The Strange Marriage of Climate Change, Ethanol and Grain Prices

This week brought the growing season here in southwestern Ontario to an end. There is still the odd cornfield around, but most of it has been harvested. Copious amounts of snow have come to the Dresden Ontario area, a rarity in December, as there have been record levels of snowfall recorded at the Windsor Ontario airport. It was almost on cue, I put my machinery away and now it is almost entombed in the polar chill until March.

Of course, what will March bring? At this point of course nobody knows and winter moisture really doesn’t have any reflection on next year’s yield here in southwestern Ontario. However, it was interesting what my DTN colleague Todd Hultman posted on his daily market close video last Thursday. It was a slide of the drought Monitor spreading in the United States. Todd, in fact called it a bullish winter tease, as if it continued it would obviously have yield connotations for 2018. Needless to say, that is a long ways away.

It is a long ways away in both calendar date and price wise for our grains. With the nearby corn futures continually fluttering around the $3.50 level, what’s it going to take to get it to the $4.50 level? Similarly, there are still bears in the woods. What might happen to see corn go down to the $3.20 futures level?

A few clues may have come from USDA in their latest USDA crop production and supply and demand report released on December 12th. The USDA pegged 2017/2018 corn-ending stocks at 2.437 billion bushels, which was down 50 million bushels from last month. This was due to an increase in the demand for ethanol by 50 million bushels. The US export demand for corn came in at 1.925 billion bushels, the same as in their November report. The soybean ending stocks number was projected at 445 million bushels, which was up 20 million bushels from the November report.

The USDA left South American production the same as the November report with Argentina and Brazil at 42 MMT and 95 MMT respectively. Their South American soybean production is still pegged at 108 MMT of soybeans for Brazil and 57 MMT for Argentina. You get the picture. There is a lot of grain in the world and South America is currently the theater for any price calamity. Rain came to Argentina recently and that saw soybeans drop over a dime last Thursday.

Of course, nobody on the farm wants prices to stay as low as they are now. However, from those USDA statistics, it’s pretty reasonable to assume we need some type of production calamity somewhere. Of course, we all hope it’s not our farm. We also need demand for grain to increase further.

Increasing grain demand is difficult especially when you are already at record demand levels and we are for both corn and soybeans. Surprisingly, we had a bit of a change in this scenario earlier this month in Ontario. The Liberal government, which faces an election in June 2018, is proposing to have fuel suppliers put at least 10% ethanol (up from 5%) in their regular gasoline by the year 2020.
This represents my long-held view that we needed to increase Ontario domestic demand for corn.

Environment and Climate Change minister Chris Ballard announced this proposal. Of course, climate change is a fairly big deal with our provincial government and accordingly, we were told moving to this blend would reduce carbon emissions by 2 megatonnes per year. Apparently, that is equivalent to taking 30,000 cars off the roads. The climate change world in Ontario is a bit of hocus-pocus, but I’m sure farmers like that part of the equation.

Of course, 2020 is still two years away and there’s a lot that can happen between then and now. Low corn prices are the bane of many Ontario farmers, but they are good for the ethanol market. Value-added domestic processing such as this is so much better than exporting a raw product. It is good for Ontario, but of course in the intervening two years we hope that corn futures prices finally find a little strength.

I have often said that hope is not a marketing plan. However, I do see a little bit of long-term hope in this bearish grain marketing environment. The Ontario ethanol example is one, but of course we also have the Chinese expanding their ethanol market. This represents more demand, which is very needed. We also know that the unmitigated rise in the supply of grain over the last five years will likely be interrupted one of these days. When that happens, the big demand train won’t be slowed down very quickly without pushing grain prices higher.

Of course, we’re still at the theory and proposal stage. This is partly been spawned by low grain prices and it’s also been spawned by the proposal juggernauts behind climate change. It might seem like a strange marriage, but we’ll take it. Someday these bearish grain prices are going to end. History tells us that. Its interesting, sometimes low prices spur innovation and change. I can see the light at the end of price tunnel. I hope getting there isn’t too painful.