Global Food Supply Concerns and Oil vs Ethanol
Update for April 24th, 2020
Corn futures have suffered significant losses since the COVID-19 outbreak and have now reached levels not seen in over a decade. Soybeans have also fallen off and are now at new contract lows.
Reuters News ran an article this week regarding the possible food crisis facing the world. The piece included an interview with China’s Ag Minister, Yu Kangzhen who also sees reason for concern. “The fast spreading global epidemic has brought huge uncertainty on international trade and markets. If the epidemic continues to spread and escalate, the impact on international food trade and production will definitely worsen and might trigger a new round of food crisis.” “The pandemic and measures some countries took to secure domestic supplies have inhibited normal trade and supplies, and caused some major price fluctuations.” The Chinese Ag Ministry does not expect they will face a food crisis in China as they are confident in their ability to obtain dependable supplies of grain and other major agricultural products. This is contrary to rumors on social media regarding food shortages in China. According to leaked government documents from last week, Chinese officials are telling their people to store 3 to 6 months of grain in case of an emergency. Many of our other foreign customers are also worried about the future of their food supply as well as some shoppers are buying more food to store at home in fear of possible shortages.
The need for a consistent flow within the supply chain has not changed. But the constant negative headlines in agriculture have captured the attention of our U.S. crop markets and our current prices reflect that. This should open the door for increases in U.S. ag sales. During the first quarter of 2020 China imported $5.08 billion in U.S. ag products While this was a large jump from sales in 2019 that pace is only 50% of what is needed for them to reach their agreement of $80 billion over 2 years ($10 billion per quarter average). The latest “market chatter” out of China indicates the country plans to increase their state stockpiles to protect itself from any potential interruptions in supply. Three sources told Reuters the plan is to purchase more than 30 MMT’s of crops and by doing so move towards fulfilling their commitment to the U.S. More specifically China plans to add nearly 10 MMT of soybeans, 20 MMT of corn and 1 MMT of cotton most of which from the U.S. In addition they plan to buy 1 MMT of sugar and 2 MMT of soybean oil but it was not clear where these items would come from. Wheat is not included on the grocery list of items. If you remember, China indicated when they signed the Phase 1 agreement that they would be market-driven in their purchases of U.S. products, given the current market prices the expected purchases make sense.
Farmers and ranchers are all waiting to hear what the Coronavirus Food Assistance Program payment formula will look like. The initial package is expect to generate $16 billion in direct payments to farmers and ranchers and an additional $3 billion in food purchases. Last Friday, Ag Secretary Sonny Perdue spoke during the White House press briefing where he explained where the funds originate from and said, “I think America knows that more than ever that the wholesome food our families depend upon starts with our farmers and ranchers.” Sen. John Hoeven (R-N.D.) chairman of the Senate Agriculture Appropriations Committee has since provided this breakdown:
$9.6 in direct aid to livestock producers
$3.9 billion for commodity crop producers
$2.1 billion for fruit and vegetable growers
$500 million for farmers that grow niche products
Signup for this new aid package will start in early May and payments will begin to arrive later that month and into June. Senator Hoeven explained that farmers will receive 1 payment that will be based on a formula which calculates price losses between 2 different time periods and at 2 different rates:
The first part of the formula will calculate the price loss from January 1st through April 15th and will be paid on 85% of that price loss.
The second part of the formula will calculate the potential price loss from April 15th through mid-October and will be paid on 30% of that price loss.
An additional $14 billion from the Commodity Credit Corp will be available at the end of June. Ag Secretary Perdue has stated that those funds will likely be used for direct aid.
There currently is a cap of $125,000 on each commodity with a $250,000 max to any individual or entity. I haven’t heard of any adjustment to these figures yet but there was some concern raised regarding these limits. Several senators sent a letter to President Trump expressing their concerns that the pay limitations “would severely restrict the program’s effectiveness…We strongly urge you to eliminate payment limits for livestock, dairy and specialty crop producers before the final CFAP programs are announced.”
Left without any assistance in any part of the aid package is our struggling ethanol industry. With half of U.S. ethanol plants idled the Renewable Fuels Association stated that the industry and the 350,000 employees that are supported by the biofuels industry “were left behind”. Geoff Cooper president and CEO of the Renewable Fuels Association said, “USDA missed a crucial opportunity to lend a helping hand to an industry that is suffering the worst economic crisis in its history. Roughly half of the ethanol industry is shut down today, as fuel demand has collapsed in response to COVID-19. Corn demand and prices have plummeted as plants across the country are idling. Jobs are being lost, grain markets are being ravaged, rural communities are being destabilized, and the long-term future of homegrown renewable fuels hangs in the balance.” The USDA and Ag Secretary Perdue are well aware of the dire situation. Perdue acknowledged, there are “huge challenges” facing the biofuels industry, “but frankly at this point there’s just not enough money to go around. The demand from all of the sectors was just more than we could accommodate at this time.”
EPA once again has numerous SRE’s pending for the 2019 compliance year with 26 pending requests (as of April 16th). If the ruling from the 10th Circuit Court is applied nationally only 2 or 3 of the requests would be eligible to be granted. 5 governors from oil-producing states have sent a letter to the EPA asking that they allow oil refineries to skip adding ethanol to their fuels. They stated that the industry can’t afford the expense of blending in biofuels due to “oil market disruptions caused by COVID-19 economic shutdown”. Geoff Cooper of the Renewable Fuels Association stated that a request of this nature is not unique to the current situation, the agency has denied similar requests in the past and should do so now. “Clearly, these governors are experiencing an acute shortage of facts and reality too. It’s clear they know absolutely nothing about how the Renewable Fuel Standard actually works. They outrageously claim that a waiver is needed because of depressed demand from transportation fuel. But because EPA translates the RFS into a percentage each year, the renewable fuel blending requirements already adjust in tandem with changes in gasoline and diesel consumption.” He added, “The EPA has no authority to grant relief when the RFS itself is not the cause of the severe economic harm, a fact that has been reconfirmed by EPA multiple times in the past when it denied similar nonsensical waiver requests.” “The governors themselves acknowledge the problems facing refiners today are driven by COVID-19 and cratering oil prices, not the RFS.” What they don’t realize or don’t care about is the fact that the same issues have also hit the ethanol industry. Brian Jennings, chief executive officer of the American Coalition for Ethanol said, “We remind the administration that oil refiners are not the only ones suffering from the economic fallout of the current situation.” “Ethanol producers, and the farmers supplying them corn, are suffering a proportional economic disaster. EPA should in fact do the opposite of the governors’ request and issue an interim rule to increase the RVO (Renewable Volume Obligations) for 2020 to the percentage necessary to ensure that the full 20.09 billion gallon required by law are used.”
Chances for precipitation are in the forecast today for a large portion of the central U.S. Light rainfall is expected across a small area of the upper Midwest with more substantial rainfall expected across the Dakota’s, Nebraska, Kansas, Missouri and Illinois. The potential for severe storms and flash flooding is located further south, primarily along the Arkansas and Oklahoma border. (Map shown below)
The outlook for tomorrow shows a likelihood for ¼ to ½ of rainfall in the Eastern Corn Belt. Much lighter amounts are possible in the region west of the Mississippi River. (Notice the map below)
Below are the extended outlooks from NOAA for April 26th-30th. The western Corn Belt looks very favorable for planting progress with below-normal rainfall and above-normal temperatures expected. The eastern Corn Belt looks to be colder and wetter than normal.