Interconnected Agriculture

The rise of the United States ethanol industry has had at least one significant impact -- for better or worse, ethanol has tied agriculture prices to the energy market. Now a large increase in speculation for oil leads to increased demand for a relatively cheaper fuel (ethanol), which in turn puts positive pressure on corn prices so as to ensure that enough acres are planted to satiate the demand.
Analysts in both industries will be watching closely Monday as the USDA (United States Department of Agriculture) releases its predictions on summer acreages for corn and soybeans. The estimates are not binding and are based on surveys of farmers, coops, and seed distributors across the country. While many are speculating that USDA estimates will show a decrease in corn acres from the amazing amount of corn planted last year, the futures markets are already making a bold statement. This past week while corn prices dipped to around $4.80 per bushel and allowed ethanol margins to grow slightly, the futures prices for corn climbed to over $5.60 per bushel on the CBOT (Chicago Board of Trade). This indicates that commodity traders are almost positive that the USDA estimates will show a significant decrease in corn production this summer. Even though that will in turn put pressure on ethanol prices to increase, it may not be as bad a thing for corn acres to dip this summer as some might think. Last year saw more than 92.9 million acres of corn planted (which is the most since 1944). Analysts believe that the USDA will predict around 86 or 87 million acres of corn this year -- still a lot but off from last year. This is due to a very strong market for soybeans (nearly $15 per bushel), a need felt among many farmers to practice crop rotation techniques, and a very large increase in fertilizer prices that make growing corn more expensive than soybeans because of their greater need for fertilizer.
My point is that if some of the acres go back into soybeans, it will recharge the land and possibly bring down some of the nitrogen and phosphorous price increases we've seen over the last year. This in turn could allow for a gradual lowing of corn prices to manageable levels while still allowing profit margins to remain constant for farmers. With more and more cellulosic ethanol technology set to come online in the next two years, it would seem prudent to start moving away from a charged up and often speculation-dominated market and prepare for another rearrangement within these markets as ethanol production switches from predominantly corn to a mix of corn and other plant materials.

DDGS and E. Coli

With the increasing amount of ethanol being produced, DDGS (dried distillers grains and solubles), seemed to be a great way for the ethanol plant to make a little extra money on the side and for livestock farmers to possibly offset some of the negative pricing pressures that corn-based ethanol places on their input costs. I know of a lot of farmers in this area interested in using DDGS blended into livestock feed as a cheap additive. But a Kansas State University report a few months ago brought up the possibility of a connection between the DDGS and e. coli occurrence in cattle. First of all, if the meat is prepared correctly there is absolutely no connection between possible e. coli abundance and food poisoning. Second, e. coli and other bacteria are commonly found within the animal digestive track and several are necessary for the animal's nutrition.
What's interesting is that no other research team had seen a similar connection between DDGS use and increased e. coli abundance. Today, the exact same group from K-State University announced the completion of a follow-up study which found that there is absolutely no connection between DDGS and e. coli. Don't ask me how someone screwed this one up in the first place but hopefully someone lost their job over it. The fact of the matter is that in this period where there is a highly charged debate over alternative fuels, (and rightly so), the public reaction to these studies can be enormous and the clean-up becomes a daunting task. This is why knee-jerk reactions to these studies are unwise at best. Hopefully this finding will allow farmers who are in a position to purchase DDGS without fear of e. coli proliferation and the pros and cons of ethanol can continue to be vetted correctly in the realm of science.

Saving at the Pump

A great report out of Nebraska underscores my point from yesterday's post -- that ethanol is helping control prices at the gas pump. I think it is fantastic to watch the national average gasoline price of regular unleaded climb to $3.26 per gallon in the past week while a quick survey of gas stations here in central Iowa shows a price of around $3.05 per gallon -- a small decrease from last week!

And now, out of Nebraska, the conclusions are clear. With an average savings of 9 cents per gallon using E10 blends of gasoline compared to regular gasoline, the state of Nebraska saves consumers $4 million per month on ethanol! This is calculated by taking the gasoline usage in Nebraska, multiplying into the percentage that using ethanol (77%) and then multiplying that number by the average savings. Amazingly, most gas stations in Iowa offer between 10 to 13 cents per gallon savings on E10 blends and so the savings to the consumer could be even greater than $4 million per month. With E10 blends averaging 10 cents per gallon savings, it should definitely be the fuel of choice, even considering the 2.7% energy density deficit that it carries. All I can say is that although it sucks, filling up on E10 when it is priced at $2.99 sure doesn't feel that bad with other states paying a lot more for their gas.

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Ethanol May Dampen Gas Prices

The Wall Street Journal is reporting that some energy market analysts predict that ethanol production in the United States could lower gasoline prices during the summer driving season. Analysts from the Credit Suisse have been quoted as saying that the nearly 7 billion gallons per year of ethanol being produced in the United States will serve to lower gasoline prices off of their anticipated record high prices coming this summer. What is interesting is that even though both a downturn in the economy and record high corn prices have cut into ethanol profits and dampened drastic increases in ethanol production, an additional 167,000 barrels of ethanol per day capacity has been added this year. This amount is comparable to a full sized refinery and the lower costs built into ethanol compared to the record high oil prices have begun to put negative pressure on the price of gas. The analysts also predict that with the depressed economy, refiners and blenders who purchase oil will have greater pressure put on them to blend ethanol into more of the gasoline so as to keep prices low enough for consumers to keep buying.
The positive results are already being realized right here in Iowa. Although the survey of the national average of gasoline climbed 7 cents per gallon to $3.22 per gallon, E10 prices here in central Iowa have actually dropped about 10 cents per gallon from a week ago to settle around $2.99. Although I am positive both of these prices will climb as we enter June and July, what's really amazing is the profound affects we are seeing on the price at the pump and on the sometimes stubborn mindset of oil refiners and blenders who are being forced by ethanol to take a second look at what might be best for the consumer. Even though ethanol has a way to go before becoming the ultimate fuel of the future, I for one think ethanol needs to do nothing else to prove itself; given the monumental affects it has already accomplished.

For the Wall Street Article, follow the link below:
http://online.wsj.com/article/SB120631308439758089.html?mod=googlenews_wsj