Tuesday, June 10, 2008

Prices Leap for Corn and Crude Oil

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By Keith Good

Chris Flood, writing on Friday at the Financial Times Online, reported that, “Torrential rain across parts of the Midwest pushed US corn prices to record levels on Friday, prompting concerns about the outlook for this year’s harvest.

“In Chicago, CBOT July corn jumped 20¾ cents to a record $6.63¼ a bushel, taking gains for this year so far to 45.6 per cent.”

The FT article added that, “One trader estimated that about 4m acres of corn and up to 19m acres of soyabeans for this year’s harvest have yet to be planted.

“CBOT July soyabeans rose 40 cents to $14.88 a bushel, up 24.1 per cent this year.

“Further rain is expected ahead of a key update from the US Department of Agriculture on Tuesday.”

Similarly, Associated Press writer Stevenson Jacobs reported on Friday that, “Corn futures shot up to a record for a second day Friday, driven higher by heavy rain in Midwestern states, a slumping dollar and skyrocketing crude oil prices.

“Other commodities traded broadly higher, with crude oil soaring more than $11 and gold, silver, copper and other agriculture futures also rising sharply.

“Heavy rains have flooded corn crops in Indiana, Ohio, Nebraska and other states, giving farmers their wettest spring since 1993 and severely delaying planting. Forecasts show the bad weather moving toward the western corn belt states of Minnesota and Wisconsin over the next several days.”

The AP article went on to explain that, “U.S. farmers were expected to plant 86 million acres of corn this year, but wet weather in Midwestern states has left 4 million acres unplanted. If the remaining fields aren’t planted by June 10, farmers will either leave them empty and take insurance payments or switch the acres over to soybeans, which have a later growing cycle.

“That would likely lift corn prices further, forcing consumers to pay higher grocery bills for meat and pork, as livestock producers would be forced to pass on higher animal feed costs and thin their herd size.

“Other agriculture futures also rose. Wheat for July delivery rose 25.5 cents to settle at $8.11 a bushel on the CBOT, while July soybeans added 5.5 cents to settle at $14.575 a bushel.

“Meanwhile, rough rice futures for July delivery added 60 cents to settle at $19.96 per 100 pounds.

“In energy futures, oil prices soared more than $11 to a new record above $139 after a Morgan Stanley analyst predicted prices could hit $150 by the Fourth of July.”

A news release issued last week by University of Missouri Extension noted that, “Many Missouri farmers are several weeks behind schedule on planting corn due to persistent wet weather. With the approach of the early June cutoff date for corn planting, farmers may have to switch to other crops or plant out of season despite risks of lower yields, said University of Missouri agriculture experts.

“Either way, corn yields will probably be lower than last year and may fail to meet the nation’s 13-billion-bushel demand. That could lead to higher food prices, reduced livestock production and ripple effects across all farm sectors, said Scott Brown, agricultural economist with the MU Food and Agricultural Policy Research Institute.

“‘A number of factors make us worried about where yields are going to be at harvest time this year,’ Brown said. ‘We have a very strong demand for corn in this country, and now we’re starting to talk about less production occurring.’”

DTN writer Chris Clayton reported on Friday that, “As thunderstorms continue dumping rain on critical Corn Belt states, there is heightened concern by policymakers, market observers and farmers about the ability to meet expected increased demand for corn in the coming year.

“Fears about the potential 2008 corn production come on the heels of high commodity prices globally that already have led to a United Nations food-aid conference and growing attacks on the use of corn and soybeans in biofuels. Even at the UN conference there was talk that U.S. spring planting was behind schedule. Agriculture Secretary Ed Schafer said Thursday after returning from the Rome conference that USDA is monitoring the weather closely right now.

“‘We’ve got a lot of concern of the wet conditions in corn country and how that’s affecting the planting of the crop and certainly the maturity of the crop,’ Schafer said.”

Mr. Clayton noted that, “Some agronomists project that even if the rains stopped, most producers would be looking at 80 percent to 90 percent of their normal expected yields in key areas of the Corn Belt. Roger Elmore, an agronomist at Iowa State University, said without adequate heat units, the yield pull can be closer to 65 percent to 70 percent normal levels.

“‘We’re getting to the point where it is really late to think about planting corn,’ Elmore said. ‘Every day I look at the forecast, it’s going to be hard to be optimistic.’”

And with respect to the Conservation Reserve Program, the DTN article indicated that, “[Sec. of Agriculture Ed Schafer] reiterated that USDA had opened up Conservation Reserve Program acres for haying and grazing later this summer. Sign-ups for that began on Monday.

“‘Hopefully that displaces corn as a feed, at least to some extent,’ Shafer said. ‘So we’re looking at it. We’re trying to do everything that we can to deal with it, and as you said we’re monitoring it closely because it is of concern.’”

