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Ethanol Industry in Crisis & USDA Report Worksheet

Update for April 2nd, 2020

Quarterly Grain Stocks and Planting Intentions reports were released this week. All quarterly stocks were reported lower than one year ago, corn fell below what the trade had anticipated to 7.953 billion bushels, 660 million bushels less than a year ago and also below the average trade estimate. Soybean inventories sit at 2.253 billion bushels, this is 474 million bushels less than a year ago but 12 million bushels more than the trade had expected. 2020 corn acreage was estimated at a huge 97 million acres, 2.7 million higher than the average trade estimate and the largest in 8 years. Soybean acres are forecast at 83.5 million which fell below average trade estimates.

These inventory levels are the lowest we’ve had for the past 3 years but still remain at burdensome levels given the current state of demand. As always the acreage estimates are based on expectations of normal planting conditions and favorable weather. Also included in the acreage estimates are the 11 million prevent plant acres from 2019 which are expected to be brought back into full production.

I know several producers that have been wondering if the newly passed Emergency Loan programs from the Small Business Administration would apply to the farming industry. According to the respected ag consulting firm of Combest, Sell & Associates…”Unlike past loan programs or even current Emergency Loans from the Small Business Administration that exclude farmers, ranchers and agriculture or tell them to go to USDA first, we are told the new law allows agriculture to qualify for the loans/loan forgiveness made under the Paycheck Protection Program. We have researched the stature and regulations and found nothing that would prohibit agricultural producers and have also gotten affirmation agriculture is eligible from the Senate Small Business Committee, but we have also requested and will be looking for an affirmative statement from the SBA. Meanwhile, given this is a limited amount of funds, we would encourage you to consult a lender and begin the application process. Keep in mind the bill was crafted quickly and just signed into law less than 100 hours ago. Guidance is still being written and there are still questions that will arise.” This package of $350 billion allocated for small business loans is likely to receive a lot of applications and loan/grants are offered on a first come basis, so don’t wait too long if this is something you are interested in applying for. Treasury Secretary Steven Mnuchin said that these small business loans for companies with less than 500 employees is expected to begin Friday.

“The ethanol industry is facing its worst crisis of its existence compressed into a three to five day period,” says INTL FCStone advisor Arlan Suderman. “Ethanol margins just absolutely collapsed, basis collapsed and ethanol plants pulled their bids or even resold some corn that they had.” A worst case scenario has developed with the price war between Saudi Arabia and Russia and COVID-19 and there is just no way to know when things will turn around. Joe Vaclavik of Standard Grain said, “We have this situation where the Saudis decided that they would increase production to record levels, and we saw all of the energy markets just fall out of bed and ethanol was no exception. We’re left with a situation where ethanol producers across the country are not buying corn from the U.S., or they’ve reduced corn purchases and basis bids have back off.” Vaclavik explained, “Essentially 40% of your demand base is the ethanol industry. So we have some real problems there, and I think that that’s going to continue to be the biggest issues here for the corn market for a little while.” Arlan Suderman believes that the current situation with ethanol will last through much of the year and continue to negatively influence prices. “We’ve shut down about 2 billion gallons of annual capacity. That’s about 690 million bushels of corn on an annualized basis, offset a little bit of that with increased corn consumption, that’s about 550, and that’s about 250 million for the current marketing year. I think the cuts (to production) will probably get deeper than that.” As U.S. corn prices decline Suderman sees a likelihood that China will enter the market. “We’ve seen China buy 30 million bushels of corn already, and we (INTL FCStone) think there’s another 50 million bushels in demand.”

Reports indicate that several Chinese soy crushers halted operations last week due to a shortage of soybeans. Inventories have now dropped to their lowest level since 2010 slowing crush operations to about 40% of normal capacity, causing soymeal prices to increase. Soy crushers in Argentina are facing a similar situation, they also have seen a dramatic reduction in soybean deliveries to their plants. Over 70 municipalities throughout Argentina are enforcing COVID-19 lockdowns which has caused a drastic 50% reduction in truck deliveries of soybeans to the crush plants. Ag and export related jobs within the country are technically allowed to work without restriction during the lockdown but low prices within the country are forcing many Argentine farmers to only sell what is need to cover cash-flow needs.

WeatherTrends 360 had forecast that portions of the U.S. could be in for a short visit from the Polar Vortex during the week of March 30th- April 5th but weather models changed and it is not expected to be nearly as cold as earlier thought.

Trends for next week April 6th-12th look to remain similar to this week, warmer in the east and cooler to the west. Next week also shows some risk for severe weather from Texas into the Ohio Valley.

WeatherTrends 360 has been watching temperature readings from the Pacific Ocean for several months. Now there are clear signs that a weak La Niña weather pattern is forming and should arrive by early summer. Expectations are that the pattern will intensify over the summer and may be quite strong by fall. La Niña is a dry cycle but it can take several weeks to a couple months for the atmosphere to fully respond but once it is in place weather models show that we should expect the pattern to remain for 12 to 18 months.

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