publication archive: Scott Irwin
June 19, 2013
E85 Pricing and Recent Consumption TrendsIn a recent post we examined price relationships that would allow E85 to be priced equal to its energy equivalent value relative to that of E10. We concluded that retail E10 prices, wholesale ethanol prices, corn prices, and D6 RINs prices at the end of the first week of June were conducive for competitive pricing of E85 at the pump. A continuation of favorable price relationships could result in an increase in E85 consumption and help fill part of the gap between the RFS mandate for renewable biofuels and the E10 blend wall in 2013 and 2014. Here we examine recent trends to determine if there is evidence that E85 consumption is actually increasing or likely to increase in the near future.
June 14, 2013
An Updated Look at the Profitability of Ethanol ProductionIt is no surprise to readers of farmdoc daily that ethanol production has played a major role in the grain price boom since 2006. Increasing ethanol production has been driven by a combination of market incentives and biofuels polices. Given the prominence of ethanol production it is important to track the profitability of the industry in order to assess likely ethanol production trends and potential impacts on grain market supply, demand, and prices.
June 12, 2013
What Combination of Corn and RINs Prices Makes E85 Competitive?In a post last week, we provided an analysis of the price of corn that could result in retail E85 prices being breakeven with E10 prices based on the relative energy value of the two fuels. In that analysis, the price of ethanol was assumed to be at a level that would allow ethanol producers to cover all costs of production for a given price of corn.
June 5, 2013
What Price of Corn is Required to Make E85 Competitive?We and others have written extensively about the impending ethanol blend wall. The blend wall is defined as the maximum amount of ethanol that can be consumed in the domestic motor fuel market if ethanol blending is limited to 10 percent of total motor fuel consumption. The blend wall becomes an issue when the implied RFS mandated requirement for renewable or conventional biofuels consumption exceeds the size of the blend wall. Technically, there is not a mandate for conventional biofuels consumption. There is a mandate for total consumption of biofuels and a mandate for consumption of advanced biofuels. Since advanced biofuels have generally not been economically attractive, consumption of those fuels has not exceeded the mandate so that the difference between the total and advanced mandate has been met with conventional biofuels, almost entirely corn-based ethanol. It is this difference that is thought of as the mandate for conventional biofuels.
May 22, 2013
Rapid Corn Planting Progress, But Well Below the Record PaceThe USDA's weekly Crop Progress report indicated that 43 percent of the U.S. corn acreage was planted during the week ended May 19, 2013. In terms of percentage of acreage planted, that equaled the record progress for the week ended May 10, 1992. In 1992, 79.3 million acres of corn in the U.S. were planted, implying that 34.1 million acres were planted during the peak week that year. U.S. corn planting intentions for 2013 were reported at 97.3 million acres, implying that 41.8 million acres were planted last week. Conventional wisdom explains the rapid rate of planting progress this year as a function of larger and more technologically sophisticated planters.
May 2, 2013
Brazilian Ethanol Imports - Implications for U.S. Ethanol and Corn DemandThe current domestic ethanol market is dominated by the ongoing collision between the RFS for renewable biofuels and the E10 blend wall. Given the slow pace of market penetration of E15 and E85, the RFS likely exceeds the blend wall for ethanol in all blends in 2013. The difference between the magnitude of the RFS for renewable biofuels in 2013 (13.8 billion gallons) and the effective blend wall (estimated at 12.9 billion gallons) will be addressed with the use of blending credits accumulated from previous discretionary ethanol blending, some increase in higher blends, or possibly by discretionary blending of biomass-based biodiesel if those blending margins become positive.
April 25, 2013
How Much of the 2013 Corn Crop Will Be Planted Late?The spring rains that have improved soil moisture conditions in many areas have been welcomed as favoring a return to more normal corn yields in 2013 following the drought of a year ago. At the same time, persistent and heavy precipitation (including snow in northern areas) that has delayed the start to corn planting raise concerns that late planting will have a negative impact on yield potential. Planting date, of course, is not the only factor and probably not the most important factor impacting corn yields. There are ample historical examples of late planted crops that yielded near or above trend value, early planted crops that yielded below trend value, and timely planted crops that yielded both above and below trend value. Still, timeliness of planting is an important consideration for yield potential at this stage of the season. Here, we address the likelihood that a larger than average percentage of the corn crop will be planted late this year.
April 24, 2013
Is Speculation Driving Up the Price of RINs?The dramatic run-up in ethanol (D6) RINs prices has been discussed in several of our recent posts here at farmdoc daily. It was argued that the underlying reason for the increased value of D6 RINs lies in the impending collision of the blend wall for E10 and the rising renewable (ethanol) mandate under the U.S. Renewable Fuel Standard (RFS). This situation results in the prospect for a sharp draw down in D6 RIN stocks in 2013 and 2014 as physical blending of ethanol, due to the blend wall, falls further and further behind the mandate levels. Not everyone agrees with this assessment. Most prominently, Senator Grassley from Iowa attributed the run-up to the actions of speculators. In a March 27th interview he said he had, "just one word - speculation," when reporters asked about the price run-up. He also stated, "That's quite a rise (in prices). It doesn't seem to me that's the marketplace," and suggested that U.S. Commodity Futures Trading Commission (CFTC) should investigate.
April 17, 2013
Was 2012 Really the 'Big One' for U.S. Corn Yields?A report from the NOAA Drought Task Force last week about the origins of the 2012 Great Plains drought has generated considerable interest and discussion. The authors of this report concluded that the drought was largely unpredictable based on conditions even a few weeks ahead of the onset of the drought and that it was unlikely to be related to global warming. It also highlighted the devastating impact of the drought conditions on corn yields, an issue we discussed in farmdoc daily posts last summer and fall (here and here). The availability of final corn yields for 2012 provides an opportunity to provide further historical perspective on the full impact of the drought on corn yields.