However, the Associated Press reported yesterday that, “Advocates for pheasant and quail hunters are concerned that new rule changes that allow Conservation Reserve Program lands to be used for haying and grazing this summer and fall could infringe on major nesting habitat.”

This AP article stated that, “Meanwhile, [Dave Nomsen, Pheasants Forever’s vice president of government affairs] sees a bigger issue: the message the rule changes send about the value of CRP lands.

“As 10- and 15-year CRP contracts are set to expire this fall and in coming years, many agriculture officials say — and conservationists fear — farmers will not re-up and instead begin growing crops to capitalize on recent high commodity prices. Some farmers may even pay a penalty to leave the program early to cash in on crops.

“‘Sportsmen and sportswomen of all types — whether you’re a fisher or a hunter — you need to be concerned about CRP land,’ said Bob St. Pierre, Pheasants Forever’s marketing and public relations director. ‘They’re cleaning our waters, they’re keeping our soils on the ground where they should be.’

“St. Pierre said there has been a ‘tremendous’ rise in CRP lands over the last 20 years, but it’s now on the decrease because of the foreign oil demand, feedstock prices and the push for ethanol.”

In more detailed news with respect to crude oil prices, Neil King Jr. reported in Saturday’s Wall Street Journal that, “Crude oil notched its largest price jump ever on Friday, leaping nearly $11 to more than $138 a barrel, on news of a weakening dollar and continued jitters over the reliability of world supplies.

“The surge, coming just as many analysts thought oil prices were set to fall, sent stocks plunging amid fears that the U.S. economy could be in for a combined bout of inflation and slow growth. The skyrocketing price of oil, now up more than 44% so far this year, is battering the airline and auto industries and causing consumers to cut back on driving and nonessential spending.”

And Sudeep Reddy reported in today’s Wall Street Journal that, “The average price of gasoline in the U.S. hit $4 a gallon for the first time Sunday, the latest milestone in a run-up in fuel prices that is sapping consumer confidence and threatening to nudge the nation into recession.

“The record nationwide average for regular-gasoline prices, announced by auto club AAA, follows Friday’s near-$11 surge in oil prices to a record $138.54 a barrel. Both are part of what, by some measures, is the worst energy-price shock Americans have faced for a generation, in terms of its toll on their pocketbooks.”

With this backdrop of crop and commodity news in mind, the Center for Agricultural and Rural Development (CARD) at Iowa State University recently released a paper entitled, “Short-Run Price and Welfare Impacts of Federal Ethanol Policies,” by Lihong Lu McPhail, Bruce A. Babcock.

A summary of the paper stated that, “High commodity prices have increased interest in the impacts of federal ethanol policies. We present a stochastic, short-run structural model of U.S. corn, ethanol, and gasoline markets to estimate the price and welfare impacts of alternative policies on producers and consumers of corn, ethanol, and gasoline. The three federal policies that we consider are the Renewable Fuels Standard, the blenders tax credit, and the tariff on imported ethanol. Our model examines the impact of these policies on prices during the 2008/09 marketing year. Our results show that in the short run, a change in U.S. ethanol policies would not have a large, immediate impact on corn prices. Eliminating any one of the policies would reduce average corn prices by less than 4%. Removal of all three programs would decrease average corn prices by 14.5%. The reason why the changes are relatively modest is that existing U.S. ethanol plants will only shut down if their variable cost of production is not covered. Changes in ethanol policies would have large distributional impacts. Corn growers, ethanol producers, and fuel consumers have a large incentive to maintain high ethanol consumption. Gasoline producers have a large incentive to reduce ethanol production and imports. Livestock producers have a large short-run incentive to reduce domestic ethanol production.”

In related news, Reuters writer Tom Doggett reported on Saturday that, “A new Senate bill to cut the U.S. tariff on ethanol imports has little chance of clearing Congress as there is not much time left on the legislative clock and it is too hot a political issue to take up in an election year, congressional aides say.

“Senators Dianne Feinstein, a California Democrat, and Judd Gregg, a New Hampshire Republican, introduced legislation this week to lower the tariff to bring it in line with U.S. ethanol blending subsidies, which a recently enacted farm bill lowered to 45 cents per gallon from 51 cents per gallon.

“The bill would cut import tariffs to 45 cents per gallon from the current level of 54 cents per gallon, and require Congress to lower tariffs again if blending subsidies are cut even further.”

Mr. Doggett indicated that, “The panel’s chairman, Democrat Max Baucus, has previously said he is against cutting the ethanol import tariff. In addition, Baucus would not normally put a priority on legislation sponsored by lawmakers who are not members of his finance committee, as is the case with Feinstein and Gregg.

“The top Republican on the finance committee, Chuck Grassley, opposes the bill, an aide to the senator said.

