Rising corn prices could be tempered by newer fuel alternatives

Rising corn prices could be tempered by newer fuel alternatives

The Department of Energy is finally putting some money behind the alternate fuel hype. Over the next four years it will invest $385 million in six cellulosic-based biorefineries. The ethanol feedstocks proposed in the projects cover a wide range: corn stover, corn stalks, woodchips and wood waste, wheat, barley straw, farm waste, forest waste, orange peels, and garbage from municipal landfills.

Congress approved aiding makers of cellulosic ethanol in the Energy Policy Act of 2005. The difficult process of making cellulosic ethanol requires special enzymes that are capable of breaking down and extracting sugars from biodegradable waste products. President Bush has made the program part of his goal to introduce 35 billion gallons of alternative fuels by 2017 to lessen U.S. dependence on imported oil.

Energy Secretary Samuel Bodman said the investment would help move cellulosic ethanol out of the research and development phase and into the mainstream, where it can compete commercially with gasoline and corn-based ethanol. Meanwhile, he said he expects that the 54 cents-per-gallon import tariff on ethanol and the 51 cents-per-gallon alternate fuel subsidy will stay in place until they expire in 2009 and 2010, respectively. Bodman claimed that the government’s support would eventually lead to U.S. producers competing globally, and that a goal was to get manufacturing cost for cellulosic ethanol to $1 per gallon.

The U.S. Department of Agriculture’s long-range projections indicate that large increases in ethanol production will drive corn prices up in the United States, while the expansion of biodiesel use in the European Union and Asia will raise global demand for vegetable oils. According to the USDA, corn prices will continue to advance through 2010. Corn prices are projected to ease after 2010 but will remain historically high.

Beef—February’s USDA cattle report showed a fifth straight month of declining year-over-year feedlot placements in January, down 23 percent from a year ago. Total feedlot inventories have now fallen to 3 percent below a year ago, the first year-to-year reduction since September 2005. The USDA reported “other disappearance” at 17 percent above a year ago, reflecting a large number of cattle killed in the early-year snowstorms.

According to the USDA, smaller feedlot placements over the past five months will result in fewer cattle available for the spring and early summer. Fundamentally, cattle herd and slaughter numbers remain historically large. However, supplies are being offset by strong demand, especially for Choice, and soaring, speculatively driven cattle futures prices. The spring run-up in Choice middle-meat prices will be accentuated a bit. Choice strip loins and short loins will both jump $2 per pound between early March and June. Choice top butts will be up about $1.25. Look for gains in Select middle meats to be roughly half of those projected for Choice.

Coffee—Futures prices have dropped from $1.25 in December to $1.11 in early March. A bumper crop in Vietnam and strong export sales from Brazil have helped deflate prices–and possibly presented the best buying and contracting opportunity for the next year or two. That’s because coffee fundamentals remain strong. An El Niño weather pattern could reduce rainfall and sharply cut the potential for Vietnam’s 2007-08 crop. And the 2007-08 Brazilian crop is expected to be cyclically lower, approximately 25 percent below 2006-07 levels. The International Coffee Organization is projecting a global supply deficit of somewhere between 6 million and 11 million bags. As a result, coffee prices should start moving higher again this spring.

Dairy—The USDA has readjusted its milk production forecast higher for 2007, from 0.6 percent to 1.4 percent growth. Cow numbers are expected to decline less than previously expected and production-per-cow will continue to rise. The USDA’s forecast assumes continued widespread usage of Monsanto’s Prosilac (rBST) bovine growth hormone. Dairy product prices are moving seasonally higher. Block and barrel were both near $1.40 in early March, up a few cents from last month. Butter was in the low $1.30s and a dime higher than in early February. Butter prices will be supported in March by demand from commercial bakers who are gearing up for Easter and Passover.

Grain—The USDA estimates for 2006-07 ending stocks for corn and wheat were unchanged from a month ago. But looking forward to the 2007-08 crop, the USDA cut corn-ending stocks by 3.5 percent. Corn use for ethanol in 2007-08 is projected to rise by 50 percent to 3.2 billion bushels. The USDA increased predictions for corn plantings to 87 million acres. New corn acres will come at the expense of soybeans, wheat and cattle-grazing pastures. Corn futures in the $4.10 to $4.20 range in early March are trading at $2 per bushel above year-ago levels.

In the food-versus-fuel debate, farmers appear to be well-supported in Washington, D.C. House Committee on Agriculture Chairman Collin Peterson, D-Minn., said that the United States has been subsidizing consumers with underpriced food and that the growing demand for corn by the U.S. ethanol industry will help raise prices to where they belong.

Oil—Although domestic stocks of soybean oil are record large, they are being overwhelmed by the new energy-based global dynamics for vegetable oil. The USDA raised its forecast of U.S. soybean oil exports. Despite escalating U.S. soybean oil prices, recent values from Argentina and Brazil have risen even more rapidly and have kept U.S. exports relatively competitive. The overall net effect will be to gradually tighten supplies over the next few months as demand starts to exceed monthly output. Soybean oil futures, hovering around 30 cents in early March, will remain well supported in the 29-cent to 32-cent range for this year. Any market dips to 29 cents or below are to be considered buying opportunities.

Pork—Higher prices for pork in early 2007 have been caused by increased domestic demand, mostly resulting from higher prices for competing proteins. However, most of the retail-driven Easter buying and contracting has concluded with ham prices peaking seasonally in early March. Look for ham prices to drop 3 cents to 5 cents in April before heading higher again in May. Pork bellies were 98 cents in early March, up 13 cents from a month ago. But belly prices appear to have advanced too far too fast and will likely trade in the mid-90-cent range through April. According to the USDA, pork production in 2007 is expected to be 3 percent above a year ago, with hog prices averaging $45, versus $47.26 in 2006.

Poultry—According to the USDA, the broiler industry will be pressured by higher feed costs in 2007. As a result, broiler output will be flat in the first half of 2007 but should pick up in the second half in response to stronger prices. The USDA reduced production estimates this month in light of a lower-than-expected number of eggs being placed in incubators and the lower numbers of chicks placed for grow-out. The revised estimate for broiler production in 2007 is 36 billion pounds, up only 0.8 percent from 2006. Broiler meat production in 2006 was 35.7 billion pounds, up only 1 percent from the previous year.

Boneless skinless breast prices jumped to the mid-$1.50s in early March, 20 cents higher than a month ago and up 44 cents in the last two months. Look for breast prices to be in the $1.70s by June and higher by summer’s end. The wing market is down 12 cents per pound from a pre-Superbowl peak and will continue to drift lower for the next few months.