Dr. Robert Wisner: Grain Outlook

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Iowa State University
AgMarketing Resource Center
Increasing Risk Exposure Risk-Management
Challenges in Todays Grain Markets 3/27/08
Dr. Robert Wisner Grain Outlook 3/15/06
Dr. Robert Wisner, University Professor
BioFuels Economist
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BioFuels Lead to Highly Volatile Grain Markets

• Prices Explosive With Weather Prob.
• Loss of Marketing Alternatives
• Grain industry offers only basis contracts beyond
  08 crop
• --Some Buyers offer only basis contracts starting
  fall 08
• Options revenue insurance are the remaining
  risk mgt. tools
• Basis Risk Greatly Increased

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Minneapolis Wheat New definition of highly
Volatile market

• Two contracts created up to 38,500 loss (or
  gain) in six-day limit locked down move
• Maximum daily limit increased with days of limit
  moves
• Has seen 7 consecutive limit up days
• A preview of corn SB with weather problems?
• Spread risk (Like HTA problem in 96)

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Risk Issues, II

• Some new-generation grain contracts not
  well tested in extreme mkt. volatility
• Example Premium-offer contracts that sell call
  options for next years crop
• Accumulator contracts (Appear to involve
  sale of over-the-counter options)
• Any others that involve sale of options

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Example Grain Elevator PositionFrom Dr. Roger
Ginder, ISU
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Many elevators dont have net worth credit
lines to cover such large needs plus other
financing.
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Where is the Risk Coming From Will it Change?
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Bio-Fuels A Global Development-- With Record
Low World Grain Stocks

• Driving Forces
• High crude petroleum prices
• Concern over green-house gas Emissions
• Government policies
• Energy security

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Corn-ethanol only partial solution to energy
challenges

• Other feedstocks needed
• Municipal wastes
• Animal agriculture wastes
• Forest product wastes
• New crops
• New automotive technology
• Hybrid gas/electric vehicles
• New engine vehicle designs
• Hydrogen fuels fuel cells
• Diversification of energy sources
• Incentives for increased mass transportation
• Wind power use increasing

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Recent Positive Developments in Biofuels Demand

• 2007 Energy Bill mandates implementation
  mechanism penalties
• New Union Pacific rapid ethanol train receiving
  unloading facility in Dallas
• North Iowa ethanol shipping facility
• Substantial ethanol market opening in Florida
  movement toward opening other southeast markets
• California state government commitment to reduce
  green-house gas emissions
• Higher gasoline prices?

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Down-side risk in crude oil prices?
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U.S. 2007 Energy Bill

• For 2008 Requires U.S. renewable fuels
  production at 9 bil. gallons
• For 2009 11.1 bil. gallons
• For 2015 15 bil. gallons corn-based ethanol (57
  bil. liters)
• For 2009 500 mil. gallons of biodiesel (1 bil.
  gallons for 2015)

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Source Dr. Terry Francel, American Farm Bureau
Federation U.S. Energy
Dept.
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Cautions in 2008-09 Grain Markets

• Fund Traders index funds as hedgers add
  potential volatility
• Bio-diesel economics not good,
• no mandate until 2009.
• Domestic user returns tighten
• with higher corn prices livestock
• fuel

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41 Countries Encourage Biofuels
Ethanol, demand growth food inflation shifting
China from to corn exporter to importer?
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U.S. expansion ContinuingChanges in U.S.
Ethanol Plants, 7/27/07 to 3/14/08 (From DTN)

• 7/27/07
  11/6/07 1/8/08 3/14/08
• U.S. Opr. Plants 134 139 163 171
• Under Const. 89 91 81
  74
• 35 under construction a year or more
• Planned plants 329 343 336 341
  
• Total 552 572 580
  586

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Recent Start-ups Soon to be on Line U.S.
Ethanol Plants

• Location Mil. Gal. Cap.
  Date
• Pikely, CA 40
  April
• Lima, Ohio 54
  March
• Greenville, OH 110
  March
• Hennepin, IL 100
  April
• Cambria, WI 40
  April
• Coshocton, OH 60
  March
• St. Ansgar, IA 100
  March
• Monona, IA 100
  April
• Alexanderia, IN 65
  Mid-April
• Volney, NY 41
  May-Jn
• Total 710

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2007-08 U.S. corn supplies adequate to meet demand

• Crop up 24 -- 20 increase in corn hectares
• But at expense of
• 16 decline in soybean planted area
• 29 decline in cotton area
• 8 decline in non-durum spring wheat
• Declines in minor crops
• Soybean supplies tighten substantially, increased
  plantings needed in 2008
• More U.S. corn will be needed in 2009,
• 2010, 2011

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Historical Needed U.S. Corn Yield Deviation
Needed From Trend
0.7
0.0
-10.2
0.0
16.2
1.8
0.9
0.9
3.3
3.8
7.5
11.8
13.4
14.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

• Other Considerations
• Sharp increase in marginal
• Corn acres
• Very tight fertilizer supplies
• Corn-on-corn yield drag
• Low C-o-C yields in bad weather

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International Impacts

• U.S. ethanol plants under construction to use 1.9
  bil. bu. of corn (About 65 increase)
• Over 3 times the volume of Japan imports of U.S.
  corn
• 105 of 2007 EU corn crop
• 54 of global corn exports
• Higher food costs ahead, U.S. globally
• Major risk-management challenges in Ag.
• bioenergy

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Figure 3.
Total 11,693 mil. Bu.
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Figure 2.
72 Potential Iowa Plants 11 Just across IA
Borders
Basis Implications in Short Crop
Capacity 159 of 2006 Crop
Iowa Corn Processing Plants, Current
Planned, 7/25/07
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Take-Home Points

• All grain markets extremely sensitive to U.S.
  foreign weather
• ISU Climatologist Elwynn Taylor sees 70
  probability of below trend 08 U.S. corn yield
• Corn SB basis likely stronger, May-August
• Strong basis creates high risk for livestock
  feeders
• Options Mkts. more important than in the past
• Options look expensive, but out-of-money strike
  prices can provide upward price flexibility

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Thanks! Questions?
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of May 8 and June 30, 1914, in cooperation with
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Iowa State University of Science and Technology,
Ames, Iowa.