2008 Acreage War Shaping Up As The Bloom Comes Off The Ethanol Rose

My big green combine is stained with the juices of green soybean straw.  My stainless steel cutter bar gummed up several times during my sorry soybean harvest.  Hopefully by switching over to corn today, it’ll have a cleansing effect.

We’ll see.  You can’t grow soybeans as part of your career without the experience of combining green straw.  It seemed like my combine growled all fall.  It had something to do with a summer bereft of moisture.  Then when the rains finally came in August the soybeans never stopped growing until they hit my cutter bar.  My agricultural economist colleagues call that a “slack variable” within the production process.  I simply call it tough straw.

Of course I’ll put up with tough straw when I see soybean futures challenging $10.00 bushel.  The bean bulls have been eating a little hay ever since the USDA March 30th production report, which was supposed to be corn’s Independence Day.  If you remember that report soybean acreage was cut 4 million acres as the hype for corn seemed to have no end.  Since then, soybeans futures have been on the bubble.  Producers who resisted the corn hype last spring may be greatly rewarded.

In the October 12 USDA Supply and Demand report the USDA cut soybean production down to 2.598 billion bushels from the September estimate of 2.619 billion bushels.  On the other hand they raised US corn production to 13.318 billion bushels up slightly from the September estimate of 13.308 billion bushels.  However, this corn estimate was lower than most in the trade were expecting.  Now that the dust has settled some of the dismal scientists who double as grain analysts actually think USDA will reduce the corn and soybean yield come the November report.

It begs the question, is any of this good news for producers?  Is the great bull market of 2006/07 just shifting gears or are we about at the end of it?  Or is the 800 lb gorilla in the market the highflying Canadian loonie or has it turned into a US greenback, which seeks new lows, almost daily?  Hmmmm, nobody has even mentioned a perceived acreage war in 2008.

Let’s do a litmus test.  Right now cash soybeans in Ontario are about $8.60 bushel with a large negative basis.  Cash corn is about $3.39 bushel with a negative basis.  Last year at this time, December corn futures finished at $3.14/bushel. That represented a 77-cent increase in December 2006 futures from September 2006.  I don’t have the records for soybeans, however they are similar.  Without the Canadian dollar in the mix, you could make an argument that Canadian grain and oilseed producers are better off.  The problem is that 800 lb Canadian gorilla.

Nonetheless there are problems in the grain and oilseed complex beside that 800 lb gorilla.  It lies mainly with ethanol and biofuel in general.  The October USDA report said corn for ethanol usage went down 100 million bushels from the September report.  Corn usage for ethanol was down an additional 100 million bushels from the August report.  Not only that but look through the news these days about US ethanol plants halting construction.  It’s pretty clear if the bloom isn’t already off the ethanol rose, the November USDA report may confirm that. Ethanol prices have fallen to $1.57/US gallon down from $4 in some parts of the United States just 18 months ago.

In Canada the ethanol gold rush has never enjoyed the same enthusiasm as our American friends.  We are an oil-exporting nation and our government’s tax coffers show it.  If ethanol withered on the vine here I don’t think anybody in government save a few rural MP’s would shed any tears.  In many ways Canadian agriculture is lucky we have any type of ethanol initiative.

Take Ontario for instance.  The Ontario Ethanol Growth Fund set aside $520 for capital assistance, operating grants to address changing market conditions and to do research.  Not all ethanol plants now being proposed in Ontario are eligible for money from the Ontario Ethanol Growth Fund.  Right now there is heavy use of this fund because corn prices are higher than expected and ethanol prices are lower than expected when the fund was set up.  Without the fund there likely would not be any new ethanol production in Ontario.  In fact some plants on the drawing board are lagging behind their schedule to garner Ontario Ethanol Growth Fund subsidies.

Key in this debate is the food versus fuel debate.  You’ve got famous conservationists like Jane Goodall blaming biofuels for threatening the primate habitat in central Africa.  We are getting story after story of higher food prices in the grocery store.  The bottom line is this argument is hitting pay dirt despite the present day fact that corn ethanol economics have grown sour.  It does not bode well for future ethanol subsidization.  It would seem everybody dislikes greenhouse gas emissions, but they aren’t willing to pay 13 cent more for a box of corn flakes to get it.

Still, futures prices are historically high for corn and soybeans so there are factors within the market, which are very bullish.  You might surmise it’s the non-commercial people, guys with black trench coats looking for the quick buck.  However, there also is that proverbial acreage war ahead.  Just this morning USDA chief economist Keith Collins predicted 87.0 million acres of corn for 2008 and 70 million acres of soybeans.  With that grain and oilseed demand remains buoyant.  How we’ll get to those acreage numbers will be determined by future price action within the grain complex.

So let the corn/soybean acreage switching for 2008 begin.  Gone is all the hype from the fall and winter of 2006/2007.  Keep your finger on your target price trigger.  Maybe a gummed up combine and green straw in the fall of 2008 won’t be so bad.