Ethanol, Gasoline and Corn: Hedging Our Risk In Front of USDA

Gas prices are in the stratosphere. Last week I paid $1.41 a litre for gas in Dresden Ontario.  The record for filling up my pickup has always been $175.   I cannot remember the circumstances around paying the $175, except for the fact that it was a few years ago and gas prices had gone up briefly.  Luckily for me my Ford F 150 still has some gas in it, if I filled it up now I might be pushing over $200.

So instead of posting the price per liter for gasoline, maybe they should just post it cost an arm and a leg.  It is funny how North Americans care about our gas prices.  Our Countries are so vast and the automobile such a large part of our economy higher gas prices affect everybody.  This little insurrection in Iraq plus limited refining capacity has resulted in this price spike.  The question is there a silver lining to these gas prices that might help us out on the farm?

I have often said publicly when I’m speaking about the markets that higher oil prices generally are good for farmers.  I say that because of the relationship between ethanol, corn and gasoline demand.  It is not a one-for-one for one relationship, moreover the synergy of demand factors among the three, which help out the price of corn.  However, generally speaking when oil prices are higher, I like to think it is better for ethanol demand.  Of course, when gasoline demand goes up the same can be said for ethanol it is quite a mixed bag.  It just so happens in the United States last week that ethanol demand reached record levels.  It surely helps that the price of corn has lost over a dollar a bushel in the last 5 weeks.

To put it in perspective US ethanol plants last week produced 972,000 barrels of ethanol a day.   This was up 28,000 barrels a day on the previous week and it was the highest figure since they started keeping those records 4 years ago.  At the time I saw a comment from DTN’s Todd Hultman regarding those statistics and I ask him to explain.  He told me that this figure represented ethanol demand at 5.3 billion bushels annually.  That is huge and without some export surprise it means ethanol production is at a record pace.

Of course I was wondering about the US blending wall.  That is in the United States gasoline refiners are at the maximum with the amount of ethanol they can blend with gasoline unless demand goes up.  It is the summer season and generally demand for gasoline goes up at this time.   However, we have this problem in Iraq and prices are higher.  Needless to say, it isn’t a perfect storm for ethanol, but it is close.   Corn prices have responded off their recent lows.

Keep in mind I am not Santa Claus.  This is only interesting to consider.  Corn has retreated $.85 to a dollar but made it back about $.15 in a couple days.  Rain makes grain, we might be shaving a little bit of the yield off, but USDA will make all things better on June 30th when they release actual planted numbers.

In Ontario, it is all so yesterday with regard to ethanol.  The $517 million Ontario ethanol growth fund comes to an end next year and it will be a hard landing.  With the provincial election just over there was absolutely zero talk about extending that.  It means that Ontario ethanol refiners will lose their maximum subsidy of $.11 per liter to produce ethanol.  It means next year that corn demand within Ontario will be weaker, not a good omen for a domestic corn economy which has been in overdrive over the last 10 years.

This little ethanol revival in the United States is a reminder of how important biofuel has been to the agricultural economy.  That said, the market will be refocused over the next 10 days as we lead into the June 30th USDA report.  In that report we’ll see how much the USDA veers off 91.7 million acres of corn and 81.5 million acres of soybeans.  Increasingly, I’m thinking the corn acres may not be there and the soybean numbers might be bigger.

Needless to say, it is a fools game for me to make those guesses.  What is important is to be hedged in front of that report.  The June 30th report along with the March 30th report and the January USDA report is one of the biggest market flashpoints of the year.   Remember what I said last week, risk management never gets old.  Hedging that risk at this time of year will go a long way to helping us pay for those high gas prices we see out the window.  We are surely in for a heck of a ride.