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Running on ethanol

By Staff | Feb 26, 2015

DAVID KRUSE, author of the CommStock Report, packed the Clay County Regional Events Center ballroom on Feb. 17 as the opening keynote speaker for the Northwest Iowa Ag Outlook, sponsored by the ag committee of the Spencer Area Chamber of Commerce.

SPENCER – David Kruse, author of the CommStock Report and a contributing columnist for Farm News, stood before a capacity crowd at the Northwest Iowa Ag Outlook event in Spencer on Feb. 17, telling farmers they need to “get with the program” when it comes to promoting their own commodities.

They can do this most simply and most effectively, he said, at the fuel pump.

“If you’re a cotton farmer and I open the door to your closet and find all kinds of rayon and micro-fiber clothes in there, I’m going to scratch my head and wonder what’s the matter with you,” he said. “Cotton would be your livelihood, and you aren’t even using it.

“People will talk about some woman in Chicago who isn’t doing everything to keep herself off of welfare. I always think, ‘Are you using E-15? Are you using E-85?’

“If not, then you’ve got something in common with that woman on welfare in Chicago because you are not doing everything you can and should be doing. You’ve got rayon in your closet.”

A CAPACITY CROWD of farmers heard David Kruse, author of the CommStock Report, tell them that the ag economy is in a state of recovery and offered marketing tips to aid them in profitability.

Kruse said if consumers would use enough ethanol to move the overall national level from E-10 to E-11, it would require 10 percent more ethanol, and that would create the demand for 500 million more bushels of corn.

“We need more blender pumps,” Kruse said. “Farmers need to get with the program when it comes to biodiesel and ethanol blends.

“When I talk to fuel distributors, they tell me they don’t have biodiesel, and they tell me that farmers are among their worst customers. They need to set an example for the rest of the nation and lead this effort. You need to step up.”

Kruse said his 2015 marketing strategy includes forward-pricing and hedging early, electing for maximum revenue coverage, reducing cost structure (which he said might require a reasonable landlord); enrolling in ARC or PLC, using crop insurance and buy-ups, and storing to capture carry and basis improvement.

Kruse said the U.S. economy is in a state of recovery, with a bearish forecast looming ahead. He said the federal government is pushing interest rates down, the U.S. dollar is strengthening (while putting exports at risk), and farmers are experiencing strong equity positions, even with margin compression.

He said the 1980s offered no demand for ethanol, but today there is a 5-million-bushel demand coming from the ethanol sector. He said the 1980s offered a poor farm bill with no revenue crop insurance, though those ag depression years created the farm bill and safety nets.

Today, he said, farmers are experiencing a relatively strong safety net in revenue crop insurance. He said farm banks are healthy, unlike they were during the 1980s.

Kruse said the global economy is weak, while U.S. farmers’s debt-to-asset and debt-to-equity ratios are in good shape.

An upkick is being seen in farm lending because farmers are hesitant to sell grain right now due to lower prices and margin compression.

In turn, they are borrowing to cover input costs.

Kruse said cost structure tends to follow revenue.

“A couple of years ago according to the USDA, we had over $500 after operating expense to be able to afford land costs, cash rent or buy farms,” he said. “Today it’s down to about $279. That means those of you in the room who are still paying $300 per acre cash rent are living off your equity this year and subsidizing the landlord to a certain extent.”

Kruse said the federal debt is around $18 trillion, and even though it’s increasing, he said the cost of servicing that debt has been “flat” because of interest rates going lower, to a little more than 2 percent.

“You go back to 6 percent (as it was at one time), and then you’ve got a problem,” he said. “It would be a very serious thing to have to deal with.”

Commodities

  • Corn – Kruse said anytime an increase is seen in ending stocks, it’s a defensive time for the markets. He said producers want to adopt risk management to protect income.

Kruse projected that ending stocks will increase this year.

Ending stocks for corn worldwide is at 189 million metric tons. Kruse said there is no number from past years that has come close to matching that figure, so he said global stocks around the world are adequate.

Corn and feed demand are up, he said, with beef cattle adding 93 pounds per head, and with porcine epidemic diarrhea virus rates declining significantly from last year.

That means more hog production and more feed demand for corn and soybeans.

He said farmers often store their commodities in bins, waiting for a spring rally, but he said it seldom pays to store a crop from October to May.

  • Soybeans – Kruse said there is much potential for carryover, as producers quadrupled carryover from last year’s tight stock to this year.

He said if farmers plant as many acres in soybeans as predicted, and if good yields are realized, “gargantuan” carryovers could be expected, putting the markets at risk.

Kruse said Brazilian farmers have expanded soybean acreage, and crop conditions have been excellent there. He noted currency conditions impacting competitiveness.

“From the time the crops started to be planted last September, you’ve seen the Brazilian real drop about 25 percent relative to the dollar. First of all, our farm hedged most of our crop in dollars before we planted it. We have it locked in (at that price). The U.S. price has gone down, and we’re hedged (higher); Brazilian currency changed by 25 percent-add on a 25 percent bonus, and life is good in Brazil for the soybean farmer,” he said.

  • Biofuels -Kruse said the ethanol industry did well in the last year, but the industry will need to be vigilant because of the pressure from the oil market collapse, which squeezed margins in ethanol.

The crude oil collapse was, in his estimation, a response to fracking. He said oil needs to get over $55 per barrel in order for the ethanol industry to remain competitive, but said there “would be blood” in the oil industry before the situation straightens itself out.

Biodiesel didn’t have as great of a year, and Kruse said the future of U.S. renewable fuels is unknown because the Environmental Protection Agency has not set the volumetric targets. He said the petroleum industry is being subsidized, while the ethanol industry is not.

Kruse said Congress did not write an E-10 mandate into the Renewable Fuels Standards, but said the RFS is important because it changed what had been historical negative economics for corn growers, and in doing so, resulted in better profitability, and the industry no longer needing to be subsidized.

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