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Big Oil and Ethanol -Friend or Foe and the Outlook for Bio Fuels

Update for February 2nd, 2021

Last week China went on a considerable buying spree of U.S. corn. There are several different schools of thought about the reasons or motives behind the sizable purchases:

  1. One theory is that China is pleased with the outcome of the U.S. presidential election and these purchases have more to do with politics than with supply.

  2. Others also see it as a response to the election but not for the same political reasons as the first theory. These well-respected traders believe that China is politically motivated but instead they are worried about how things will play out here politically in the U.S. There is a lot of political instability in the world today.

  3. New leadership in U.S.

  4. Tensions are mounting again between China and Taiwan.

  5. Tensions between China and Japan in the South Sea are increasing.

  6. Issues continue to build between China and Australia.

  7. China has to be uncertain how the U.S. will respond if they decide to take further action in any of the situations listed in 2. Would Washington cut off shipments of goods jeopardizing the Chinese food supply?

  8. Or is it possible that China never had the vast surplus of usable corn supply that we had been led to believe? And was it strategically located throughout the country so it was readily available where most needed?

A “pearl of wisdom” by Warren Buffett potentially fits this situation well…

Next Tuesday, February 9th, the USDA will announce their latest updated numbers. Most in the trade expect the agency to report friendly numbers and a sharp revision to the export numbers considering recent sales. Of course, there are always some concerns and “what if’s” to consider as the report approaches.

  • Market bears have raised the question whether the U.S. can even load out many additional Chinese purchases during the next 6 to 7 months. If true than China can continue to book U.S. corn but the question will be, can we handle shipping volume?

  • Export prices out of Argentina are now competitive with ours, will that transfer some of the buying away from the U.S.? Additionally, production losses in South America are likely not as significant as earlier thought which will alter balance sheets.

  • The U.S. Dollar has regained some of the value lost, now recapturing highs from several weeks ago.

Soybean harvest in Brazil is now at its slowest pace in nearly a decade due to rainfall and wet field conditions. AgRural reported that as of January 28th, only 1.9% of the Brazilian soybean crop had been harvested compared to 8.9% last year. Late season rainfall has delayed harvest progress and slowed crop maturity. The pace is expected to increase as we reach the 2nd half of February, almost a month later than the 5-year average. This will also slow the planting of the Safrinha crop. Currently 1.5% of the country’s intended second corn acres have been planted making this the slowest start to the planting season since 2013.

Last week the U.S. oil industry lobbyist asked for support from biofuel groups to work together to form an even larger lobby against Biden’s administration and their push for electric vehicles. They want the two sides to work together on a policy that would reduce the carbon intensity of transport fuels and block efforts to provide federal subsidies for electric vehicles. An alliance between the two groups would be quite unusual and is very unlikely. Geoff Cooper for the Renewable Fuels Association said, “We weren’t born yesterday and we’re not going to let the oil industry play us like a fiddle. They have a long history of pushing surrogates and proxies to the microphone to do their dirty work and we’re not interested in that.” Emily Skor, head of the Growth Energy said, “it’s no surprise the oil industry all of a sudden wants to give us a bear hug. We produce lower carbon fuels. They don’t.” The National Corn Growers Association is considering the offer and may send a staff member to the meeting this month.

Much of this concern developed following a couple of major announcements over the past couple of weeks. First Biden announced his commitment to replace all gas-powered U.S. federal vehicles in the country with electric models. This will not be an easy, quick or inexpensive change to make as data from 2019 shows the government has more than 645,000 vehicles in their fleet. He also has made mention of possible incentives that may be offered to citizens to purchase their own EV, some tax credits ranging from $4,000 to $7,500 are already available to consumers which vary upon the model. Additionally, General Motors has announced plans to phase out all gas- and diesel-powered vehicles by 2035. The company CEO says the company will be net carbon-neutral by 2040. GM plans to introduce 30 electric vehicle models by 2025 and has a plant under construction in Ohio to make the batteries required to power these new cars and trucks. The company is seeking on additional sites for battery plants and is working on new models for future EV’s. China made the decision late last year to require most new vehicles in the country to be electric by 2035. Britain, Ireland and the Netherlands have also announced intentions to ban the sale of new gasoline and diesel cars beginning in 2030. (The New York Times)

New studies conducted by researchers from Environmental Health and Engineering, Harvard University and Tufts University show Green House Gas emissions from corn based ethanol emits 46% less GHG than gasoline. ADM expects the status of ethanol to improve through increased exports to China and industry reconfiguration. Last week the Rhodium Group, a leading climate analysis firm released a report that shows the large and important role that biofuels play in any effort to reduce transportation sector emissions. Growth Energy CEO Emily Skor stated. “The biofuels industry and rural America stand ready to help President Biden and his administration harness the benefits of biofuels to attain aggressive net-zero emissions goals and look forward to their plan to include biofuels in the solution to climate change.”

Spring Base Revenue Insurance Guarantees price discovery has now started and will continue through the end of February. Corn price guarantees are based off the daily closing price of December corn futures while soybean guarantees follow November futures. The chart below shows the spring revenue guarantee’s over the past several years.

Corn 2020 - Spring price $3.88; Harvest price $3.99 2019 - Spring price $4.00; Harvest price $3.90 2018 - Spring price $3.96; Harvest price $3.68 2017 - Spring price $3.96; Harvest price $3.49 2016 - Spring price $3.86; Harvest price $3.49

2015 - Spring price $4.15; Harvest price $3.83 2014 - Spring price $4.62; Harvest price $3.49 2013 - Spring price $5.65; Harvest price $4.39 2012 - Spring price $5.68; Harvest price $7.50

Soybeans 2020 - Spring price $9.17; Harvest price $10.54 2019 - Spring price $9.54; Harvest price $9.25 2018 - Spring price $10.16; Harvest price $8.60 2017 - Spring price $10.19; Harvest price $9.75 2016 - Spring price $8.85; Harvest price $9.75 2015 - Spring price $9.73; Harvest price $8.91 2014 - Spring price $11.36; Harvest price $9.65 2013 - Spring price $12.87; Harvest price $12.87 2012 - Spring price $12.55; Harvest price $15.39

More winter weather is predicted to hit the Midwest this week. A system is expected to move into the region Wednesday and Thursday and will be followed by an arctic blast by the weekend.

The Polar Vortex will be making a return and will be responsible for the arctic temps this weekend. The Polar Vortex has been absent for much of the winter season, thankfully the cold is predicted to exit the area quite quickly which will allow for a big warm-up as it pulls out the third week of February.

Recent updates indicate that the La Niña weather pattern is expected to remain an important factor in world weather through much of 2021. According to WeatherTrends 360, “This will ultimately lead to a dry cycle for many areas of the World including the U.S. as we go into Spring and Summer along with a very active and destructive hurricane season.”

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