April 10, 2013
Freeze It - A Proposal for Implementing RFS2 through 2015We propose to freeze RFS2 mandates in 2014 and 2015 at 2013 levels argue this represents a pragmatic way forward. It is realistic in that it would not force large scale adoption of E15, E85, or biodiesel. This is particularly important since it is by no means clear whether the infrastructure investments necessary for widespread E15 or E85 adoption could actually be made in this time frame. There is also uncertainty whether sufficient biodiesel production capacity would be available. However, the proposal does provides incentive for modest growth in E15 and/or E85 penetration by keeping the mandate for renewable fuels above the current E10 blend wall. Obligated parties in the motor fuel supply chain could more easily meet their blending obligations with a combination of physical blending and use of RINs stocks. Finally, implementation of the proposal would also likely reduce the price of D6 ethanol RINs and eliminate the differential impact of those high prices on obligated parties. The key for the success of the proposal is that regulators, legislators, and industry participants use the next two years to develop a mutually agreeable biofuels policy beyond 2015.
April 3, 2013
Ethanol Blending Margins, RFS2 Compliance, and the Price of GasolineOur post on March 27 discussed the potential implications of current high prices of D6 ethanol Renewable Identification Numbers (RINs) on the cost of compliance with the 2007 Renewable Fuels Standards (RFS2) and the price of gasoline. That post focused on the complexities of the petroleum refining and blending supply chain and how RINs prices affect various participants in that supply chain. We concluded that the buying and selling of RINs within that supply chain results in something close to a zero-sum game in terms of profitability for the industry. The result is that high RINs prices at the present time likely have a minimal impact on RFS2 compliance and the cost of motor fuel at the retail level. The focus on RINs prices alone, however, diverts attention from the larger issue impacting the on-going cost of complying with RFS2 and the price of gasoline.
March 27, 2013
High Gasoline and Ethanol RINs Prices: Is There a Connection?On March 8 we wrote about the sharp increase in the price of ethanol (D6) RINs since the first of the year. There, we indicated that the E10 blend wall would require RINs credits to be used to meet part of the RFS mandate in 2013 and beyond, increasing the value of those RINs credits. As indicated in Figure 1, the price of 2013 (current year) vintage D6 RINs remains high. The price was quoted at $0.685 per gallon on March 21, 2013, after peaking at nearly $0.90 two weeks ago.
March 8, 2013
Exploding Ethanol RINs Prices: What's the Story?The objective of this post is to provide a brief explanation of the underlying cause of the recent very sharp increase in the price of ethanol (D6) RIN credits and to identify the factors that might influence future price direction. As described in an earlier post by Nick Paulson, "RINs are the basis of the accounting system created by the Environmental Protection Agency (EPA) for use in enforcing the fuel mandates outlined under the RFS2."
February 28, 2013
New Era Crop Price Distributions and Marketing the 2012 and 2013 CropsIn yesterday's post, we evaluated the average farm price and distribution of monthly farm prices of corn, soybeans, and wheat in Illinois since December 2006 relative to much earlier projections for the new era of prices that began in late 2006. Today we will use the actual Illinois monthly average prices of corn, soybeans, and wheat for December 2006 through December 2012 to evaluate whether the original projections of average prices and price distributions in the new era need any modifications. We will also use the new era projections to evaluate the current level of prices in these markets and draw implications for marketing 2012 and 2013 crops. But first it is useful to briefly review yesterday's post.
February 27, 2013
The New Era of Crop Prices --- A Five-Year ReviewIn a 2008 report and a 2009 article we addressed whether the trend towards higher crop prices that started in the Fall of 2006 was here to stay. Our analysis was motivated by the need of farmers, landowners, and others in the agricultural industry to have some reasonable way of assessing long-term price prospects. From a farmer's standpoint, the question basically came down to this, "What is a good price for corn, soybeans and wheat?" We argued that corn, soybean, and wheat prices moved to a new, higher nominal price level beginning in about December 2006. We suggested that the new price level would persist for an extended period of time and we projected the likely average Illinois monthly price and range in monthly prices for those commodities in the first five years of new era.
February 18, 2013
farmdoc daily Reaches 500Today we celebrate another farmdoc daily milestone. Friday's post was the 500th since we started publishing in March 2011. We are actually slightly ahead of our long-standing goal of providing one post each day based on original analysis and writing. And what an amazing array of topics that have been covered.
February 13, 2013
The Ethanol Blend Wall, Biodiesel Production Capacity, and the RFS...Something Has to GiveWe have had a number of posts in in the last year addressing issues associated with U.S. biofuels policy. In particular, we noted that the new era of higher crop prices that began in late 2006 could be extended well into the future as a result of the Renewable Fuels Standard (RFS) for advanced biofuels which in all likelihood could only be met with a rapid expansion in biodiesel production. That analysis is revisited here based on additional information, including the mandated RFS volumes of biofuels for 2013 recently released by the U.S. Environmental Protection Agency (EPA). Our focus is on the increasing difficulty of meeting the RFS for both renewable biofuel (domestically produced ethanol) and advanced biofuels in the next 12 to 18 months. This issue is quickly coming to the forefront as the total mandate for biofuels continues to increase sharply--from 16.55 billion gallons this year to 20.5 billion gallons in 2015. Most importantly, the mandates could exceed the capacity to produce and/or blend biofuels by a substantial amount as soon as mid-2014.
