Commodity Meltdown: American RFS Mandates Still Are Key

Is it safe to come out now?  On my last deadline for the Ontario Corn Producers Association Podcast December corn futures broke through $8 bushel.  Now after a meltdown reminiscent of Chernobyl, the same contract stands at $5.42, a drop of $2.58 bushel.  Needless to say on the podcast deadline I told Ontario corn producers there were many analysts who thought prices were going higher.

Of course everybody is a smart guy now.  Needless to say the bears had their day.  Nobody knows what the future holds.  However, for those lamenting the days of $2 corn, the last few weeks have been testament to the fickle nature of testosterone induced commodity prices.  At the end of the day there might be some vanquished air in corn producers wallets, but ethanol refiners and livestock producers might feel a little better.

I have a good friend who is in the feed business near Alliston Ontario.  Back in the day we used to go to war against each other on the basketball court.  He was six foot three and a defensive specialist.  I was six foot two with a 10-foot fade away jump shot, which couldn’t be stopped.  The only problem is 25 years have passed and gravity has taken over.  Now he never ever resists a chance to chide me about the “ethanol subsidy” or that “government money”.

In his world corn is a basic cost for his feed business.  His geographic location puts him in a position where the corn cash price is set at the Collingwood Ontario ethanol plant.  Certainly other big feed manufacturers in the province face the same thing.  The Ontario ethanol industry as fledging as it is essentially sets cash prices regionally within Ontario.  With the Ontario Ethanol Growth Fund putting over half a billion dollars into Ontario ethanol through 2016, it gets my buddies ire up.  He’d rather set the price the way it used to be.

It’s understandable if you are a non-ethanol corn user.  The RFS or Renewable Fuel Standards both in the United States and Canada have long been viewed by the livestock sector as a pillar of higher corn prices.  The recent request to the US Environmental Protection Agency by Texas Governor Rick Perry to lift 50% of the RFS for 2008 in my mind was a litmus test of the political will going forward to lessen the weight for livestock producers.

The Governor had launched the request in response to the pressure being put on the livestock industry.  However, last week the EPA came down with their decision.  They denied the request for the waiver. Ethanol boosters were thrilled.  Livestock producers in the form of cattle and hog producers reacted surely like my feed business friend from Alliston.  Colin Woodall, executive director of the (US) National Cattlemen’s Beef Association said, “We’re not against corn growers or ethanol. The cattle industry is based on a free-market approach. We just want the ability to compete on a level playing field for that bushel of corn.” (Quoted from Todd Neeley and Adam Templeton’s excellent DTN News piece)

So for corn growers and ethanol boosters, I see this as a real victory.  How it will manifest itself in corn markets I don’t know.  After the last few weeks, I’m just as smart as anybody else.  However, I’d think livestock producers would take the negative $2.58 move down in corn versus eliminating half the 51-cent ethanol blender’s credit in 2008.  Maybe not, but I’d think after a move like that, everybody gets a little breathing space.

Nothing of course is perfect to satisfy two “warring sides.”  However, it’s important to remember that the American RFS isn’t a rubber stamp for higher corn prices or even higher corn demand.  Right now, it’s simply the fact that the corn infrastructure is set up to satisfy the American biofuel requirements.  However, the language built into the American RFS legislation allows for waivers like the one Governor Perry requested.  These wavers would be granted if there was a shortfall of supply or if there is a negative economic or environmental impact in satisfying those mandates.

Under the current American RFS corn demand for ethanol “should” reach 5.4 billion bushels.  However, there are no guarantees of that.  If the American political culture feels “the ethanol thing” isn’t saving enough greenhouse gasses or is not reducing dependence on foreign oil or some new technology comes along in renewable fuels development, ethanol induced corn demand could be derailed.

In Canada we are essentially “piggy backing” onto these policies.  We’ve got our subsidies, our policies both federal and provincial, but so far our public policy results aren’t even on the map.  However, we soldier on.

For Canadian farmers all of this must seem like luke warm poutine.  There are no easy answers going forward despite all the springtime hype about our demand driven biofuel induced future.  The recent commodity meltdown has cooled some of that reality.  We’ve always known high prices ration demand.  Moving ahead, with markets still jittery, we’ll see how much they have left.