$4 Cash Corn: ISU CARD says "Get Used to It!"
Corn/Soybeans continued to new highs this week, with huge strides technically. Corn rallied above decade old highs with little effort, clearing the $3.35 Dec level while beans shattered the yearly highs. While these price levels are almost unbelievable changes from just 3 months ago, more and more public sources are telling us this is not just a flash in the pan.
While our USDA Chief Economist, Dr. Keith Collins, in the past few months has clearly indicated the bullish tendencies of the marketplace via biofuels, this week another highly respected public entity added fuel to that fire. These paraphrases might not do complete justice to Collins presentations (better to read them yourself), but basically Collins indicated "corn is likely to run to new price highs" the next few years, and that the demand shock of biofuels is similar to the Russian grain buying in the 1970's, some very inflammatory and bullish comments. Old highs in corn were over $5.50, while during the 1970s grain prices doubled previous high price levels and really never went back! Its no wonder private spec funds have jumped all over grains the past 3 months. For most grain farmers, if this occurs it will be a dream come true!
This week, Iowa State University's highly respected CARD division (Center for Agriculture and Rural Development) is weighing in on the issue with a Nov. 6 report titled "The Long-Run Impact of Corn Based Ethanol...." In it, they conclude that given $60 crude oil and current ethanol/biofuels policy, ethanol plants can pay as much as $4.05 for corn and continue to service all of its fixed and variable costs. In other words, as long as corn is below $4.05, ethanol development will continue to expand, and the size of the fuel market is well over 5x the current entire corn crop developed into ethanol.
In that study, they concluded that the most sensitive variables to that conclusion are the price of oil and the ethanol tax credit. The removal of the tax credit would drop the corn price to $2.52 at $60 crude, so in essence it accounts for $1.50+ of the long-run corn price at any crude oil price. Crude oil prices at $40 (and the subsidy still in) mean $2.67 cash corn, $50 is $3.36 corn, and $70 crude is $4.74 while $80 crude (this summer's price) is $5.43 cash corn. This in essence is the first study that explicitly estimates the corn energy price value given today's situation (51c blending tax credit and $60 crude oil). As we discussed in last week's column, the burning up of food/feed supplies in fuel tanks is changing the valuation methods for grains, and this is a huge example of what is attracting the huge speculative funds.
Here are highlights from their executive summary of the report:
"Estimates of the long-run potential for ethanol production can be made by calculating the corn price at which the incentive to expand ethanol production disappears. Under current ethanol tax policy, if the prices of crude oil, natural gas, and distillers grains stay at current levels, then the break-even corn price is $4.05 per bushel. At this price, corn based ethanol production would reach 31.5 billion gallons per year, or about 20% of projected US fuel consumption in 2015. Supporting this level of production would require 95.6 million acres of corn to be planted. Total corn production would be 15.6 billion bushels, compared to 11.0 billion today. (Total corn use in ethanol would be 11.1 billion bu, with feed use down 33%). Most of the additional corn acres come from reduced soybean acreage. Wheat markets would adjust to fulfill increased demand for feed wheat (prices up 20%, production down 3%, feed use up 88%, exports down 16%). Corn exports and production of pork and poultry would all be reduced (exports to zero) in response to higher corn prices and increased utilization of corn by ethanol plants. These results should not be viewed as a prediction of what will eventually materialize. Rather, they indicate a logical end point to the current incentives to invest in corn-based ethanol plants."