January 31, 2013
Expanding the Ethanol Blend Wall - a Role for E85?We began a discussion of the potential domestic blend wall for ethanol in a post in May of last year. The issue remains important for the biofuels industry, regulators, and policy makers. Domestic ethanol consumption is almost entirely in the form of low level blends with gasoline capped at 10 percent (E10), although small amounts have been consumed in "flex fuel" vehicles as an 85 percent blend (E85) and very small quantities are being consumed as a 15 percent blend (E15). With blending dominated by E10, the blend wall is reached when the ethanol inclusion rate reaches 10 percent of domestic motor gasoline consumption. The blend wall can be problematic since the federal Renewable Fuels Standards (RFS) require increasing quantities of renewable (ethanol) biofuels consumption for the next three years. Those requirements exceed the expected E10 blend wall.
January 16, 2013
Domestic Biodiesel versus Brazilian Ethanol RevisitedIn a post on January 10, 2013 we examined the relative profitability of meeting the RFS for advanced biofuels with domestically produced biodiesel and imported Brazilian ethanol. We concluded that even with the $1.00 per gallon tax credit for biodiesel, price relationships still favored Brazilian ethanol. We received a number of comments from readers in both the public and private sectors pointing out some omissions in the analysis as well as suggestions for alternative analysis. Here we incorporate those comments into an updated analysis of the relative economics of biodiesel and Brazilian ethanol based on prices as of January 10, 2013.
January 10, 2013
Does the Biodiesel Tax Credit Change the Advanced Biofuels Landscape?In an earlier post we highlighted the importance of the advanced biofuels Renewable Fuels Standard (RFS) for the current and future demand for biodiesel and biodiesel feed stocks. The RFS for 2013 is expected to require a minimum blending of 1.28 billion gallons of biodiesel and 2.75 billion gallons of all advanced biofuels. The difference between the minimum biodiesel requirement and the minimum total requirement is referred to as undifferentiated biofuel. That requirement can be met by Brazilian ethanol, biodiesel, or cellulosic ethanol. Since cellulosic ethanol is not available in any substantial quantities, the requirement will be met by either Brazilian ethanol or domestic biodiesel. In a separate post we illustrated that imported Brazilian ethanol was a cheaper alternative for meeting the undifferentiated advanced RFS than the domestic production of biodiesel. Those economic conditions implied that Brazilian ethanol imports would be maximized (estimated at 830 million gallons) in 2013 and would limit domestic biodiesel production to the minimum RFS requirement of 1.28 billion gallons. In addition, the impending ethanol blend wall near 13.3 billion gallons implies that Brazilian ethanol imports would limit the production of U.S ethanol to 13.17 billion gallons (assuming exports of 700 million gallons) in 2013.
December 28, 2012
IFES 2012: The Impact of Biofuels Mandates on Grain and OilseedListen to MP3 podcast
Minimum volumes of biofuel usage were first mandated for the U.S. in the 2005 Energy Policy Act and then revised in the Energy Independence and Security Act of 2007. The current legislation sets annual minimum volumes through 2022 in four categories of biofuels: cellulosic, biomass-based diesel, undifferentiated advanced, and renewable. There is a hierarchy among these different categories based on their life-cycle contribution to reducing "green house" gas (GHG) emissions. Most people are surprised to learn that there is not an explicit mandate for corn-based ethanol. Instead, corn-based ethanol has been the cheapest alternative to date for fulfilling the renewable component of the mandates.
December 19, 2012
Do Recent Precipitation Deficits Tell Us Anything about Next Summer's Precipitation?Drought conditions that impacted corn and soybean production in many areas of the U.S. in 2012 generally began in June. By the end of the growing season, large precipitation deficits developed in some areas. Some of those areas remain very dry, while more normal levels of precipitation have been received in other areas since August. That diverse pattern is illustrated below, which shows cumulative precipitation deficits for four major corn producing states for the period June through November 2012. Average statewide precipitation for this six-month period in Illinois, Indiana, Iowa, and Nebraska is compared to the average precipitation for the same six-month period since 1895. All four states received less than the average amount of precipitation since June, but the deficits are smaller in Illinois and Indiana, larger in Iowa, and much larger in Nebraska.
December 7, 2012
What's Driving the Surge in Ethanol Imports?With ethanol production margins under pressure in recent months there has been an understandable search for explanations. One widely-discussed factor is the recent surge in "cheap" imports of ethanol to the U.S. from Brazil. As Figure 1 documents, the volume of ethanol imports to the U.S. definitely has risen notably in the in the last few months. Total imports during January-May 2012 totaled only 43 million gallons, but increased over five-fold to 235 million gallons over June-September. It is important to keep in mind that ethanol imports have actually been much larger in the past. The U.S. imported a total of 1.7 billion gallons of ethanol in 2006-2008, mainly due to an immediate need to replace MTBE as an oxygenate in our motor fuel gasoline supply.
November 21, 2012
How Many Acres of Corn are Needed in 2013?The corn market will continue to be influenced by an array of factors over the next several months. One of the important price factors in the new year will be the prospective size of the 2013 U.S. crop. Prospective crop size begins with the magnitude of planted acres. Rather than forecast the likely magnitude of those plantings, we pose the question of how many acres are needed?
November 2, 2012
The Biofuels Era - A Changing of the Guard?The increase in corn used for ethanol has been a major driver of crop prices in the New Era that began in the Fall of 2006. In the face of one of the worst droughts of the last century this summer, there have been numerous calls to limit the policy incentives to use corn for ethanol production in the upcoming year. The U.S. Environmental Protection Agency (EPA) is currently considering formal requests for this potential relief. While ethanol has garnered nearly all of the headlines in recent years, its role as the leading driver of crop prices may be nearing an end.
October 18, 2012
farmdoc daily Gets Social (Media)The goal of the farmdoc Project has not changed since its inception in 1999 to provide crop and livestock producers in the U.S. Corn Belt with round-the-clock access to integrated information and analysis to better manage their farm businesses. While the goal has remained constant, the technology available to meet that goal has undergone enormous changes during the last dozen years. We created the farmdoc daily site with an eye towards not only the technology people are increasingly using to access information but also the desired form of the information.
