Bloomberg writers Heloiza Canassa and Romina Nicaretta reported yesterday that, “Cargill Inc., the largest U.S. agricultural company, said Brazil faces a glut of ethanol in two years as supply grows faster than domestic demand…An increase in ethanol exports to the U.S.would reduce the risk of oversupply, said Sergio Rial, the company’s Latin America director. The U.S. currently imports only 3 percent of its ethanol consumption, he said during an interview in Sao Paulo today.”

I. Farm Bill- Production / Prices
II. Ethanol

I. Farm Bill- Production / Prices

DTN writer Chris Clayton reported yesterday (link requires subscription) that, “U.S. senators working on the farm bill are grappling with ways to craft a revenue assurance plan that would work on a local level, but the cost of such an income-based counter-cyclical program is a problem.

“The farm bill is ‘at a critical moment,’ Sen. Kent Conrad, D-N.D., told farmers at a forum Tuesday with House Agriculture Committee Chairman Collin Peterson, D-Minn., at a farm outside Hillsboro, N.D. Senators are negotiating over a lot of concepts and trying to determine how they would work in practice, he said.

“Conrad lauded Peterson repeatedly for his work in getting a bill to pass the House, but Conrad noted that a revenue-based counter-cyclical program based on a national per-acre income would not work, particularly in states prone to yield swings, such as North Dakota.”

Mr. Clayton indicated that, “A national trigger works better in more stable yield states such as Indiana, Iowa and Illinois, Conrad said. The problem with a county revenue trigger, however, is that it could cost $5 billion to $6 billion more to implement. That was the reason the House established the new counter-cyclical program on a national level and as an option — farmers can choose it or stick with the current counter-cyclical program.

“‘The reason we put it as an option in the bill was because it cost $5 billion and we didn’t have $5 billion,’ Peterson said. ‘Right now, a lot of us don’t know how it would work and that’s the reason we had it as an option.’

“The National Corn Growers Association has pushed for a county-based revenue counter-cyclical program, but most other commodity groups have begged off the plan. The Bush administration backs a program based on a national trigger price or per-acre revenue.”

Interestingly, near the article’s conclusion, Mr. Clayton reported that, “One possibility, Conrad told the 80 or so farmers in attendance, is that the Senate could very well reaffirm the House bill then work out certain issues.

“‘We may come to a situation where we pass (Peterson’s) bill in the Senate then go to conference and work out the details there,’ Conrad said.”

In agricultural production news, Philip Brasher reported in yesterday’s Des Moines Register that, “The government says most of Iowa’s crops are in good to excellent shape, despite the heavy rain and strong winds that knocked down fields of corn in northern Iowa last week.

“In its weekly crop progress report, the U.S. Agriculture Department estimated Monday that 70 percent of the state’s corn crop was in good or excellent condition, compared with 71 percent the week before.”

The Register article stated that, “Cornfields that have suffered wind damage can still be harvested, though farmers have to slow their combines, which means it take more time and fuel to get the crops in the bin.

“In some areas, cornstalks have been blown almost flat, making them prone to disease. The plants will die if they are standing in water for too long, reducing grain yields, agronomists said.

“In northern Humboldt County, ‘the wind damage is horrendous,’ said John Holmes, the Iowa State University extension agronomist for nine counties.

“In many fields, he said, the stalks are ‘not just leaning, they’re flat.’”

Bill Hord, reporting in yesterday’s Omaha World-Herald indicated that,“The Midlands’ two major crops are on target to provide record yields and record income for farmers, despite spotty damage from wind and heavy rain.

“Not only are corn and soybean prices high, but crop conditions in Nebraska and Iowa are even better than they were in the record yield years of 2004 and 2005.”

Mr. Hord also noted that, “In Nebraska, 77 percent of the corn is in good or excellent condition, according to Monday’s crop progress report from the U.S. Department of Agriculture.

“In 2004, when the state’s corn produced a record 166 bushels per acre, on average, only 71 percent of the crop was rated good or excellent at the end of August.”

