Is There Enough Corn To Satisfy Future Demand?

It is the eve of the big USDA August 11th crop report.  The experts are saying 10.8 billion bushels of corn, 3 plus billion bushels of soybeans and good weather ahead.  It seems with all those triple stacked bt-corn seeds, yields just keep climbing.  However, maybe I’m wrong.  That’s why we have a market and as you all know the market is always right.

I smell a 12 billion bushel corn crop.  However, the experts don’t agree with me.  Smelling 12 billion bushels will probably come, but we’ll have to have quadruple stacked hybrids to get there.  In past presentations to corn producer groups I’ve told the story of 12, 13 and even 14 billion bushel corn crops.  They are coming, but thankfully in 2006, I don’t think so.

In Canada corn producers are into their second year producing corn on “hope.”  You see it everywhere, everybody hoping that the industrial demand for corn will redefine price.  In fact December 2007, 2008 and 2009 futures offer prices which Ontario producers just might be able to make a buck on.  However, with August 2006 cash prices at $2.30, producing corn is a road to nowhere.  Catching that gold rush mentality in the ethanol complex seems to be our one great hope.

I recently got to tour an ethanol plant and I was impressed.  The technology to produce ethanol continually gets better.  Seeing truckload after truckload of corn disappearing into ethanol heaven makes me feel all warm inside.  As I’ve told you before, if I could send that corn to the moon, I’d do it.

So what should we do?  Last week I mused about farmers feeding cities or farmers fueling cities.  This past week I was asked if investing in a proposed “farmer owned” Ontario ethanol plant would be a good idea.  Invariably in these situations I say I don’t know.  However, investing in an ethanol plant these days is almost like buying shares in Google in 1998.

Do you get it?  At the present time the “crush” spreads between corn prices and ethanol prices are very wide.  The “crush” is an industry buzz phrase, which measures the profitability of ethanol plants.  In the United States over the past year the difference between ethanol and corn prices has lifted from less than 50 cents to over $3 gallon.  That has meant that the return on capital for some of the ethanol plants built in the US is close to 50%.  That’s one reason why you see so many plants being built in the US.

Take Archer’s Daniel Midland for example.  They are a huge agricultural processing company based in the United States.  They produce about 29% of US ethanol.  This is showing up in their fiscal bottom line.  The following financial statistics are taken from “Ethanol: The Corn Conundrum via  “In the fiscal year ended June, ADM’s operating profits from corn bio-products increased year-over-year from $259 million to $446 million. In total, ADM earnings rose 26% from the prior fiscal year, to $1.3 billion, or $2 a share, on a 2% rise in revenues to $36.6 billion. ADM shares have also bubbled up on an ethanol premium. At their recent level of 42, the company’s shares valued the business at $31.8 billion (including debt).”

According to Business Week magazine there are 101 ethanol plants in existence, more than 41 new facilities and expansions being constructed, and another 100 in the planning stages. At an average construction cost of $75 million, that’s potentially $10.5 billion headed into ethanol.  It is truly as I said last week, California 1849.

So I was asked among other things on the way to the ethanol plant if we would have enough corn to feed these plants.  I think most farmers would answer an emphatic “Who cares!” to that question.  I was a bit taken aback because remember, I’m the guy who is dreaming about a 12 billion bushel crop.  Even with all this corn why is the cash price $2.30 bushel.  There is seemingly corn everywhere.

When you read the literature about this corn/ethanol/gasoline file you see all kinds of things.  However, one thing that sticks out is there isn’t enough corn in the US to replace present gasoline demand with ethanol or some other bio-fuel.  So it all points to corn prices going up, way up.  Getting around on these ideas takes time.  It also makes me smell some “hocus pocus”.

You see it’s all about the government money.  Regardless of the “crush spread” at the present time, this whole industry’s business model is based on government subsidy.  Some might call it “corporate welfare.”

In Ontario we have the $520 million ethanol growth fund sponsored by the provincial government.  There have also been federal government subsidies.   At the same time right now this industry is in a fiscal environment, which is a license to print money.  Having governments pitch in taxpayer’s dollars is just a waste.  They simply don’t need it.  Putting this money into an agricultural safety net policy for corn farmers would be much better.

Farther down the track is ethanol made from cellulose sources like corn stalks, saw grass or even municipal waste.  That yields seven times more ethanol than corn kernels.  Many of the new plants being developed today can be switched in the future.

So as farmers producing corn in Canada, do you still feel hope is on the way?  Maybe.  The arguments are compelling.  However, its not all what it seems.  There is a bubble building.  The key for farmers will be to capture some potential profits before that bubble bursts.