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DAVID KRUSE

By Staff | Oct 11, 2018

My ‘ethanol put option’ is not working. Long term subscribers should remember that my rationale for investing in the ethanol industry was that we were supposed to be getting good dividend checks from profitable ethanol companies when corn prices were low to make up for the poor price for corn to supplement our income. Yet corn prices are terrible and my mail box has been empty with no ethanol dividends to speak of…what gives?

The plan was that an investment into value added ethanol production would serve as the equivalent of a put option on the value of corn. If corn prices were high and ethanol companies were not making any money, that would be okay as we would make money off of the high price of corn. No ethanol dividend check was then needed. In reverse, if the price of corn was poor, as it is now, then ethanol production should have good margins and we would be getting dividend checks to supplement our corn revenue and we could continue to pay the bills.

What we are actually seeing today is low corn prices and yet ethanol margins are so poor that GPRE was “idling” plants which puts additional pressure on corn prices. There are no dividend checks. How could that be with the price of crude oil soaring back above $75 barrel again? The answer lies in Trump’s ethanol/RFS policy.

Eight-four percent of farmers answered “yes” to a question posted by the Farm Journal Pulse poll as to whether the ag economy was in a recession? The reason there are no ethanol dividends and that we are in an ag recession is the man-made policy driven result of Trump RFS and trade policies.

They are not “Making U.S. Agriculture Great Again”. His policies are doing quite the opposite. The reason that gasoline prices are high and ethanol prices are low is that Trump’s EPA undermined the RFS enforcement mechanism by issuing 2.25 bln gallons of RIN waivers so that refiners do not have to blend ethanol. RINs have gotten cheap enough that blenders have opted to buy them instead of blend ethanol. The 83 cent/gallon spread between unleaded gasoline and ethanol should be tremendous financial incentive for blenders to use ethanol, but the fact that ethanol prices are so weak is evidence that they are not.

The purpose of the RFS was to mandate blenders to use 15 bln gallons of corn-based ethanol annually and FAPRI calculated that the RIN waivers effectively watered down the RFS so that it reduced the amount to 13.7 bln gallons. Given low corn prices and relatively high fuel prices ethanol plants should be “rocking” instead of “idling”, making a lot of money from which they could pay dividends…and they are not. My ethanol put option is pretty worthless under Trump ethanol policy.

His buddy Carl Icahn owned a refinery and lobbied hard for the RIN waivers and made out like the swamp fox taking home big profits when they were granted. Corn farmers got screwed. Trump campaigns as a strong ethanol proponent. That is a big fat con job. He is supposed to come to Council Bluffs October 9th and announce that E-15 will be given a vapor waiver so that it can be marketed year around. He is touting this announcement as a big deal.

The E-15 vapor waiver is much needed and will open the opportunity for more market access. However, if fuel retailers will not blend ethanol with an 83-cent spread margin, what difference does the blend make? Once E-15 is approved we will find that answer out. There is another caveat though. In order to approve E-15 it is also reported that Trump wanted other diluting changes to the RIN market so that refiners will have even less reason to buy ethanol. They will tout giving us the E-15 vapor waver while they hide the knife they stick in the RFS’s back.

The diluted RFS alone did not give us an ag recession. Trump trade policy did that. He has been busy “Making South American Agriculture Great” and “Russian Agriculture Great” and so on. Instead we got a recession. He brags about this being the best economy in U.S. history. The ag economy is in recession or at least 84 percent of farmers think so and we have no idea what he is talking about. Tax cuts do you little good if you make no money.

It was nice to see he relented to accept Canada into the US-Mexico-Canada Agreement. I would point out that agriculture had zero tariffs under NAFTA and we have zero tariffs under the USMCA so that means that we got back what we had before. There were a few tweaks to help dairy but overall that was intended to generate something for an applause line. It will not restore profitability to the dairy industry.

There was a University of Illinois headline that read, “Farmers will not make money from rented land in 2019”. In other words, there is no profitability for corn/soybean farmers given the current cost structure. It could be a cold winter as bankers assess loan viability for farming next year. There will be no major price recovery until the export outlook is restored and that requires a settlement with China that Trump says that he is in no hurry for. He wants the pain of tariffs to soak into the Chinese economy so that he wins the negotiation before it begins.

I do not think that China will cooperate. The U.S. ag economy is paying the price far larger than the tariff relief checks that he is sending us. I think that those who expect that there will be some reward for the ag economy for enduring these trade losses are delusional.

This ag recession was man-made and the man who made it was Donald Trump. Instead of making U.S. agriculture great, his policies have undermined its greatness destroying two cornerstones of its foundations by ruining RFS policy and pursuing the folly of a trade war that is instead making our export competitors great.

I could add a footnote that his immigration policy will also exacerbate a labor crisis for the ag sector which is adding another ton of bricks on top of the ag economy. U.S. agriculture will not be Great Again until Trump RFS, immigration and trade policies are changed.

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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