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DAVID KRUSE

By Staff | Aug 1, 2014

Here is where we are at. U.S. grain/soy prices are likely going to fall to depressed, below-the-cost-of-production price levels until demand increases to consume the burdensome supply.

There is not going to be any quick fix and there are structural issues that have to be addressed in order to have access to markets for growth.

The new farm bill has support levels built in too low to help. Crop insurance revenue guarantees will reflect depressed market levels offering little protection.

In order to get corn consumption back into line with demand to raise corn prices to breakeven or profitable levels we should have a goal of finding 500 to 600 bushel additional corn demand.

USDA says we will use 5.05 billion bushels of corn for the ethanol process next year and when it updates the corn yield in the August WADSE report, it’s likely to forecast a 2 billion bushel carryover.

China is not going to bail us out of this one. It has all the corn it needs which is why it banned U.S. corn and DDG imports in order to stem the importation of cheap foreign corn weighing on its domestic market costing Beijing too much in farm subsidies.

I don’t think that prospects are good for picking up more corn demand from the export market. It will take time to shut off foreign production and wheat is cheap again.

There should be a better chance to grow feed demand. Every time livestock and poultry producers retain a heifer or gilt or add chick sets there are more mouths to feed.

Cost of gain is phenomenally profitable, so producers will add pounds, lengthening feeding periods which increases feed consumption.

PEDv is an obstacle to pork industry expansion. Drought has faded as an obstacle for beef herd expansion although high price extremes make expansion expensive.

After the poultry industry takes enough dump trucks full of cash to the bank from feeding cheap corn, it too should expand chick sets.

USDA forecasts a modest 25 million bushel increase in corn feed consumption year over year, and that is not enough to help the corn market recover.

I think its estimate is understated. Corn growers need to see feed consumption increase 5 percent, or 260 million bushel, to help balance off supply with demand. That would require a PEDv vaccine.

High fuel prices and cheap corn should boost ethanol production right? Not so fast. This is one of the structural obstacles to growing demand that I alluded to.

If the fuel market was open and free we would see a significant expansion in ethanol production. The problem is that access to consumers for ethanol is blocked by limited infrastructure and regulation so that the market signals calling for more ethanol, given a burdensome supply of cheap corn, are short-circuited.

Brazil has used E/20 and E/25 blends in all its vehicles for decades, long before flex-fuel vehicles.

Problems and obstacles to using higher ethanol blends have been part of an anti-ethanol petroleum market share protection campaign by Big Oil.

The difference was that Brazil didn’t have oil companies to contend with there and therefore the market was actually open to biofuel. It would vary the blend relative to the supply and price of sugar which is the base feedstock there.

Ironically, our Environment Protection Agency was all turned into knots approving E-15 in newer vehicles and surrendered to the oil industry intransigence over expanding fuel dispensing infrastructure beyond E/10.

It is what it is, and while we can push the EPA to do the right thing, push back on Big Oil’s misinformation campaign and look for markets overseas for ethanol exports, it will be an uphill battle to expand market access for ethanol to grow corn demand that will be seriously needed for Corn Belt agriculture.

If we use 5 billion bushels of corn to fill the E/10-sized current market, do the math on what it would do for corn demand to fill an E/15 market.

To market enough E-15 to boost the percentage consumption from E-10 to E-11, add 500 million bushel to corn demand. E-12 would provide enough market access for ethanol to fill the corn feedstock RFS mandate.

That would certainly take care of the burdensome corn carryover. We can only get others to do what we can get them to do, but there is much that we can do ourselves as an industry that we are not doing.

Farmers, farm organizations, and farm cooperatives need to wake up and be leaders in taking the ethanol market to a new level that the market is calling for, but can’t gain access to, because of the structural roadblocks astutely put in place to stop it.

I think they are still in denial over $7 corn and had frankly gotten complacent over doing the work necessary to grow demand. I think that some of these obstacles are actually illegal under anti-competitive practices.

The RFA produced a report card that showed “less than one percent of branded stations offer E15 or E85. Of nearly 48,000 retail gas stations carrying a ‘Big Five’ oil company brand, less than 300 offer E85 or E15.”

In a future report, I will share the report card with you and comment that not only is it the fault of Big Oil companies controlling the fuel market blocking needed corn demand, but ag interests have not done all they could do to expand market access for ethanol either.

You need to do what you can to the extent of your ability to achieve solutions before you can blast the actions of others.

The ag sector has work it can do on its own to grow consumption of biofuel.

Future net farm income rides on the result.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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