October 3, 2012
How Bad Was the 2012 Corn and Soybean Growing Season?Prior to 2012, the most adverse growing season weather conditions for U.S. corn and soybeans in recent history occurred in 1988. Now that the 2012 season is over, it is instructive to compare the two growing seasons and the impact on the U.S. average yields of the two crops.
September 26, 2012
The Impending Collision of Biofuels Mandates with Market RealityIn the face of a small corn crop and high prices, there has been a great deal of debate about a partial temporary waiver of the Renewable Fuels Standards (RFS) mandate for ethanol in 2013. While the headlines have focused on the short-term implications of waiving the ethanol mandate in 2013, a potentially much larger issue looms on the horizon. Beyond 2013, there are real questions about the feasibility of meeting the ever-increasing requirements of the RFS, and this concern goes beyond the well-known difficulties with meeting the mandate for cellulosic biofuels. The purpose of this post is to show why the RFS is likely to collide with market realities in the near future.
September 14, 2012
What Price of Crude Oil Makes Ethanol Production Profitable?There has been a great deal of interest this summer in the ethanol market, RFS mandates, and corn use for ethanol production. This reflects the impact of the historic drought of 2012 in the Midwest and concerns about how reduced corn supplies will be allocated across consumption categories. The focus of this post moves from the short-term to the long-term. In particular, we are interested in analyzing the basic economic question of how high do crude oil prices have to be in order for ethanol production in the U.S. to be profitable. Sometimes this simple but important issue is lost in the blizzard of daily market data and analysis. The answer also helps provide a frame of reference for thinking about the longer-term outlook for the market demand for ethanol.
August 15, 2012
Rationing the 2012 Corn Crop RevisitedA month ago, we presented alternative supply, consumption, and price projections for the 2012-13 marketing year in the context of addressing the question of whether or not prices were high enough to ration a much smaller crop. We concluded at that time that prices were likely still not high enough if the national average yield was below 135 bushels. Now that corn prices have moved higher and the USDA has released the first survey-based forecast of 2012 corn yield and production, we revisit the question of rationing.
August 2, 2012
Ethanol - Does the RFS Matter?As we noted in a post last week, drought conditions this summer have become as bad as 1988 and perhaps worse, potentially only rivaled in the last century by 1936. As corn yield expectations have declined issues related to rationing usage in 2012-13 have taken center stage. The full extent of any needed rationing will not be known for a while, but the USDA's August 10 Crop Production report will provide some guidance. Assuming that substantial rationing will be required, the issue becomes one of which consumption sector will make the majority of the adjustment. The primary consumption sectors are exports, feed, and ethanol and by-products. It is generally believed that export demand is relatively price inelastic so that high prices might result in only small declines in exports. The Renewable Fuels Standards (RFS) require minimum levels of blending of renewable biofuels so that ethanol use of corn would presumably remain large even with a small crop and high prices. The bulk of the adjustment to a smaller corn supply, then, might be left to the livestock industry as has typically been the case in previous small crop years.
July 25, 2012
Update on the Shutdown Price of Corn for Ethanol PlantsIn a recent post (July 13, 2012), we examined the U.S. supply/demand situation for corn in 2012-13 under various yield scenarios. This analysis focused on the demand rationing that would be required as yields declined. If yield turns out to be above 140 we concluded that prices at the time appeared to be sufficient, and perhaps more than sufficient, to ration usage. However, we argued that an average yield of 135 bushels or less would require substantial further rationing, resulting in record high average prices. It is clear that corn yield prospects have continued to decline in the last two weeks as drought conditions this summer have become as bad as 1988 and perhaps worse, potentially only rivaled in the last century by 1936.
July 13, 2012
Rationing the 2012 Corn Crop - Are We There Yet?The 2012 corn crop will be much smaller than anticipated earlier in the year when producers planted near-record acreage in a very timely fashion. Prospects then were for an above-trend average U.S. yield and a record large crop in excess of 14.5 billion bushels. A crop of that size would have allowed for an increase in consumption and some build-up in inventories and resulted in much lower prices than experienced over the past year. In May, for example, the USDA saw prospects for U.S. corn stocks to grow from 850 million bushels at the end of the current marketing year to 1.88 billion by the end of the 2012-13 marketing year. The average farm price was expected to decline from $6.15 this year to $4.20 to $5.00 next year.
July 11, 2012
USDA Jolts the MarketsThe USDA's World Agricultural Outlook Board (WAOB) released the monthly WASDE report this morning. Several changes were made in supply and consumption projections for corn and soybeans. By far the most important changes were the drops in yield projections. Following is a brief summary and implications of the report.
June 26, 2012
Where Should We Be Now With Corn Yield Expectations?Based on an analysis of the recent trend in the U.S. average corn yield and a near record early planted crop, the USDA's May and June WASDE reports indicated prospects for a record U.S. average corn yield of 166 bushels in 2012. With much of the Corn Belt crop now entering the critical stage of the growing season, this seems to be an appropriate time to re-assess yield prospects.
June 20, 2012
Thinking Out of the Box about Crop and Livestock MarketingCrop and livestock producers have long identified price risk as one of the highest risk management priorities of the farm business. One of the major challenges of marketing is the extreme variability in prices, not only across years, but within years. A second challenge in making pricing decisions is that future prices cannot be anticipated with a high degree of accuracy. Producers have a long time period in which to price their production. Livestock futures contracts are available 18 months into the future while crop contracts are available four years into the future. The factors that determine prices cannot be accurately forecast that far into the future. Even limiting the pricing window to a few months before livestock reach market weight or a few months before crops are harvested through the storage period, price-determining factors can and often do change dramatically, making the decision about when and how much to price extremely difficult.