“The condition of soybeans was rated 79 percent good to excellent in Nebraska, compared with 65 percent at the same time in the record yield year of 2005.”

With respect to prices, the Associated Press reported yesterday that, “Corn for December delivery fell 8.25 cents to $3.4475 a bushel, while soybeans for November delivery finished down 0.5 cent at $8.7225 a bushel.”

An item posted at Barron’s Online yesterday, under the tag, “UBS Investment Research,” stated that, “We expect a 2007 corn yield of 156 bushels per acre, above the USDA’s forecast for 152.8 bushels per acre. We continue to expect a larger-than-consensus corn crop to cause an increase in corn inventories and a reduction in corn prices into the harvest.”

II. Ethanol

Bloomberg writers Heloiza Canassa and Romina Nicaretta reported yesterday that, “Cargill Inc., the largest U.S. agricultural company, said Brazil faces a glut of ethanol in two years as supply grows faster than domestic demand.

“An increase in ethanol exports to the U.S. would reduce the risk of oversupply, said Sergio Rial, the company’s Latin America director. The U.S. currently imports only 3 percent of its ethanol consumption, he said during an interview in Sao Paulo today.

“Cargill, based in Wayzata, Minnesota, is doubling sugar cane-processing capacity at its Cevasa plant to 1.2 million metric tons a year starting mid-2008, according to Rial. The plant will produce ethanol and most of the output will be exported, he said.”

Meanwhile, Chris Clayton, writing earlier this week at the DTN Ag Policy Blog, noted that, “One of the lingering ag policy questions not being answered rightnow is what may happen to the ethanol and grain markets once the country’s ethanol producers hit the 7.5-billion gallon renewable-fuels standard.

“The issue needs to be addressed because that 7.5-billion mark is coming up quick. Bob Young, chief economist of the American Farm Bureau Federation, spoke Thursday to the North Carolina Farm Bureau’s policy group. Young said that right now, ethanol-plant capacity is at 6.8 billion gallons and by next July the plants under construction will push capacity to 12.8 billion gallons.

“When oil companies make their 7.5-billion gallons of renewable-fuel buys for the year, there is no obligation or incentive for them to buy more. Hardball price negotiations could create a significant dip in prices and cause ethanol plants to operate at significantly lower capacity.”

The update also stated that, “I asked Young what would happen to the ethanol market when we hit that 7.5-billion mark.

“‘That’s a real good question and some of the data on that is going to be hard to come by as to what the markets are doing,’ Young said. ‘One of the variables you want to look at very closely over the next six to nine months is going to be capacity utilization. How hard are those plants running?’

“That 12.8 billion gallons, or effectively 13 billion gallons, is plant capacity that is going to happen, Young said. Those plants are pouring concrete and gearing up for production. The question then becomes if anyone else would be able to get into the ethanol market without an improved RFS.”

This issue also highlights the growing importance of the market price of crude oil as a variable in the potential profitability of ethanol production. As I stated in a paper from May, “Because corn-based ethanol may have to compete with unleaded gasoline as a low-cost input for fuel blenders, as production exceeds mandate, ethanol demand will be influenced by the price of oil. An increase in the price of oil will likely make ethanol a relatively cheaper input for fuel blenders to use compared to unleaded gasoline.”

And, as economists from the University of Illinois noted recently, “Once Federal mandates for use of biofuels are reached, ethanol’s primary use will be as a substitute for gasoline…[M]oreover, ethanol price will be directly related to crude oil price.”

This report also included a break-even corn price model for ethanol production based on crude oil prices (summary chart here). According to this research, if crude oil is priced at $70 per barrel, ethanol processors could pay as much as $5.40 per bushel for corn and still cover all the costs of production.

Tim Annett noted yesterday at The Wall Street Journal’s Energy Roundup Blog that, “Crude-oil futures ended lower, below $72 a barrel Tuesday, with declining U.S. equities and refinery restarts in Texas and Mississippi outweighing concern that natural gas production could be hit by a storm along the U.S. Gulf coast.”

As noted above, December corn futures closed yesterday at $3.4475 a bushel.

Keith Good