USDA Report, Corn/Wheat Based Ethanol, Buckle Your Seat Belts. 2007 Might Be Quite a Show

Editor’s Note: Thanks to all who responded last week to my call for opinion about the Canadian Wheat Board.  I had both supporters of the CWB and non-supporters contact me.  I’ll be re-visiting the Canadian Wheat Board in future columns, so keep those opinions coming.  An American opinion would surely be valuable too!

Are the bulls still eating hay?  Or will there be a temporary setback on commodity markets, as we get closer to Christmas?  We’ll see.  On November 9th the USDA released their latest crop production/ending stocks report.  For those of us hooked on this monthly fix, the November numbers see a big corn crop continuing to get smaller and a big soybean crop continuing to get bigger.

The USDA crop estimates came in at 10.745 billion bushels for corn and 3.204 billion bushels for soybeans. The USDA trimmed the size of the corn crop by 161 million bushels, to 10.745 billion bushels, down from 10.905 billion bushels in October and below the 11.112 bb in 2005.  The USDA also cut its estimate of ending stocks of corn, to 935 mb, down from 996 mb in October and 1.971 bb for 2005.  A 50 million cut in exports is partly reflected in the smaller cut in ending stocks.

Soybeans at first glance don’t seem to have the same bullish tone.  The 3.204 billion bushel figure is higher than last month’s estimate of 3.189 billion bushels.  Ending stocks remain onerous at 565 million bushels.

As readers of this column you all know the “arithmetic” of the corn ethanol revolution.  It has always been described as a wound up coil just ready to spring.  Prices have appreciated over a $1 for corn in just over six weeks.  Soybeans have also seen a $1 appreciation.  New crop bids for corn in 2007 of $3.80 to over $4 can now be realized.  So some growers believe the coil has finally sprung.  I’m not so sure, but the proof will come in the weeks and months to come.

Still there are big problems in Canadian corn country even with the price appreciation.  American corn continues to flood into Canada at a time when domestic corn growers are harvesting.  Quebec farmers demonstrated their discontent with this by dumping 12 tonnes of corn in front of the Guy Favreau Building (the main federal government building) in Montreal on Thursday.  The Canadian Corn Producers are currently appealing their lost countervail action.  A decision will probably come next summer.

The clock in ticking on that appeal and end users of corn in Canada will surely be watching it.  They might not get a repeat of the lost decision last year.  Pricing “old crop” corn into 2007 will surely be affected by this decision.

For corn producers in Ontario, all of this might seem for the moment “above the radar.”  Farmers have immediate concerns.  That’s because of one of the wettest falls in years, and vomitoxins damaging much of the crop in southwestern Ontario.  However, even with that price levels are the best since 2003.  Many people are increasingly optimistic about what I’ve called the corn ethanol gold rush.

I recently read a report from the Iowa State University’s Center for Agricultural and Rural Development concerning the impact of corn-based ethanol production on US and world agriculture.  It was an exhaustive report.  However, listed below are the highlights taken from the report.  You can access the report by clicking on http://www.card.iastate.edu/

— Under current ethanol tax policy, if the prices of crude oil, natural gas, and distillers grains remain at current levels, then the break-even corn price is $4.05 per bushel.
— If corn gets to $4.05, corn-based ethanol production would reach 31.5 billion gallons per year, or about 20% of projected U.S. fuel consumption in 2015 (corn use in ethanol would be 11.103 billion bushels). Supporting this level of production would require 95.6 million acres of corn to be planted. Total corn production would be approximately 15.6 billion bushels.
— Most of the additional corn acres come from reduced soybean acreage.
— Wheat markets would adjust to fulfill increased demand for feed wheat.
— Corn exports and production of pork and poultry would all be reduced in response to higher corn prices and increased utilization of corn by ethanol plants.
— The adjustments required to free corn for the U.S. ethanol industry would be felt all over the world. For example, Argentinean corn producers would adjust by growing more corn, whereas U.S. and Chinese consumers would respond by buying less pork. (The Long Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, Authors Elobeid, Tokgoz, Hayes, Babcock and Hart)

Interesting points.  It’s all based on a corn price going to levels which most of us can’t imagine.  However, even at a futures price of $4.05 the study says we need 15.6 billion bushels of corn.  The 2006 November USDA report pegs production at 10.745 billion bushels.  So right now, we’re not even close.

How would this translate to Canada?  Would Canadian pork and poultry production go down with high corn prices?  Would Canadian wheat country be in a good position to replace corn going into ethanol?  Can a wheat based ethanol industry in western Canada compete with a corn based ethanol industry in eastern Canada?  Or is all of this just political/agricultural economic hocus-pocus?

We’ll see.  It’s pretty clear the demand numbers for ethanol from corn are pretty impressive.  The ramifications from such price movement laid out in the Iowa report are impressive too.  It leads me to think 2007 might represent a watershed year where we step into an agricultural economic world we’ve never seen before.  Add a weather event into the mix and it just gets spookier.  Something tells me it won’t be for the feint of heart.  Buckle your seatbelts.  It’s going to be quite a ride.