June 6, 2012
Recent Observations on the Tolerance of Corn Yield to Drought ConditionsThe tolerance of U.S. corn yields to hot and dry, or drought, conditions is a topic of perennial interest. There has been a great deal of discussion in recent years whether current corn varieties have greater drought tolerance than in the past. We have discussed this issue in a previous post and publication. Here, we highlight three recent observations that provide further pieces of this puzzle.
May 24, 2012
Is the Long Ethanol Boom Coming to a Close?U.S. ethanol production has increased rapidly since 2006, reaching about 13.95 billion gallons in 2011. The increase was driven by a combination of high crude oil prices, federal Renewable Fuel Standards (RFS) for domestic renewable fuel consumption, a generous tax credit for ethanol blenders, and large net exports in 2010 and 2011. The expansion in domestic ethanol production has been one of the main drivers of the corn market since 2006, as corn is the primary feedstock for ethanol production in the U.S. The USDA estimates that corn processed for ethanol production totaled 5.021 billion bushels in the 2010-11 marketing year and projects use at 5 billion bushels for the current marketing year. Accounting for co-product production, net corn consumption for ethanol production in 2011-12 will be near 3.35 billion bushels, or about 26 percent of total expected consumption.
May 23, 2012
Rationing Old Crop Corn and Ethanol Shutdown PricesThe tightness of the old crop corn supply and demand balance is a subject of considerable debate as we head into the final quarter of the 2011/12 marketing year. The final degree of tightness will be a function of several variables, including the accuracy of previous USDA stock estimates, the availability and price of feed wheat this summer, the amount of "early" harvested corn available in August, and the consumption pace of end-users. This latter variable is mainly a function of livestock numbers both in the U.S. and overseas and ethanol production here in the U.S. Since livestock feeders have a limited capacity to adjust usage over a few months, ethanol producers would likely bear the brunt of any additional rationing if it is necessary.
May 16, 2012
What is a Reasonable Starting Point for Estimating the U.S. Corn Yield in 2012?The magnitude of the U.S. average corn yield in 2012 will be one of the most important factors in determining the average price during the 2012-13 marketing year due to the relatively low level of carry-out from the current marketing year. Early in the season, yield expectations generally start with an analysis of the trend in historic yields and an extension of the trend into the current year. As the planting and growing season progress, yield expectations are modified by the timeliness of planting, weather developments, and USDA crop condition ratings. The USDA provides survey based yield estimates beginning in August. See this publication for a detailed discussion of the procedures used by the USDA to produce the survey estimates.
April 25, 2012
Speculation and Gasoline Prices: Is There a Link?The role of speculation in energy markets has flared up again. Earlier this month, Joseph P. Kennedy II, former U.S. Congressman from Massachusetts, made the following statements,
But there are factors contributing to the high price of oil that we can do something about. Chief among them is the effect of "pure" speculators -- investors who buy and sell oil futures but never take physical possession of actual barrels of oil. These middlemen add little value and lots of cost as they bid up the price of oil in pursuit of financial gain. They should be banned from the world's commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon.Just last week, President Obama stated,
Rising gas prices means a rough ride for a lot of families. We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.As part of his crackdown on speculators in energy markets, the President proposed increasing penalties for market manipulation and increasing oversight of U.S. energy markets.
April 18, 2012
2012 Corn Crop To Be The Earliest Ever Planted?Unusually warm weather in March and early April provided the opportunity to start planting the 2012 corn crop earlier than normal. While there is little doubt that some corn has been planted much earlier than usual, determining whether the crop in total is being planted at a record pace is not as straightforward as it may seem at first glance. The problems include: i) corn planting is generally spread over a relatively long time period, ii) the timing of planting differs substantially by region of the country, and iii) there are several ways to characterize how early or late the crop is planted. One consistent measure is the date at which planting in those states in the heart of the Corn Belt reaches 50 percent completed, as reported in the USDA's weekly Crop Progress report.
April 11, 2012
A Look at the Profitability of Ethanol PlantsThe boom in ethanol production is a well-known and much-discussed phenomenon. Less understood is the profitability of all the ethanol plants built during the last decade. It is important to track the profitability of ethanol plants not only to assess investment performance in the industry but to also analyze short-term implications for the production of ethanol and use of corn as a feedstock.
April 2, 2012
Winter Precipitation and Corn YieldDue to the very warm temperatures in the winter of 2011-12, we recently examined the relationship between average winter temperatures and average temperatures the following summer and the relationship between average winter temperatures and corn yield. We showed that the correlation between average winter temperature and both average summer temperature and average state yield is small for Illinois and Iowa. Here we extend the analysis to the relationship between total state average precipitation during December, January, and February and the total precipitation in the following July and August. In addition, we examine the relationship between the total winter precipitation and the trend-adjusted corn yield the following year. Once again, the analysis is conducted for Illinois and Iowa (the two largest corn producing states) over the period 1960 through 2011.
March 30, 2012
USDA Reports a Jumble of SurprisesThe much anticipated USDA Prospective Plantings and Grain Stocks reports were released this morning and contained an interesting mix of surprises. For a review of the USDA methodology for the Prospective Plantings report, see this Marketing and Outlook Brief.
March 23, 2012
How Much Impact Will Early U.S. Corn Planting Have on Potential Yield?Conditions that have allowed early field work and some very early planting of corn in the Corn Belt have raised the issue of potential impact on the 2012 U.S. average corn yield if the crop is generally planted earlier than normal. That question is addressed here by first briefly summarizing some of the research that has been conducted on the impact of planting date on corn yields.
