Grain & Feed Outlook 2009-10

Dr. Robert WisnerAg Marketing Resource Center

Iowa State University

June 2, 2009

Key Grain Market Influences

• Planting progress - - E.CB. & ND• Global economy • U.S. $ value• Sharp drop in S. America crops• China SBM exports or SB

cancellations?• Crude oil prices• Livestock prices & numbers• Dry weather – NE China & W. Canada

Funds

General Econ. Outlook

3 Highly Likely Developments3 Highly Likely Developments

• Trend toward weaker $• Increasing inflation, esp. in 2-3 years• Higher interest rates– in 2-3 years, possibly

sooner

Driving forces: Driving forces: hugehuge budget deficits and “cap budget deficits and “cap & trade”& trade”

U.S. General Econ. OutlookWhat Kind of Recovery?What Kind of Recovery?

• V – looking less likelylooking less likely• W – temporary recovery• U -- gradual recovery• L -- extended period of stagnation extended period of stagnation

(with inflation) : can’t be ruled out (with inflation) : can’t be ruled out with higher taxes & cap & tradewith higher taxes & cap & trade

USDA S-D Report 6/12/09USDA S-D Report 6/12/09Likely ChangesLikely Changes

• Argentine SB crop estimate down 36 to 72 mil. bu. (1-2 mil. T.) vs. May.

• Lower Paraguay soy crop?• U.S. 2008-09 soybean exports up15 to

20 mil. bu. • ‘08-09 carryover down 10 to15 mil. bu. • ‘09-10 carryover down 15 to 25 mil. Bu. • Corn – probably not much change

Potential Market Impacts• Even tighter old-crop soybean supply (It’s already Even tighter old-crop soybean supply (It’s already

record tight)record tight) • Bullish old & new-crop soybeans & meal,

– Especially old-crop mealEspecially old-crop meal• With inverse, SBM strength is concentrated in July

futures, but will shift to Sept. by late June• Corn market up $0.29 since 4/30 break-out. Price

likely volatile until June 30 acreage report• Informa report suggests about 1 mil. A. less ’09

corn acres – via late plantings in E. Corn Belt

Cautions in Soy Meal Supply• Local shortages of soybean meal in Aug. & Local shortages of soybean meal in Aug. &

Sept -- a definite possibility, with the sharp Sept -- a definite possibility, with the sharp drop in S. America's spring ‘09 soy drop in S. America's spring ‘09 soy harvest.harvest.  

• 8/31/09 anticipated soybean stocks--much tighter than last year, 2.2 weeks supply vs. 3.5 weeks in 2007-08. (Tightest since at least (Tightest since at least 1965)1965)

• Uncertainty: China’s 56 mil. Bu. unshipped purchases. Small S. Am. Crop reduces chances of their cancellations.

Corn Supply• Old-crop: ample if yield prospects look good   • New-crop: probable tighter supply even with New-crop: probable tighter supply even with

trend yieldtrend yield– Sharp drop in S. America spring ’09 productionSharp drop in S. America spring ’09 production– China: only small exports expectedChina: only small exports expected– Reduced foreign feed-wheat competitionReduced foreign feed-wheat competition– Some increase in corn for ethanolSome increase in corn for ethanol

• Prices: depend heavily on weather, global oil price, & whether E-15 will be allowed for conventional vehicles

Weekly U.S. Dollar Index

5/28/09

Weekly December Corn 5/28/09

Downside Risk

increasing?

Weekly SB Price

5/28/09

Weekly SBM Price

5/28/09Gap @ $395

Weekly Ethanol Price 5/29/09

Gap

Weekly Crude Oil Price

5/29/09

Percent Change in U.S. Corn Plantings from Intentions Survey to Next January, 1965-2008

-14%-12%-10%

-8%-6%-4%-2%0%2%4%

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007 Avg

.

