated with the nation’s renewable fuel industry claim the removal of federal subsidies will only have a limited impact on profitability.

While the analysts do believe margins will be tighter, ethanol plants should be able to retain a positive margin. One of the primary reasons for this is blenders are the only ones who receive credits, not actual manufacturers. Another is that today’s ethanol plants are not as highly leveraged as they once were.
The reinstatement of renewable fuel subsidies has been a great benefit to the biodiesel industry. Vegetable oil use for biodiesel production is currently up 96 percent from a year ago at this time.

While this seems positive, the total industry is still only running at 25 percent of capacity. Many biodiesel plants did not come back online when subsidies resumed, as either the plants did not qualify for them or they did not believe the payments would last long enough to justify startup costs.

The U.S. ethanol industry continues to be pressured by reduced fuel consumption on a whole, however. Data indicates that for every 1 percent gasoline demand declines, we see an equal drop of 138 million gallons for ethanol.

In turn, this reduces corn demand for ethanol production by 49 million bushels. This factor is why some economists have begun reducing their ethanol corn demand figure and increasing corn carryout estimates.

Some of this pressure may be relieved by new ethanol use forecasts. The U.S. Environmental Protection Agency (EPA) has released its renewable fuel usage projections for 2012, increasing demand for most fuels.

The EPA proposes ethanol use of 13.2 billion gallons, up from this year’s projected use of 11.6 billion. Biofuels are proposed to account for 11 percent of all fuel usage in 2012, compared to 8 percent in 2011.

The EPA cut it cellulosic ethanol production estimate for the second year though, as the high cost of manufacturing is not favorable to that biofuel.
Brazil is on its way to becoming one of the leading suppliers of ag commodities to the world market. The country already controls a large portion of global soybean trade, but in the next 10 years, this share is expected to increase.
Brazilian officials claim within 10 years, it will supply the world market with 12 percent of its corn and 33 percent of its soybean needs. Brazil is also expected to provide the world with 49 percent of its chicken, 12 percent of its pork and 30 percent of its beef over this timeframe.

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 believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.