Market already reacting to weather predictions
In a word, La Nina. The NOAA has released data which suggest a La Nina as early as April with an adverse impact US summer crops. World Weather Inc (our Weather Watch provider) suggests caution before buying into making key financial decisions. If the NOAA model is repeated within a wk or two, more confidence may be placed in a developing La Nina.
First, the very obvious, the entire world investment community is enamored with prospects of alternative fuels. More directly to the agriculture community is the prospects of increased demand, more strain placed on an already tight stocked corn inventory. Held within USDA's 15 year baseline projections, call for a 49% increased in corn use for ethanol in the 2007-2008 marketing year. For 2006-07, USDA forecast corn use for ethanol at 2.15 bil bu (up 34% over 2005-06) and have not increased it's demand estimates even though an ave of 2-4 new plants coming on line each month. There may be a good reason why. According to the Energy Information Administration (report ethanol production and stocks levels) for the first three months of the marketing year, production is not keeping pace with USDA and Dept of Energy's target. As mentioned this year's corn use is projected 34% higher than the year before 1.603 bil bu. For the month of Sept, corn use was only 27% higher, Oct 24% higher and Nov 24% higher. As you can see because of the lag in reporting by the EIA, USDA has no reason to revise corn usage off the 2.15 bil bu. It was during these 1st three months, corn futures were rallying while crude oil was dropping. Very likely ethanol plants scaled back on operating efficiency as profit margins came off of $7 net per bushel highs in the summer of 2006 to recent lows of $1 per bushel.
CORN PRODUCTION AND STOCKS
At 10.3 million barrels of ethanol produced for the months of Nov and Oct of 2006, they represent record production. Oct's 10.3 million barrels is 2 million barrels more than Oct of 2005. The same is true for the month of Nov. Interestingly at the same time ethanol production was clipping higher by 2 million barrels per month, we need to look at stocks levels to see how its barometer is operating. For the month of Sept 2006, ethanol stocks were 4.4 million barrels more than Sept of 2005, Oct 2006 stocks of 9.8 million barrels were 4.2 million barrels higher than Oct of 2005 and in Nov of 2006, stocks were 3.5 million barrels more than yr earlier levels. Two observations, #1 is how the stocks of ethanol are building at a faster rate than production. #2 is if there is a glimmer of positive news is how from the Sept and Oct levels, Nov stocks did at least drop showing signs of usage.
As the stocks out pace production it is important to know, just how much ethanol needs to be produced for 2007 consumption. This is where Allendale's research relies upon official Dept of Energy records. After using 141 billion gallons of gasoline in 2006, the DOE anticipates (and this is extremely current data) the 2007 gasoline use to be 142 billion gallons. This suggest 5.6 billion gallons of ethanol will be needed to blend for total gasoline and ethanol usage for 2007 of 147.9 billion gallons. To leave present ethanol stocks unchanged, this 5.6 billion gallons of ethanol could require 2.07 billion bushels of corn when using a conversion factor of 2.7 gallons of ethanol from one bushel of corn. With 107 ethanol plants currently on line and operating, its production capacity is 5.789 billion gallons, surpassing the 5.6 billion gallon ethanol target, and still would be able to add a few stocks. As long as all 107 operating plants remain on line, its capacity could require 2.144 billion bushels of corn. Now do you see how USDA may be stuck on its 2.15 billion bushels of corn use? By 2010, the DOE is estimating 10.6 billion gallons of ethanol will be required to blend with the 146 billion gallons of gasoline to be used. 10.6 billion gallons of ethanol will require 3.93 billion bushels of corn IF all ethanol at the time is made strictly from corn. We look at Thursday's 15 year baseline projections released by the USDA and its suggest corn use for ethanol will be 4 billion bushels of corn. Once again, it may become more apparent where USDA is pulling its corn use estimates for ethanol from. There are approximately 67 plants under construction or in expansion phase. These 67 plants have the capacity to produce 5.136 billion gallons of ethanol. Add in the 107 plants currently operating and we have total production capacity of 10.9 billion gallons which can meet the 2010 target. One last scenario to work on. By 2017 the DOE suggest 11.5 billion gallons of ethanol will be needed to blend with 161 billion gallons of gasoline. This 11.6 billion gallons of ethanol will require 4.3 billion bushels of corn if all ethanol is to be derived from corn. Presently there are 88 ethanol plants in the process of obtaining building permits and another 71 ethanol plants in the planning phase. The combined operating, new construction-expansion, permitted and planned plants would have the capacity to produce 26.294 billion gallons of ethanol which would require 9.75 billion bushels of corn. USDA's 15 yr baseline projections suggest 4.35 billion bushels of corn needed for the 2016/17 marketing year. There are several points to ponder in the end. Some of those questions could be, what could the real value be of the planned and a portion of the permitted plants if production could far exceed demand. Could it be the US will need to mandate for all states a specific ethanol requirement to be blended as production out paces demand? Does the proposed $1.6 billion dollars of budgeted monies for cellulosic research temper the ethanol future plants plans?