March 21, 2012
farmdoc daily is One Year Old!Today we celebrate the one year anniversary of farmdoc daily. And what a year it has been! We have published almost 300 articles (291 to be precise) on an amazing array of topics related to ?Corn Belt farm economics.? This has actually exceeded our goal of publishing one original article of research-based analysis and information every business day.
March 14, 2012
Tackle Economic, Agronomic and Technological Issues at Top Farmer Crop WorkshopWe are pleased to announce that the farmdoc team will be partnering with the Purdue University Center for Commercial Agriculture on the 45th annual Top Farmer Crop Workshop, which is set for July 9-11, 2012 in West Lafayette, Indiana. As two of the leading agricultural economics programs in the country, we are looking forward to providing workshop participants with solid, science-based information on some of the most pressing issues facing farming operations today.
March 8, 2012
Do Warm Winters Tell Us Anything about Summer Temperatures and Corn Yields?The mild temperatures experienced in the winter of 2011-12 have some wondering if there is any relationship between average winter temperatures and average temperatures the following summer. Implicit in that question is whether are not there are any implications for crop yields following a mild winter. Here we examine the relationship between state average temperature during December, January, and February and the average temperature in the following July and August. In addition, we examine the relationship between the average winter temperature and the trend-adjusted corn yield the following year. The analysis is conducted for Illinois and Iowa (the two largest corn producing states) over the period 1960 through 2011.
February 24, 2012
More about the Historic Pattern of U.S Winter Wheat YieldsIn yesterday's post we examined the history of average U.S. winter wheat yields in search of any patterns that might be helpful in anticipating the average yield for 2012. We expand that analysis here in recognition that, unlike corn and soybeans, winter wheat consists of several classes of wheat. The USDA reports winter wheat production in four classes--hard red, soft red, hard white, and soft white. An estimate of the percentage distribution of production by class in each state and an estimate of state average yield of all classes are made, but an estimate of U.S. average yield by class is not provided. Here we select representative states to illustrate the historical yield pattern of hard red winter (HRW) and soft red winter (SRW) wheat. Kansas is selected for HRW wheat since it is the largest producer of that class of wheat and 98 percent of the production in the state is HRW. The selection of a representative state for SRW wheat is more difficult because that class of wheat is produced in relatively small quantities in a large number of states in the eastern U.S. Here we use Ohio as a representative state since that state is among the largest producers and 100 percent of the wheat there is SRW.
February 23, 2012
The Historic Pattern of U.S Winter Wheat Yields, Any Implications for 2012?The U.S. average winter wheat yield was below trend value in 2011. Market sentiment favors a return to trend yield in 2012. Here we examine the pattern of yields from 1960 through 2011 to identify any patterns that might be helpful in forming expectations for 2012. See our earlier posts for similar observations for corn and soybean yields in 2012.
February 15, 2012
The Truly Amazing Continuing Story of Natural Gas PricesIn a post last November, the dramatic decline in the price of natural gas relative to the price of crude oil was highlighted. The dramatic break in the relationship was attributed to rising production associated with a new technique known as hydraulic fracturing, or fracking for short, which is the use of liquids forced into deep rock formations to ï¿½crack openï¿½ previously unreachable deposits of natural gas.
February 8, 2012
The Historic Pattern of U.S Soybean Yields, Any Implications for 2012?Like the U.S. average corn yield, the U.S. average soybean yield was below trend value in 2011. Market sentiment favors a return to trend yield for soybeans in 2012. Here we examine the pattern of yields from 1960 through 2011 to identify any patterns that might be helpful in forming expectations for 2012. See our earlier post for similar observations about corn yield in 2012.
February 2, 2012
The Historic Pattern of U.S Corn Yields, Any Implications for 2012?The U.S. average corn yield was below trend value in both 2010 and 2011. Market sentiment seems to be that such a pattern reduces the odds of a below-trend average yield in 2012. That sentiment raises the interesting issue of what, if anything can be learned from the historical pattern of U.S. average corn yields that would be useful in anticipating yields in any particular year? Here we examine the pattern of yields from 1960 through 2011.
January 27, 2012
Corn Basis RevisitedThe extremely strong corn basis is currently receiving a lot of attention. We first made note of the strong basis pattern in our post on October 20, 2011. We suggested at the time that the strong cash prices relative to futures prices implied that futures prices may have been under-valued relative to demand strength. We concluded with the statement that "Historically, divergences like this one have not tended to last long. It will be interesting to see exactly how this one is resolved. Stay tuned"
December 16, 2011
Seasonality and the Ethanol Blending MarginIn yesterday's post the relationship between gasoline and ethanol prices was explored. The importance of tracking the difference between gasoline and ethanol prices as an indicator of the "blending margin" between gasoline and ethanol was highlighted. A positive difference means market blending economics favor ethanol and vice versa. In recent years it has been profitable to blend ethanol in gasoline about 70% of the time (without consideration of the blenders' tax credit).
December 15, 2011
Trends in Gasoline and Ethanol PricesIn recent posts, we began exploring basic pricing relationships in the energy markets. The first post examined crude oil and gasoline prices. The second post looked at the relationship between crude oil and natural gas prices. Now we push on closer to agriculture and look at the crucial relationship between gasoline and ethanol prices.
November 18, 2011
Marketing Corn, Soybeans, and Wheat in the New EraIn posts on March 29, April 5, April 12, and April 19 we examined crop and livestock price behavior in the new era that began to emerge in fall 2006. We argued that unfolding evidence suggested that corn, soybean, and wheat prices were indeed likely establishing a higher (nominal) average than previously experienced. Not surprisingly, the range of prices we forecast for this new era was also very wide. The purpose of this post is to take a more detailed look at the distribution of corn, soybean, and wheat prices we expect in this new era.
November 2, 2011
Trends in Crude Oil and Natural Gas PricesIn a recent post, we began exploring basic pricing relationships in the energy markets. The first post examined crude oil and gasoline prices. In this post, we will take a look at the relationship between crude oil and natural gas prices.