“Grassley said earlier this week that Brazil and other countries can export more than 452 million gallons of ethanol duty-free to the United States this year under a special trade agreement with Caribbean nations, but that threshold has yet to be met.

“‘Until Brazil and other countries take full advantage of their existing ability to ship ethanol duty-free to the U.S. market, we shouldn’t even discuss providing them with yet more duty-free access,’ Grassley said.”

In other news regarding biofuels, an AFP article from Friday stated that, “Brazilian Foreign Minister Celso Amorin met the European Union Troika here Friday for talks on biofuels and strategic ties between his country and the 27-member bloc.

“At the meeting, Amorin defended his country’s use of biofuels, insisting that they did not affect food production, but helped reduce petrol consumption.

“Ethanol production in Brazil ‘has grown to the point that it more important for us than gasoline,’ Amorin said, speaking in English at a joint news conference with Slovenian Foreign Minister Dimitrij Rupel.

“And he added that it ‘helps lower the demand for oil.’”

The AFP article noted that, “Slovenia, which currently holds the E.U.’s rotating presidency, said the meeting will focus on cooperation in areas such as the fight against poverty, climate change and energy security.

“E.U. Commissioner for External Relations Benita Ferrero Waldner is also attending the meeting at the Brdo pri Kranju castle, just outside Ljubljana.

“Addressing E.U. concerns about the effects of biofuel production on the Amazon, Amorin said ethanol was being produced outside the rainforests. It covered just one percent of agricultural land and just 0.4% of Brazil’s entire territory.”

Meanwhile, the New York Times editorial board stated in today’s paper that, “Over the past year, the prices of grains and vegetable oils have nearly doubled. Rice has jumped by about half. The causes include soaring energy costs, drought in big agricultural producers, like Australia, and rising demand by a burgeoning middle class in China and India. But misguided mandates and subsidies in the United States and Europe to produce energy from crops are also playing an important role.

“The International Monetary Fund estimated that biofuels — mainly American corn ethanol — accounted for almost half the growth in worldwide demand for major food crops last year. About a third of this country’s corn crop will go to ethanol this year. Yet at the summit meeting in Rome, the Bush administration insisted that ethanol is playing a very small role in rising food prices and resisted calls to limit the drive to convert food into fuel. The United States wasn’t alone.

“Brazil, which has an enormous sugar-based ethanol industry, also rejected demands to curb biofuel production. Argentina objected to calls to end export taxes that it and other countries have erected to slow food exports. The United States and Europe also rejected suggestions that their farm subsidies should be blamed for depressing agricultural investment in poor countries.”

And more broadly with respect to energy policy, James Kanter reported in Saturday’s New York Times that, “The International Energy Agency, a group that advises industrialized countries, said Friday in a report that investments of at least $45 trillion might be needed over the next half-century to prevent energy shortages and greenhouse gas emissions from slowing economic growth.

“Nobuo Tanaka, the agency’s executive director, called for ‘immediate policy action and technological transition on an unprecedented scale.’

“Mr. Tanaka said the world would ‘essentially require a new global energy revolution which would completely transform the way we produce and use energy.’”

Doha Trade Talks

Reuters writers Jonathan Lynn and William Schomberg reported on Thursday that, “The United States and the European Union said on Thursday the Doha round of world trade talks could collapse because of 11th-hour intransigence by some big developing countries.

“The warning comes ahead of a potentially decisive push to end the long-delayed World Trade Organization talks, and could deepen a gap between rich and poor nations.”

The article added that, “U.S. Trade Representative Susan Schwab said the WTO talks were entering their most critical days since they started.

“‘None of us alone can carry this forward and it only takes a few of us to make sure the talks stall,’ she told reporters. ‘We do not have the luxury of unlimited time — on the contrary.’

“Mandelson and Schwab did not name countries risking Doha’s collapse but both have said in the past that advanced developing countries like Brazil, India and China are not doing enough. France says it doesn’t want to be hurried into a premature deal.”

However, on Friday, Reuters writer Doug Palmer reported that, “World trade ministers could convene in late June or early July to try to reach a long-sought world trade deal if their negotiators make enough progress in the coming days, the top U.S. trade official said.

“‘I think there is a shared sense of urgency, some pickup in momentum,’ U.S. Trade Representative Susan Schwab said in a telephone interview on Friday after meetings with other trade ministers this week in Paris and last weekend in Peru.

“Schwab’s comment came one day after she and European Trade Commissioner Peter Mandelson warned the Doha round of world trade talks could collapse because some big developing countries were not offering significant new market openings.”

Reuters news also provided a “FactBox” Summary of the Doha talks: “Key tasks for WTO trade negotiators,” which was posted on Friday and can be viewed by clicking here.

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