I had a fellow asked me this week my opinion about corn prices and how the Gulf oil spill might affect them. I don’t know but you could surmise by that question that he had more corn to sell and was looking for some type of late spring early summer Hail Mary pass in the futures market to give him an opportunity. My answer to him was in the short term there would be no effect but in the long term it might be very significant.
Our world is fluid at the best of times. This past week was evident of that as we had a naval dustup at sea between the Israelis and Gaza activists and oil continues to pour into the Gulf of Mexico. We also had the North Koreans threatening war with the South Koreans. Meanwhile in our field, we have one of the biggest corn crops ever planted knocking on record yields at this time of year. Whether it gets to the finish line is another thing. Needless to say, my colleague’s question about the oil spill in corn prices should serve as an example in 2010 that things might not work out in agricultural markets like some soothsayers are saying.
I heard one statistic that the oil being spilled into the Gulf of Mexico is about 19000 barrels per day or about 3 million litres per day. Nobody really knows because BP has not let any independent observers in. The United States uses slightly over 20 million barrels a day so you can see the oil spill is like a grasshopper on your windshield. It is the worst environmental disaster in US history and the ramifications of it will surely thunder long into the future. Part of those ramifications might be a brighter future for agricultural biofuels.
That was the longer answer to my colleague’s question. At the present time Pres. Obama is putting the brakes to deep water drilling. You can also hear the gnashing of teeth with regard to oil exploration in the Canadian high Arctic in Ottawa. As every Canadian school kid knows the Arctic Archipelago is ours. However, in 2010 our polar regions are increasingly coming under scrutiny from other nations because of the oil resources underneath them. In light of the Gulf disaster, could you imagine if that happened in the Canadian high Arctic? The optics of it at -40°C would be a nightmare.
That has put a chill within governments with regard to future oil exploration and at the same time it is been like a can of starting fluid to an old tractor tending the biofuel paddocks. If you can turn more corn wheat and soybeans into biofuel, it means less chance of an oil disaster from deep water drilling. That might be a simple statement but as more oil is released into the gulf and as the hype grows, it represents one of the best opportunities for the biofuel industry in many years. The question is can they seize the brass ring and nudge government to make this safe clean choice?
The answer in the United States may come if and when the EPA gives the go-ahead to E15, gasoline blended with 15% ethanol. That ruling may come at any time but I think it may even be pushed into next year. With oil spewing into the Gulf, that might represent a stimulus to think differently. Increasing gasoline blends to 15% ethanol would represent a major boost in the demand for corn possibly channeling another 900,000,000 bushels into the ethanol complex. The effect on price would be substantial possibly being impacted like it was in 2007 and 2008.
In Canada, I cannot see any increase in ethanol blends. (5% in Ontario) As an oil exporting country, there is no political will to reduce that. In fact when I show up in Edmonton in January 2011 to speak to the provincial convention of the Association of Alberta Agricultural Fieldmen and mention biofuels, there surely will be some strange looks. Like, why would want to do that, let’s just sell more oil. So in many ways, the oil disaster in the Gulf of Mexico might spur our American friends to greater biofuel usage but not in Canada.
I hope I am wrong about that but under our current Canadian political arrangements I don’t think I am. Keep in mind as we look ahead grain markets tend to top out toward the end of June with seasonality taking them down into harvest lows. Sometimes it makes for a long summer. Needless to say, we don’t know if that will happen in 2010. The optics are for a huge crop ahead especially in the United States. At the same time our geopolitics are boiling as oil continues to gush into the world’s media pages. Volatility, yes we will see that. Sure, at the end of the day it might represent opportunity for biofuels. Sometimes the world changes on a dime. This might be the month where it just so happens.