October 20, 2011
Corn Prices, Basis, and SpreadsDecember 2011 corn futures increased by $2.00 between July 1, 2011 and August 29, 2011. That contract closed at $7.70 on August 29. Basis levels also strengthened during that period. The average cash bid for harvest delivery at country elevators in south-central Illinois, for example, strengthened to $0.28 under December futures on August 29, compared to about $0.40 under earlier in the spring and summer. In addition, the spread from December 2011 to July 2012 futures narrowed from $0.32 on July 1 to about $0.18 on August 29. Much of the price increase and reduced carry in the market was fueled by prospects of very small stocks of corn at the end of the 2010-11 marketing year and deteriorating prospects for the 2011 harvest. The market was discouraging storage of the new crop and signaling corn consumers to slow the pace of consumption in a classic "short crop" price pattern. Such a pattern is typically characterized by high prices and lack of carry early in the marketing year followed by declining prices and increasing spreads as the year progresses, resulting in the saying that "short crops have long tails".
October 12, 2011
October USDA ReportsToday the USDA released the October update of survey-based forecasts of the size of the 2011 U.S. corn and soybean crops. In addition, forecasts of consumption and ending stocks for the 2010-11 and 2011-12 marketing years for corn, and soybeans were updated. Following is a summary of those reports.
October 10, 2011
Revisiting Recent Corn Stocks EstimatesListen to MP3 podcast
While the USDA's estimate of the September 1, 2011 inventory of old crop corn is old news, there are ongoing questions surrounding the quarterly stocks estimates. For corn, quarterly stocks estimates have not been well anticipated since June 2010.
October 6, 2011
Trends in Crude Oil and Gasoline PricesMuch has been written in recent years about the linkages between the agricultural and energy markets. Energy prices have always had an impact on agricultural prices indirectly through their effect on input costs. What's new is their direct impact on output prices forged via biofuel production. In particular, corn prices are now inextricably linked with crude oil and gasoline prices. With that background in mind, this is the first of a series of posts that will explore basic pricing relationships in the energy markets and between energy and agricultural markets.
September 29, 2011
U.S. Corn Exports--The Rest of the StoryExports of unprocessed (whole) corn from the U.S. vary substantially from year to year, ranging from 1.588 billion bushels to 2.437 billion bushels over the past 10 years, but generally have been trending lower since 2007-08. Annual exports from all other origins are also variable, but have been increasing since 2008-09. For the 2011-12 marketing year, the USDA projects U.S. corn exports at a 9-year low of 1.65 billion bushels and exports from all other origins at a record large 2.02 billion bushels. If the forecasts are correct, this will be the first year since the early 1970s that U.S. exports were smaller than those from all other origins.
September 9, 2011
2011 U.S. Corn and Soybean Yield ExpectationsIn posts on July 19 and August 4 we reviewed the Illinois and U.S. average corn and soybean yields in previous years when July temperature was well above average in Illinois, as was the case in 2011. Those analog years included 1977, 1980, 1983, 1999, and 2002.
September 1, 2011
USDA Corn and Soybean Yield Forecast Errors Across Report Release MonthsIn an earlier post we examined the accuracy of the USDA's August forecast of the U.S. average corn and soybean yield since 1970 to determine if there had been a change in accuracy over time. Here we examine the magnitude of the yield forecasting errors for corn and soybeans over the forecast cycle from August through November. The same time period as used in the previous analysis, 1970 through 2010, is used here. The analysis of forecast errors should be helpful in evaluating forecasts in the current forecast cycle.
August 19, 2011
Have the Accuracy of USDA's August Corn and Soybean Production Forecasts Changed?USDA crop forecasts and estimates continue to be criticized by a wide range of users of the information. Part of the criticism appears to stem from a lack of understanding of the methodology used in producing the forecasts and estimates. In an earlier publication, we provided some detail of the USDA crop production forecasting methodology. Part of the criticism appears to stem from perceived inaccuracies in the forecasts and estimates. The large over-estimate of the 2010 U.S. average corn yield in August 2010, for example, suggested to some that the accuracy of August yield and production forecasts may have diminished over time.
August 4, 2011
Hot Summer Weather and 2011 Corn and Soybean YieldsIn the post on July 19 we examined trend-adjusted corn yields in Illinois in the 5 previous years since 1975 when the average July temperature and precipitation most resembled that of 2011 (average temperature above 77 degrees and below-average precipitation). The state average corn yields varied considerably in those 5 years, reflecting highly diverse weather conditions in August, but averaged well below trend. Barring extremely favorable weather conditions in August 2011, the analysis pointed to a state average corn yield in 2011 in the low- to mid-150 bushel range, 13 to 15 bushels below trend value.
July 19, 2011
Hot July Weather and Corn YieldsThe onset of high temperatures in much of the Corn Belt this week has raised the issue of the impact of high summer temperatures on corn yields. See this recent article for an overview of the effects of high temperature on corn plant physiology and yield potential.
June 16, 2011
Save the Date: Announcing the Schedule of 2011 IFES MeetingsThe University of Illinois Extension and members of the farmdoc team from the Department of Agricultural and Consumer Economics at the University of Illinois once again will be holding a series of five Illinois Farm Economics Summit meetings to discuss and analyze the most pressing economic issues facing Illinois producers.