Perc

ent

Avg. - 0.5%Avg. Chg. 1996-08: +0.3%

Ethanol Break-even Price, $/Gallon With Credit for DGS Value

(Corn price locked in @ June '08 level)

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Jan-05

Mar-

05

May

-05Ju

l-05

Sep-05

Nov-05

Jan-06

Mar-

06

May

-06Ju

l-06

Sep-06

Nov-06

Jan-07

Mar-

07

May

-07Ju

l-07

Sep-07

Nov-07

Jan-08

Mar-

08

May

-08Ju

l-08

Sep-08

Nov-08

Jan-09

Mar-

09

$ pe

r ga

llon

Ethanol PriceFixed CostsOther var. costNatural GasNet Corn Cost

Source: Iowa Ethanol Report, EIA

Net Corn Cost After DGS Credit

Corn Balance Sheet – Wisner - 5/29/09

May 09 420

--

Jul 09 428

436

Sep 09 4366 446

Dec 09 448 459

Mar 10 459 468

May 10 4678 475

Jul 10 474 480

Sep 10 463 466

Dec 10 446 450

Jul 11 4668 472

Dec 11 453 458

Corn Futures Close 5/12/09 5/29/09July ’09 – July ’10 spread = +$0.44

Key Assumptions

• Slow economic recovery until at least Q1-2010• Gradually weakening U.S. Dollar• Crude oil prices in the $55-$65 range through

2009, then gradually increasing into 2011• Government approval of intermediate ethanol

blends• Gradually accelerating inflation beginning in

mid-2010

Soybean Balance Sheet - Wisner

U.S. Soybeans,Weeks Supply

02468

101214161820

1965 1970 1975 1980 1985 1990 1995 2000 2005

Wee

ks R

eser

ve S

uppl

y

Pipeline Stocks

5/12/09

S. America Crop ProspectsS. America Crop Prospects5/12/09 USDA5/12/09 USDA

Mil. Bu. Chg. Vs. last yr.

• Argentina corn -355• Argentina SB -450• Brazil corn -320• Brazil SB -147 • Paraguay SB -114

– Total corn change -675– Total SB change -711

Rapidly Emerging Longer-term Rapidly Emerging Longer-term Grain IssuesGrain Issues

• Biofuels mandates: on collision course with GHG regulations & allowable ethanol blend levels

• If E-15 is allowed, expect about 45% increase in corn use If E-15 is allowed, expect about 45% increase in corn use for ethanol vs. current levels – over next 4 yearsfor ethanol vs. current levels – over next 4 years

• California: will it become the national standard for GHG emissions? – If so, Midwest ethanol will find it hard to compete on E. and W.

coasts. – Alternative fuels with strong GHG competition: Brazil ethanol,

compressed natural gas, compressed landfill gas, electric vehicles– Ratings for cellulose ethanol not yet available in California   

• Key element in ethanol & biodiesel GHG competition with Key element in ethanol & biodiesel GHG competition with other alternatives: indirect land use emissionsother alternatives: indirect land use emissions– Look for efforts to eliminate indirect land use from Look for efforts to eliminate indirect land use from

consideration in GHG emissions evaluationsconsideration in GHG emissions evaluations– Also look for pressure to increase research on indirect land Also look for pressure to increase research on indirect land

use emissions- - both scientific & economicuse emissions- - both scientific & economic

Greenhouse Gas DevelopmentsGreenhouse Gas Developments• Both EPA & California proposed air quality

regulations are negative to ethanol & biodiesel -- especially biodiesel

• California proposal would lock out Midwest ethanol in 4-5 years, but would allow California-produced ethanol to continue as motor fuel

See our forthcoming report on this at: http://www.agmrc.org/renewable_energy/agmrc_renewable_energy_newsletter.cfm

• USDA projected soy oil use for biodiesel in ’09-10 USDA projected soy oil use for biodiesel in ’09-10 is about 60% of mandated level. This tempers is about 60% of mandated level. This tempers soybean & oil price prospects for ’09-10soybean & oil price prospects for ’09-10

Take-Home PointsTake-Home Points• Severe drop in S. American crops to bring

tighter corn & SB supplies until next spring• Summer ‘09 bean supply record tight:

expect high & volatile meal prices through early Oct.

• Expect adequate SB & meal supplies beyond spring 2010

• Look for tightening ‘09-’10 corn supply• Biofuels & Greenhouse Gas policy are on

collision course: Look for policy changes• Wild cards: China, weather, & crude oil

Thanks!

Questions?

Web Site• http://www.econ.iastate.edu/faculty/wisner/