June 14, 2011
Interpreting Recent Data on Corn Planting ProgressThe USDA's weekly Crop Progress report released on June 13th indicated that corn planting progress had caught up to the normal level of 99 percent by June 12. Some caution is warranted in interpreting the planting progress numbers. First, planting progress always catches up to the average pace since planting is eventually completed. Planting progress this year caught up to the average pace very late in the season, underscoring the fact that a much larger than average percent of the crop was planted after the optimum date for maximizing yield potential. Yield potential is reduced in a non-linear fashion with lateness of planting, with yield penalties increasing for later planting dates. Figure 1 depicts that relationship for Illinois based on estimates from research here at the University of Illinois by Emerson Nafziger. Yield penalties become very large for corn planted after mid-May. The yield penalty for corn planted in early June, around 25%, is especially striking.
June 3, 2011
Corn Planting Speed RevisitedIn a previous post, we examined the question of whether corn planting in recent years has occurred at a faster pace than in previous decades. That analysis consisted of examining the percentage of the corn crops in Illinois, Indiana, and Iowa planted during the week of the greatest planting progress each year from 1960 through 2010. The peak week of planting was selected for analysis since there was likely considerable acreage left to be planted during that week and the largest numbers of producers were likely planting during that week. No trend toward planting a larger percentage of the crop in the peak week of planting since 1960 was found
June 1, 2011
Is Speculation Driving Commodity Prices?The role of speculation in the ongoing boom in commodity prices is hotly debated. President Obama recently waded into the debate, stating that, "It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand... The problem is ... speculators and people make various bets, and they say, you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we're going to bet that oil is going to go up real high. And that spikes up prices significantly."
May 10, 2011
Do High Prices Destroy Demand?During the period of rapidly increasing commodity prices since the summer of 2010, there has been occasional reference to "demand destruction" resulting from higher prices. That terminology is misleading and conceptually incorrect. What commentators are generally referring to, of course, is that high and increasing prices would be expected to result in less consumption of the commodity than would have occurred at lower prices. That relationship, however, does not constitute demand destruction. That is, a change in consumption in reaction to a change in price does not represent a change in demand.
April 25, 2011
Late Corn Planting and Planting SpeedThe recent and on-going widespread precipitation in the Corn Belt raises two related issues. One issue is the potential impact on the U.S. average corn yield if a substantial portion of the crop is planted "late". The second is the speed at which the crop can be planted when weather conditions improve. As for the impact of late planting on corn yields, agronomic research clearly demonstrates that late planted corn generally yields less than corn planted in a timely fashion. For a brief, but informative discussion of this research see Nafziger 2008. While there continues to be mixed evidence about the optimum planting time for corn and the magnitude and pattern of yield decline as planting gets later and later (Nafziger 2011) there is clear evidence that the rate of yield decline increases as planting delays increase. Current market commentary centers on May 15 as dividing timely from late planting.
April 19, 2011
A New Era in Real Agricultural Prices?In posts on March 29, April 5, and April 12 we examined crop and livestock price behavior in the new era that began to emerge in Fall 2006. Each of these posts was based on the behavior of nominal prices, so that the effects of changes in the general price level over time were not considered. Focusing on nominal prices made sense in the previous posts because farmers make marketing decisions using nominal prices. From a broader economic perspective, it is actually real, or inflation-adjusted, prices that matter. A simple example will help to explain why. If someone has $100 of income and purchases a basket of goods for an average price of $10, they can purchase 10 'baskets' of the goods. Now let the person's income and all prices double, so they have $200 of income and the average price of the basket of goods is $20. Is the person better off? Of course not-- since they can still only purchase 10 baskets of the goods.
April 12, 2011
Livestock/Corn Price Ratios in the New EraIn posts on March 29 and April 5 we examined the changes in average nominal (not adjusted for inflation) price levels for crops and livestock in the most recent era compared to the previous era. Here, we examine the ratio of livestock prices ($ per hundredweight) to corn prices ($ per bushel) in the most recent era of higher crop prices compared to ratios in the previous era. Since feed costs account for a high percentage of livestock production costs, these ratios have long been used as indicators of livestock production profitability. One should of course remember that these ratios are imperfect reflections of profitability since feed and other production efficiencies can change over time.
April 5, 2011
A New Era in Livestock Prices?Our post on March 29 provided updated evidence that nominal crop prices entered a new era beginning about January 2007. The increases in price levels that have occurred in this new era are generally consistent with the increases that occurred in the previous era that extended from January 1973 through September 2006. We have not previously examined livestock prices to determine if a shift in those prices has also occurred recently. Here we examine the average monthly farm prices of hogs; steers and heifers; and milk in Illinois in the accompanying three figures to identify the timing and magnitude of any previous or recent shift in nominal price levels.
March 29, 2011
A New Era in Crop Prices?In a 2008 report and a 2009 article we addressed the following basic question: Are higher crop prices here to stay? We argued that unfolding evidence suggested that corn, soybean, and wheat prices were indeed likely establishing a higher (nominal) average than previously experienced. Some disagree with this conclusion. We revisit the evidence here to see if the data continues to support our original conclusion.
March 23, 2011
USDA Corn and Soybean Acreage Estimates and Yield Forecasts: Dispelling Myths and MisunderstandingsListen to MP3 podcast
The U.S. is the world's largest producer and exporter of corn and soybeans. As a result, the size of the crops in the U.S. has a substantial impact on the price of corn and soybeans. During the planting and growing season, market participants form expectations about the potential size of these crops from a variety of private and public sources of information. The National Agricultural Statistics Service (NASS) of the U.S. Department of Agriculture (USDA) is the primary provider of public information relative to potential crop size. These reports are among the biggest market movers year-in and year-out.
March 17, 2011
Welcome to farmdoc Daily!
The goal of the farmdoc Project has not changed since its inception in 1999-- to provide crop and livestock producers in the U.S. Corn Belt with round-the-clock access to integrated information and expertise to better manage their farm businesses. While the goal has remained constant, the technology available to meet that goal has undergone enormous changes during the last dozen years. Smart phones, iPads, blogs, and social networks are now commonplace but scarcely imagined just a few years ago.